Leases are more difficult to understand than traditional financing. This means there are opportunities for buyers to get amazing deals on cars they couldn’t afford to finance, and it also means that if you don’t know what you’re getting into, you could be in serious financial trouble.
Before leasing your next car, take a look at these common leasing mistakes. If you are aware of these 10 mistakes people tend to make when leasing, you’ll be much more prepared when you actually start new car shopping.
Mistake #10 – Going to the dealer instead of contacting the internet sales department
Internet sales departments generally care about volume more than profit, so they tend to quote prices that are already close to their lowest possible price.
It’s also harder to review a lease deal at the dealership, away from your computer unless you’ve studied it a lot. At home there’s no pressure, and you can use online lease calculators, or consult with members of online leasing forums on your own time before going to the dealership to sign the lease contract.
Mistake #9 – Not negotiating the selling price
Yes, you can negotiate the price of the car for a lease. Dealers usually advertise lease specials based on a low monthly payment, most likely using MSRP, or basically full price for the car. The lower the selling price of the car, the lower your monthly payment will be as well. Try to get the selling price down to around invoice price.
Mistake #8 – Paying a marked up money factor
A lease does have interest. But in a lease it’s called the money factor. The money factor usually is a very small number between 0.0010 and 0.0020 which can make it confusing. Multiply the money factor by 2400 to convert it to an interest rate. For example, 0.0010 x 2400 = 2.4%.
Car dealers don’t advertise the money factor in their lease deals; they don’t have to legally tell you the rate. What they can do is mark it up, which makes the lease payment more expensive.
It’s good to learn how a lease is calculated if you are going to lease a car. There are many good resources that explain the money factor and how it is used in calculating a lease payment.
Mistake #7 – Buying upsell items you don’t need
When you finally agree to buy or lease a car, you will be taken to the finance manager’s office to sign the contract. This is where he or she will try to sell you a bunch of extra stuff that you don’t need.
Some common ones are extended warranties, alarm systems, paint protection and pre-paid maintenance plans.
Politely refuse everything. If they keep offering these products keep politely refusing until they give up. They will make it sound like these are things you really need but you don’t.
Mistake #6 – Underestimating miles driven
This is the most common problem I see people asking about online, what to do when they are way over their allowed miles on a lease. When it gets to that point, it’s almost too late.
A common penalty is $0.20 per extra mile, but it can be higher. So if you’re 10,000 miles over you will have to pay an extra $2,000 when the lease is over.
If during the middle of your lease it’s obvious that you’re going way over the allowed miles, some dealers will allow you to pre-pay for the extra mileage at a discounted rate. For example, if the penalty is $0.20, they may allow you to pre-pay for the extra miles at $0.18.
Mistake #5 – Making too big a down payment
If you ever see a lease special with a monthly payment that seems too good to be true, it’s probably because it requires a huge down payment (they put the part about the $5,000 down payment in the fine print).
Technically, you should never put any down payment on a lease, because if the car is stolen or totaled you’ll probably never get that money back. I think it’s ok to put $1,000 or $2,000 sometimes to get the monthly lease payment to a number that is comfortable, but any more than that is risky.
Mistake #4 – Buying the car at the end of the lease
Generally this is a bad idea because the buyout price will be too high, that is, above market value. That means that similar cars to yours will be selling on the used market for a lower price than what you agreed to for the buyout price on your lease contract. Sometimes it does make sense to buyout your car at the end of the lease.
A. If you are way over allowed miles
If you have to pay $2,000 or $3,000 in penalties for going over allowed mileage, you might want to just buy the car. If you buy the car, you also don’t have to pay the disposition fee, which is usually between $350-$500.
B. Or if the car has lots of damage, i.e. scratches, wheel rash, etc. that you’ll have to pay for
Again, if you have to pay $2,000 or $3,000 to repair wear and tear when the lease ends, it might be better just to buy the car. Then you won’t have to pay those penalties, and you’ll also save on the disposition fee.
Mistake #3 – Breaking the lease
Once you sign the lease contract, you are responsible for all the payments no matter what. There are only two ways to get out.
A. Transfer the lease to someone else. You can post in the classifieds at leasehackr forums, or try advertising on swapalease.com or leasetrader.com and see if anyone wants to take it over.
B. Sell your car to CarMax, Vroom or Carvana. If the price they offer you is close to what your current lease buyout price is, then you can sell your currently leased car to them and they will pay off the bank that is responsible for your lease.
This doesn’t happen often. It’s more likely that the price that CarMax, Vroom or Carvana offers you will be lower than the buyout price, which means you have to pay the difference yourself.
Mistake #2 – Getting a lease term that’s too long
The sweet spot in terms of value for most leases is usually a 3 year term. However, if you know you tend to switch cars often, it might be better to get a 2 year lease. Your payments will be higher, but the upside is you won’t have to deal with the headache of trying to get out of your lease early if you get bored of the car quickly.
Mistake #1 – Not thinking about the end of the lease
A common theme I see among people posting for help about their leases online is that they get in trouble when the lease is almost over. They either want to:
A. Get out of the lease a few months early, and/or
B. Are way over allowed miles / have lots of wear and tear on the car
In both cases, you’ll have to pay up. Also remember that there is a $350-$500 disposition fee due at the end of the lease. So before you run to the dealer to get that new car you’ve been eyeing, think about these scenarios closely and see if any of them might apply to you when your lease is over.
People love leasing because it allows them to drive a new car they normally couldn’t afford. But you have to look at more than just the monthly payment.
Don’t choose a lease that has less total miles allowed than you actually need and then tell yourself that you will drive less. If you go over, you will owe a lot of extra money at the end of the lease and it will hurt, trust me.
