Are you making these common car leasing mistakes?

By Douglas Matus

Vehicles are among the costliest purchases you’ll ever make, and usually require some form of financing. When you buy a car with a loan, your payments build equity you can utilize later. A lease generally costs less per month, but you will always have a car payment. On the other hand, you can exchange the lease every few years to have the benefit of a brand-new car.

Despite the lack of equity, many people choose to lease, as the arrangement can allow for nicer vehicles than they could typically afford. Before you sign the dotted line, however, you’ll want to consider the fine print, and watch out for these costly mistakes. See our related article about your credit score and car leasing.

Maintenance Neglect

An eye-catching lease can blind buyers to the additional costs of vehicle ownership. Sure, you can afford the advertisement’s low monthly payments; but what about everything else?

“The cost of a car is just the beginning,” says Cortney Johnston of LightStream, the online lending division of SunTrust Bank. “Before you lease, think about out-of-pocket expenses like fuel, insurance, maintenance and repair costs, and state fees.”

The higher your car’s value, the more you pay for insurance. (Your credit score can also affect what you pay for insurance.) Maintenance and repair can also become a killer. Most dealers will waive the effects of “normal use,” such as small scratches, but you’ll need to study the fine print to understand the particulars. If damages exceed the value stipulated in the lease agreement, you’ll be on the hook when you return the car.

Know When to Let Go

Most people only keep leased vehicles for two or three years, as frequent upgrades are one of the chief benefits of the leasing arrangement. In fact, you should actively strive to return leased cars within this timeframe, since keeping them too long costs more money.

“It’s usually recommended that you sign a lease for a term of four years or less,” says David Bakke of MoneyCrashers.com. “Take one for longer than that, and problems and repairs can pop up which you will have to pay for.”

As cars age, maintenance costs rise, which is why the average vehicle’s manufacturer warranty lasts three years. If you want to keep a car for longer, you should consider an outright purchase.

Mind the Gap

Many consumers relate to optional insurance as an unnecessary expense. However, when it comes to leased vehicles, gap insurance can prove invaluable. Those who overlook its benefits to save a little money may pay for this mistake down the road.

When you lease a car, you become liable for the car’s total value. If the car gets stolen or wrecked, your standard insurance covers its market value — not its full value in the terms of the lease. Since every vehicle depreciates with time, the driver becomes liable for the difference.

Gap insurance will cover this balance, and often gets included with the cost of the lease. Again, make sure to read the terms of your lease agreement. If it doesn’t include gap insurance, you should consider shopping elsewhere.

Too Much Upfront

Failure to negotiate a lease can lead to an especially costly mistake: too much money paid upfront.

“One mistake to avoid is not haggling over the price of the vehicle,” says David Bakke. “You can negotiate the price on a leased car just as you could if you were purchasing one.”

Advertisements may promote low monthly payments, but fail to mention a prepay requirement. This covers a part of the lease ahead of time, but if something happens to the vehicle, such as theft or an accident, the lessee loses his or her money.

It will serve your best interests to negotiate as low an upfront payment as possible. Monthly payments will increase, but you can invest the extra cash or simply put it towards the monthly bill; either way, the money won’t get “lost” should something happen to the car.

The decision to lease or purchase comes down to each person’s preferences: is it more important to have a new vehicle on a regular basis, or own a car for years and build equity? If you decide the former, a lease can save you time and money — provided you watch your step.

About the Author

Doug Matus is a freelance writer who contributes frequently to Self.

Written on April 26, 2016

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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