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Know the Real Cost of Leasing a Vehicle

Who wouldn’t want to drive a new vehicle every couple of years — especially a more luxurious model that you can’t afford to buy? It’s the first reason people opt to lease a car rather than purchase one outright. Another attractive selling point is the low monthly payment. But as in most good things in life there is a downside that may not be obvious. The potential pitfall of leasing a car is in the fine print of the agreement where hidden dangers may lie. So before you sign a leasing contract, consider the following expenses that may be missed in the excitement of driving home in the vehicle of your dreams.

Never Ending Payments

Unless you purchase a vehicle, you’ll never stop sending money to the car companies. Although this may not be problem for some people and the lure of driving new vehicles can be appealing, choosing a lease means a never ending cycle of payments. Even if you’re financially stable and don’t have a problem with debt, a car lease is just one more responsibility — and it won’t go away until you buy. Think about all the money you could be saving after you payoff your new vehicle and stop sending in checks. 

A Complete Loss of Equity

While it’s true that the minute you drive away in a new car it begins to lose value, owning a car provides a source of equity and the option to sell it and recoup some of cost, although at a fraction what you paid. There will be some residual value to your purchased vehicle no matter how long you own it, especially once it’s been paid off. Lease a vehicle, on the other hand, and there is no way to recoup any of the money you put into it. Fulfill or terminate a lease and you’ll end up with memories and the need to shop for a new car.

Limited Miles & Milage Fees

This is the one factor of leasing that many people underestimate. If you use your current driving pattern to calculate whether a 12,000 mile limit will be adequate, you may neglect to consider the emotional highs of driving an upscale ride. You may end up finding more reasons to take long country excursions or to drive to your vacation destination rather than fly – things you wouldn’t have done in the past with your old beater.

Going over the limit will mean over-mileage fees of an average $0.18 per mile that can quickly put the brakes on your adventurous spirit and even curtail your normal driving habits. In addition, dealers offer the best lease rates for annual limits of 10,000 miles, making the matter even worse. Here’s an example of the financial cost of going over the limit on a three-year lease with a 10,000 mile annual limit:

1st year     15,000 miles (5,000 over limit)    = $  900 over mileage fees
2nd year   10,000 miles (zero over limit)       = $     0 over mileage fees
3rd year    12,000 miles (2,000 over limit)     = $  360 over mileage fees

Due at the end of your agreement                     $1,260

* Calculate your excess mileage with a Car Lease Mileage Calculator

Damage Penalties

When owning a car, any damages that occur are entirely your responsibility. You can choose to repair (or neglect) any dents, scratches or major accidents. With leasing, you need to take extra care to keep the inside and outside of the leased vehicle in satisfactory condition or pay the price in damage fees when you return the vehicle. The big sticking point is that the idea of ‘satisfactory condition’ is relative; what you may think is normal wear and tear may be totally unacceptable to the dealer, when you return the car. Penalties can run into the thousands of dollars depending on the amount and type of damage.

Legal Terms and Language

In today’s world, there are very few decisions that don’t require a legal agreement with all the confusing language that goes with it. So it goes with vehicle leasing contracts. Terms that may be bandied about are residual value, capitalized cost reduction, depreciation expense and money factor – the last being the most important. The money factor calculation is simply the interest rate you will pay on the lease to compensate the lender for taking on the risk of lending you the money. To see the rate in comparable terms to a credit card’s APR, multiple the money factor by the number of months of the lease, i.e. 0.002 x 24 months makes the interest rate 4.8%.

Insurance Lapses

This issue is more relevant to the insurance coverage you purchase but still needs to be addressed to avoid a problem with a lease. If, heaven forbid, you total a leased vehicle, your insurance may only cover the market value which may be less than you owe. Double check with your insurance agent to be sure you have coverage that will pay off your entire obligation with a leasing company before signing on the dotted line.

Leasing a vehicle is a viable option for anyone who doesn’t care to own. It’s also for people who want or need the reliability of a new model every few years. But like any other major purchase, you need to understand the details. Review how the contract will affect how you drive and all the requirements and potential fees of the agreement.

* For more information, see the Federal Reserve’s Consumer Guide to Vehicle Leasing.

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