Leasing a Car: What to Do and What to Avoid

06.03.2023
1066
17 min.

Car leasing provides a vehicle for a specified period and mileage. In many ways, it's the same as if you were renting an apartment instead of buying a house. Shorter contracts mean less money upfront, but you'll still have to shell out the dough.

Leasing a Car: What to Do and What to Avoid

You can get a car for a fixed period and a set monthly payment amount by signing a car lease. You'll have to decide whether to start a new lease, buy a car, or go carless after your current one ends.

Here, you will learn more about auto leasing and decide if it is the best option.

Leasing vs. Buying a Car

When you lease a car, you pay a fee in exchange for using it for a set amount of time. It is typically a period of 36 or 48 months. There are limits on the number of miles you drive and the kinds of customizations you can make.

Lenders may incur various charges. You can return the automobile to the dealer at the end of the lease and receive a refund if you decide not to purchase the vehicle.

The lender will transfer the title to a car to the buyer when payment is made. You will own it outright if you pay cash or pay off the loan used to fund the purchase. You own the car outright and can do whatever you want, including selling it, trading it in, keeping it, or giving it away.

Pros and Cons of Leasing a Car

Pros

  • Budget-friendly monthly fees. If you're struggling to make ends meet each month, a lease may be an option to get lower monthly payments. Renting typically requires a smaller initial investment than buying does. Some people use this as justification for purchasing a more expensive-than-necessary automobile.
  • Potential tax breaks. More tax breaks may be available through a lease than a car loan if you use the vehicle for commercial reasons. The IRS lets you deduct the depreciation and financing fees that are part of each payment. If you lease a luxury car, you might need help getting rid of a big chunk of the costs.
  • Every few years, a car is replaced. In many people's eyes, nothing can compare to the thrill of driving home in a brand-spanking-new automobile. Once the lease period has been over, the leased car is returned, and the lessee takes possession of a brand-new vehicle. Leasing also ensures that you obtain the newest and most significant features in automotive technology every few years.
  • No resale concerns. It's as easy as dropping off the vehicle (unless you choose to buy it). Your sole responsibility is to settle any outstanding balance due at the lease's conclusion, such as any charges for excess wear and tear or mileage.
  • No-hassle repairs. These days, it's common to find new cars with a guarantee that covers you for at least three years. If you sign a three-year lease, you may not have to worry about paying for many repairs during that time. There may be a possibility of avoiding substantial, unexpected costs through leasing arrangements.

Cons

  • Control failure. This vehicle cannot be sold or traded to offset your next vehicle's cost. Plus, you'll have regular monthly payments and a continuing lack of control over certain car parts because you'll have to start a new lease whenever the old one ends.
  • Lack of property rights. Limits imposed by a lease may prevent you from driving as frequently or as far as you'd like. In addition, motorists who wish to modify their vehicles should be aware that costs may be involved. They may have to pay more if they take back the changes they made after the lease is over.
  • Payments and expenses. Fees in your lease contract apply to extra mileage (usually 10,000 to 15,000 miles per year), modifications to the automobile, and excess wear and tear. You'll have to pay the penalty if you want out of your contract before it's up. And there's also a purchase fee to consider (also called a lease initiation fee). You may have to pay a charge to reimburse what the dealer pays to clean and sell the automobile once your contract finishes. Lastly, if the lease doesn't contain gap insurance, you could be responsible for paying for any damages caused by incidents your insurer doesn't cover.

How to Lease a Car

Finding a car to lease follows a process similar to finding a vehicle to purchase. Investigating is essential. You can also do the following:

  1. Get a copy of your credit report. A low credit score, particularly below 600, makes selling a product or service easier. You will need a higher down payment to be approved when your credit score is down. A better FICO score means a smaller money factor.
  2. Analyze the data. Determine the most significant upfront cash payment you can make. When signing a lease, there are typically non-negotiable deposits and other costs that you must pay. The lessor may also demand a down payment.
  3. Find out how many miles you typically drive in a year. When signing a lease, the lender will ask you to select a yearly mileage limit between 10,000 and 15,000 miles. Drive as you drive. Every mile driven beyond the allotted limit will incur additional fees.

Mistakes to Avoid When Leasing a Car

    1. Too high an upfront payment. While many lenders offer car leases with affordable monthly lease payments, getting into one may require a down payment of several thousand dollars. That sum covers a portion of the lease payment. Your auto insurance will pay the leasing company back for the car's value if it is totaled or stolen within the first few months of your lease. Still, the leasing company probably won't give you back your initial monthly payment. You would be left without transportation and lose the lease-initiation amount you made to the leasing business. When leasing a vehicle, it's best to spend at most $2,000 upfront. You can save money on a down payment by including all the fees in your monthly income. Leasing companies often don't require large down payments, so you won't lose a ton of money if something occurs to the car before the lease is up.
    2. Failing to negotiate the lease terms.You can be leaving hundreds, if not thousands, of dollars on the table if you don't try to negotiate these prices. There are usually a few areas of wiggle room in leasing agreements, and these are:
      • Purchase cost
      • It is the price at which you and the dealer would agree to exchange ownership of the leased car upon the expiration of the lease
      • Disposition fee
      • This charge compensates the dealer for their time and effort in getting the car ready for sale after receiving it
      • Total capitalized cost
      • The monthly payment and the total car cost depend on this number, also known as the vehicle's sales price
      • Mileage allowance
      • If you exceed the allotted mileage per year on a lease, the lender will charge you extra money until you either buy the car after the lease or pay the penalty.
    3. Not buying gap insurance.You should get gap insurance if you drive a rented vehicle. The "gap" is how much you still owe on your lease minus how much your automobile is worth. Let's imagine that the buyout price of your leased vehicle is set at $13,000. If you get into an accident and wreck the car before the lease is up, the insurance company will evaluate the automobile's fair market value and pay that amount to the car dealership. Assume that the insurance firm estimates the value to be only $9,000. If you don't have gap insurance, you'll likely have to come up with $4,000 to cover the discrepancy between the residual value stated in the lease agreement and the vehicle's actual value. Gap insurance fills in the blanks. Gap insurance is typically a standard feature of leases. You can buy gap insurance from your dealership, but you might find better rates with a more traditional insurance company. The protection provided, however, is undoubtedly worth the nominal cost.
    4. Underestimating the mileage limits. Knowing your driving patterns ahead of time will save you money on your automobile lease. Think about the time spent traveling to and from work each day. Consider asking for a higher limit if you plan to drive more miles than the agreement allows. Due to more wear and tear, your monthly payment will probably go up if you drive more miles. A lease agreement may cap yearly total miles driven at 10,000, 12,000, or 15,000. The lease may include a clause that states you will be charged up to 30 cents per extra mile driven after the lease term ends if you go over your allotted mileage. At 30 cents per mile, if you go 5,000 miles over the limit, you'll owe an extra $1,500 when you return the car after the lease.
    5. Not maintaining the car. When you return your car to the dealer, you may have to pay extra fees if it has damage beyond normal wear and tear. Most of the time, businesses won't charge extra for car scratches that are no bigger than the edge of a driver's license or business card. If the leasing company decides that the damage was too bad, you may have to pay more. However, "normal use" can be interpreted differently from one dealer to the next. If dings or scratches on the body or wheels, cracks in the glass or windows, unusually worn tires, or holes in the upholstery, your lessor will deduct those from your final payment. Make no assumptions about the inspector's leniency.
    6. A long lease period. Ensure the lease term is the same or shorter as the vehicle's warranty. Manufacturer warranties may cover anything from three years to 36,000 miles but are often limited to a shorter period. If you plan to keep the car longer than the standard warranty covers, you should buy an extended one. If not, you can pay for repairs and upkeep on a vehicle you don't own while still owing money on a lease. Barbara Terry, an auto expert and journalist from Texas, believes that if you're going to lease a vehicle for a long time, you should buy it. "If the driver owns the automobile, he would have to pay for the car and maintenance, but he could continue to drive it for several years without worrying about a required monthly lease payment," explains Terry. You can use a car lease calculator to find out if buying or leasing a car will save you more money in the long run.
    7. Not considering the insurance. If you've ever financed a car, you may already know that most lenders require you to have collision and comprehensive coverage. But you might need to raise your liability limits, which you might wonder if this is the first time you've rented a car and had it insured. Suppose you are found to be at fault in an accident. In that case, the liability coverage on your car insurance will help pay for the other person's medical care and repairs to their property. In addition to comprehensive and collision coverage, most leasing companies require you to have liability limits of at least $100,000 per person and $300,000 per accident for bodily injury, and $50,000 for property damage. On the policy paperwork, you might see the notation "100/300/50." If you want to add a leased car to your auto insurance policy, these limits could increase your high rate. Before signing on the dotted line, it's a good idea to get an insurance quote for the car you're thinking of buying to avoid any unpleasant surprises.

FAQ

Is it a good idea to lease a car?

Leasing is a good option because it doesn't require any money upfront, the monthly payments are manageable, and you don't have to worry about selling the leased item. The benefits of purchasing include having complete control over annual mileage and knowing how much money you will spend.

Is there a downside to leasing a car?

When you lease a car, you don't personally own it at the end of the contract, which is an obvious downside. As a result, you can't use your current vehicle as a trade-in when buying a new car. People who lease cars for extended periods may end up paying more over the long term than if they had just purchased the exact vehicle.

Is it better to finance or lease a car?

Lease payments are, on average, less than loan installments. You pay for the car's depreciation over its rental period with a lease. If you only look at the monthly payments, leasing is often less expensive than buying in the short term.

How does leasing a car work?

Automobile leasing is like a long-term rental. In exchange for making a down payment and subsequent monthly payments, you'll get the use of an automobile for a set time, typically a few years. Return the leased vehicle after the lease term and decide whether to enter a new lease, buy a car, or forego transportation altogether.

How hard is it to lease a car?

Leasing a car when you have poor credit and no down payment is challenging but possible. It takes a good credit score to qualify for most zero-down leasing deals. But people who want to buy a car but don't have perfect credit shouldn't worry; they have many good options.
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