With interest rates low, now is a great time to buy a car. But if you’re not interested in a long-term commitment, leasing may be the better choice. When you sign a lease, you’re essentially financing the vehicle for a set period of time and when the lease is up, you hand the keys back over to the dealer. This can be a good option for people who aren’t interested in keeping a car for the long haul or those who want to trade up for a new model every few years. If you’re considering a leased vehicle then it can be a good idea to work with a financial advisor to figure out how this might fit into your long-term financial goals.
Leasing a Car
While leasing offers certain benefits, there are some potential drawbacks to consider before you sign on the dotted line. If you’re not careful, you could end up paying much more than you would if you were purchasing the vehicle instead. Most people focus a lot on how much they spend on a car but there is a lot more to consider when leasing. When you’re shopping around for a deal on a car lease, take care to avoid these potentially costly missteps.
1. Paying Full Price
If you were buying a new car, chances are you’d try to talk the salesman down a little on the price. The same should go when it comes to leasing. Even though you’re not planning to keep the vehicle for the long term, you should still try to get the best deal possible. While the price of cars skyrocketed in 2022, there are still good deals to be had – especially for leases.
When you’re working out the details of your lease agreement, it’s easy to focus on just the monthly payment, but you need to pay attention to the bigger picture. If the dealer is charging you the full sticker price for the car, you may not be saving as much as you thought. Getting even a $1,000 knocked off the price can make a big difference in how much you’ll pay over the lease term.
2. Putting Too Much Money Down
In order to guarantee customers the lowest payment possible, some car dealers will ask for sizable down payments upfront. Typically, this money goes towards paying off a chunk of the car lease. But ponying up all that cash early on doesn’t always work in your favor.
If the car is stolen or totaled in an accident during the first few months of the lease, the insurance company would reimburse the leasing company but there’s a good chance you’d be left out in the cold. Not only would you be short a vehicle but you’d also be out of the money you put down. Paying less upfront or even nothing at all may make your monthly payment a little higher but you wouldn’t have to worry about coming up short if something were to happen to the car.
3. Underestimating Mileage
When you sign a lease contract, one of the stipulations you’ll have to agree to is how many miles you can put on the car. Typically, mileage is capped at anywhere from 12,000 to 15,000 miles a year. If you exceed the limit, you’ll have to pay a fee for every mile you go over. Depending on the leasing company this could be as much as 25 cents per mile, which can quickly add up if you’re constantly on the road.
Before you agree to a lease, it’s important to assess your driving habits carefully to make sure the limits are feasible. If you think you might end up going over, you could ask the dealer to increase your mileage limit. Just keep in mind that it’ll still cost you. Either your monthly payments will go up to reflect the higher limit or you’ll be asked to prepay in advance for potential overages. If you have to prepay, make sure you include a clause in the lease that allows you to receive credit back for any unused miles.
4. Keeping the Car Too Long
Leasing is meant to be a short-term commitment. If you’re signing a lease for longer than three years you could be setting yourself up for trouble. Generally, lease agreements include a vehicle warranty that’s good for a specific amount of miles. The longer the lease term, the more likely you are to be on the hook for maintenance or repairs that aren’t covered once the warranty expires.
If you do decide to take on a four or five-year lease, it may be worth it to invest in an extended warranty to help cover some of the added cost. Otherwise, you run the risk of having to put even more money into a car that you don’t actually own.
5. Forgetting About the Fine Print
Just like any other contract, you need to read over the fine print carefully before you finalize the agreement. For example, dealers will typically include specific details as to how the car must be maintained during the lease period. A tiny scratch may not seem like a big deal but it could end up costing you big if you get hit with a penalty when you turn the car in. It pays to know exactly what you’re getting yourself into before you drive off the lot.
6. Not Maintaining the Vehicle
A big part of a leased contract on a car is your obligation to take good care of it, including maintaining the vehicle regularly. Some leasing companies may even require that you maintain the vehicle only at approved locations. If you’re failing to maintain the regular oil checks or tire rotations then it could come back to bite you at the end of the lease and you could end up paying more than you thought.
The Bottom Line
Leasing a car isn’t the right choice for everyone but it can be a good way to have a fresh car every few years without having to worry about the hassle of selling. There can be a lot of restrictions on how much you can drive the car, though, so it’s important to know what you’re getting into and what you can do with your vehicle before signing on the dotted line. You should also be keenly aware of how this could impact your finances.
Tips for Leasing a Car
- Have financial questions beyond car leasing? Whenever you have major financial decisions to make, you should consider working with a financial advisor. They can help you make a financial plan to determine the right choices for your overall financial goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re not sure how a lease will fit into your budget, you can use our free budget calculator to help you figure out how much extra money you may have each month.
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