For some people, there is an appeal to leasing a car vs. purchasing it outright. Leasing a car is one way for many would-be car owners to be able to finance a more expensive car with a lower monthly payment than they would have otherwise been able to afford.
This low monthly payment is not all it is cracked up to be, though. In fact, there are several hidden dangers when you lease a car that you do not typically find when making a purchase.
With the popularity of leasing on the rise and new commercials hitting the airwaves every week, it’s important to understand how these hidden expenses can wind up costing you more money in the long run than if you had simply purchased the car.
Here are four of the biggest hidden dangers that people face when leasing a car instead of buying a new car.
Lack of equity
While most financial experts are quick to point out that your new car loses value as soon as you drive it off the lot, they also often fail to mention that you will eventually have some sort of equity in the car.
When you finish making payments on your car loan — if you are a buyer — there is still a residual value to your paid off car. This is the value that you can sell the car for in the end. Granted, your car’s value may just be a fraction of what you paid for it initially, but it still has some value.
If you had leased the car instead, that wouldn’t be the case. When you lease a car, you agree to return the car at a predetermined point in time, typically three years after signing the lease. At the end of your agreement, you simply return your car and are left with nothing but memories.
Also can be the risk that if you wreck the car or have it stolen, your auto insurance will only cover the market value – which may be less than you owe on your lease.
When you lease a car, you are typically limited to driving between 10,000 and 12,000 miles/year. If you want the best deal on a new car lease, you may find yourself stuck at the low end, with a 10,000 mile annual limit.
Many lease agreements charge 18 cents per mile or more when you go over your limit. So, for example, if you drove 15,000 miles each year during a three year lease that only provided you with 10,000 miles annually, you could be looking at an extra $2,700 in charges when you your leased vehicle to the car dealership at the end of your agreement.
A car lease requires that you return your car in good shape, and dealerships can vary in terms of what they consider to be satisfactory condition. What you may view as simple dings and chips from normal wear and tear may be unacceptable to the dealership when you return your car.
One friend of mine found himself penalized thousands of dollars for damage thanks to stains on the carpets of his car from coffee spills. ProTip: You may be able to take your car to the dealership for a pre-inspection before returning it, thereby allowing you to fix/clean it up before being charged.
Lots of legalese
Both leasing and buying a car can both be tricky, and car dealerships don’t make things easier on their customers with all their legalese.
You’re bound to hear terms such as money factor, residual value, capitalized cost reduction, and capitalized cost when you look at leasing a car. One of the most important figures to focus on is the money factor, which is essentially the interest rate on your lease.
You have to multiply the money factor by 2,400 in order to find the annual interest rate that the dealership is charging you. For example, with a 0.002 money factor, the interest rate is 4.8%.
Leasing a car is starting to make a big comeback in mainstream America as more consumers are looking for new cars while trying to minimize their monthly payments. According to the Automotive Lease Guide (ALG), which tracks industry leasing trends and residual values of cars, the popularity of leasing is expected to continue to increase over the next four years.
ALG estimates that leasing will grow to over 17% of the mainstream car purchasing market by the end of the year, with 43% of all luxury cars being leased. Leasing a car may be a viable option for many consumers, but you need to go into the transaction with an understanding of all the requirements, potential fees, and hidden dangers that lie ahead.
Have you ever leased a car? If so, did you run into any unwelcome surprises?