1. Expensive mileage restrictions
Many car leases have a limit on how many miles you can drive each year. According to the Federal Highway Administration, Americans drive an average of 13,500 miles each year.
Matt DeLorenzo is a senior managing editor at Kelley Blue Book and says that some car leases have annual mileage caps of 10,000 or less. Depending on which vehicle you drive, you may be subject to a mileage penalty of between 10 and 25 cents per mile for exceeding your annual limit.
Penalties are higher for cars with higher prices. You could face a $750 penalty if you drive more than 3,000 miles per year and your penalty is 25c/mile.
Takeaway: To determine how much you will be charged if you exceed the mileage limit, calculate how many miles you drive each year if you’re considering leasing a car.
2. Termination fees for early termination
You might need to pay quite a bit if you wish to terminate your lease early. It all depends on your lease terms. However, you may have to pay the difference in the amount of the car’s depreciation and the amount you paid for it. This charge could be several thousand dollars in some cases.
Let’s say you lease a car worth $40,000 After three years, the car has cost $18,000. The car’s value has declined by $21,000 over the three years. If this is the case, you may need to pay $18,000 plus $21,000 for the difference in what you have already paid and what the car has depreciated. You’d be responsible for $3,000.
Taxes and a vehicle disposition charge can be added to early termination costs. These fees help offset the lender’s cost of selling the vehicle. In addition, you will be responsible for any late fees, parking tickets, and outstanding monthly payments.
3. Low residual value
The residual value refers to the car’s current value at the end your lease term. Let’s assume that the lender estimates that the car you lease today for $30,000 will be worth $15,000 three years from now. The lender will calculate your monthly payments to compensate for the $15,000 loss. A 36-month lease would equate to $416.67 per month, excluding interest and any taxes.
The bottom line: The residual value is the agreed-upon car’s value at the end of the lease. Depreciation is included in the residual value.
4. A huge down payment is required for an advertised price
DeLorenzo advises that you do your research and understand what you’re getting into when you see a monthly payment for a lease advertised at $200. These low prices often translate into huge down payments. To qualify for low monthly payments, you will need to verify how much down payment you are required to make.
DeLorenzo states that a $5,000 upfront fee on a 4-year lease adds over $100 to the advertised monthly payments.
Takeaway: A lease with low monthly payments usually has a catch: a large down payment.
5. Monthly payments for leasing vs. buying
Dealers might attempt to convince you to lease. They will compare the monthly payments for purchasing and leasing, and show you how much you would pay if you chose to lease. Remember that you own the car when you purchase it. You must return the car if you lease.
Takeaway: Don’t let a dealer try to compare apples with oranges or tell you how financially smart it is to lease your car.
6. It is important to consider the price of the car.
Leasing doesn’t mean that you shouldn’t be concerned about the cost of the car. It is still important because the price of the car and the depreciation rate will affect the amount you pay to lease it.
Remember: When leasing a car, it is important to consider the price and value of the vehicle.
7. End-of-lease fees
Be sure to read all fees before you sign a lease. These could include:
Acquisition fee: Also known as an administrative fee or bank fee, this one-time fee is charged by lenders to set up the lease. This fee can range from $400 to $900.
Sales taxes and license fees are not included in your monthly payment. This is dependent on where you live and what contract you have. Make sure to carefully read the fine print.
Price to buy out: You have the option of purchasing the vehicle instead of returning it back to the lender at the end.
8. You can get lower monthly payments if you sign up for a longer term
Let’s suppose you speak to the lender about lowering your monthly payment. You get a return call from the lender letting you know that they were able reduce your monthly payments by extending your lease. You aren’t actually saving money. A longer lease term may mean that you pay less per month but you will still pay more interest.