If you intend to lease a car instead of purchase, chances are you want to drive a newer car for less. However you should always go through the contract before signing it. Leasing a car can lead to lower monthly payments, but it can burn a hole in your wallet if you don’t know what you’re doing.
Here’s how to lease a car without making five of the most common car-leasing mistakes and help yourself with the lease vs buy dilemma.
1. Making a high payment upfront
Car dealers and salespeople promote low monthly lease payments on new vehicles, but you’d perhaps have to pay several thousand dollars at the start of the term to get the low payments. That money is usually used to pay a portion of the car lease in advance.
But what if the car is damaged or stolen within the first few months?
If that took place, the insurance company would reimburse the leasing company for the value of the car, but the money you gave off upfront would likely not be refunded. As a consequence, you’d be out of a car, despite having already paid a lot of money.
Interestingly, it’s recommended to pay no more than around $2,000 in advance when you lease a car. And in some instances, it may make more sense to put zero down.
If you pay less in advance, your monthly payment would be higher. But you could take the prepayment cash and put it in an interest-bearing account instead.
After, you could use that money to help make the monthly lease payments. And if something happens to the vehicle before the end of the term, at least the leasing company wouldn’t have a big share of your money.
2. Ignoring gap insurance
The value of any new vehicle tumbles down significantly after it’s driven off the lot — and leased cars are no exception. If you drive a leased car, it’s in your best interest to have gap insurance.
A “gap” means the difference in what you still owe on your lease, and how insurance companies value your car. If your leased car is stolen or totaled, the car insurance company makes a payment for their assessed value of the car. Their sum may not cover the amount that still remains on the lease.
You’re still responsible for the difference between the two — the “gap.” You’ll perhaps have to pay the balance on your own unless you have gap insurance. In that case, the policy would cover the difference.
Any car lease that begins should come with a question – if the contract includes this specialty gap insurance coverage. If it doesn’t, consider looking for a car with a lease plan that does.
3. Underestimating miles you’ve driven before you lease
Many leasing firms are able to advertise low monthly payments because they have low mileage limits, where you can drive only a number of miles per year.
It’s common for leasing contracts to have a driving maximum of 10,000 miles to 15,000 miles. If you go over those limits, you could be charged an additional 10 cents to 30 cents per mile at the end of the lease.
So when it comes time to turn in the car, you could end up owing a substantial amount — on a car you’re no longer driving.
To avoid this extra fee, review your driving habits before choosing to lease a car. If you know you’ll probably drive more miles than the agreement allows, you could ask for a higher limit.
Still, there’s a drawback: Your monthly lease payment would probably go up with a mileage increase.
4. Low maintenance
If your car is tampered with beyond normal wear and tear, you could be on the verge of additional fees when it’s time to return it to the dealer.
Typically, if a car has a scratch but the mark is less than the size of a driver’s license or business card, many companies may consider it normal use. They probably won’t charge a penalty. If the leasing company considers the damage excessive, they may charge additional fees.
The definition of normal use can vary from dealer to dealer. Don’t assume that your own lease servicers will be lenient. Before leasing a car, ask if there are any lease-end-condition guidelines. These guidelines determine types of damage you would have to pay for before you turn your car back in.
If the car is significantly damaged, drivers can expect a bill for repairs at full market price.
5. Leasing a car for too long
Most car-lease terms are from two to four years, though some can go longer. However, drivers who lease cars for too long could end up paying extra money in maintenance.
If you opt to lease a car, make sure the lease period either matches or is shorter than the car’s warranty period. Warranties vary from lender to lender, but on average they last up to three years or 36,000 miles, whichever comes first.
If you keep the car for longer than the warranty period, you may have to consider an extended warranty. Otherwise, you may be responsible for maintenance and repair costs — a tall order for a car you don’t own. And you’ll still be responsible for monthly leasing costs.
Choosing to lease a car instead of buy can be a great way to drive a newer car for less money per month. But you might be open to risks that could cost you more money in the long run — which would defeat the purpose of leasing a car in the first place. By doing your research, you will find out that financing a vehicle is always better as it helps you build your credit and that too, way faster.