(Newswire.net — October 30, 2020) — Leasing, rather than buying a car, has the potential to get you much lower monthly payments — or a nicer car than you could otherwise afford. However, it’s important to go into the deal carefully to ensure it works out financially.
With that in mind, we’ll review some of the most common car leasing mistakes to avoid. First though, here’s a quick primer on leasing in general.
How Leases Function
You’ll go through the same process you would if you were buying, including negotiating the purchase price. However you’ll do this on behalf of the financial institution from which you’ll lease. Your monthly payment is based upon the amount you agreed to pay for the car, less your down payment, less what the car is expected to be worth at the end of the lease (the residual value).
You’ll agree to keep the car in good condition and drive it no more than a set number of miles in total (generally no more than 12,000 annually). You’ll also promise to make no modifications that cannot be reversed and keep the car for a set number of years (typically three to five).
At the end of the lease term you have the option of returning the car and getting another if you’d like. You could also buy it outright for the residual value, or sell it yourself, pay off the residual value and keep the profit.
Committing Too Much of Your Cash
Yes, the more cash you put in up front, the lower your monthly payment, just as when you finance a purchase. However, unlike a purchase, you won’t get any other financial advantage from doing so.
Moreover, if something happens early on in the lease and an insurance company declares the car a total loss, you’ll be out that money. Any insurance payoff would go directly to the leasing company. You will also need to come up with more money to get a replacement.
This is why experts recommend limiting your cash contribution to $2,000 or less.
Miscalculating Your Annual Mileage
One of the key determinants of the overall cost of your lease will be the number of miles you drive on a monthly basis. If you’re looking to avail yourself of one of the best lease deals, this means you’ll need to drive an average of 12,000 miles or less a year in a mainstream car. Luxury and high-end sports models typically place the mileage cap at 10,000.
This means you can do a total of either 36,000 or 30,000 miles, depending upon the classification of the car you lease. Failing to take this into consideration and going over can get rather costly on the back end of the lease. Most companies impose charges of around 25 cents a mile when the “mileage cap” is exceeded.
Overlooking Gap Insurance
Going back to our total loss scenario above, if the insurance payout were less than sufficient to pay off the lease, you’d also be on the hook for the difference. Gap insurance (as the term implies) covers the gap between the fair market value of the car and the amount it would take to pay off the lease.
Let’s say your lease deal places the residual value of the car at $20,000. The car is totaled and its fair market value at the moment of the accident is determined to be $15,000. The insurance company would pay the leasing company $15k. That organization would then be looking to you to cover the other $5k. Gap insurance would pay this off for you.
These are the three biggest car-leasing mistakes to avoid. Smart lessees also make sure the duration of their leases coincide with the warranty on the car. This way, manufacturer will repair it if anything goes wrong during the lease period.