I've always had somewhat of a phobia about leasing cars…which is odd, since I’m typically commitment-phobic enough to prefer renting when it comes to nearly everything else. But leasing and renting aren’t one and the same. The difference is a matter of degree—specifically, the degree of responsibility the lessee takes on for the care and wellbeing of the specific item being leased. On that topic, since leasing cars first became popular, it seems I’ve heard nothing but cautionary "don't do it" tales. Perhaps this is because the leasing landscape is rife with fees. Some fees are obvious (like the monthly lease payment) while others are wearing camouflage worthy of seasoned black ops agents. If you are considering leasing a car, here’s what you need to know before you sign on the dotted line!
1. Mileage-adjustment fee
Lease vehicles are reputed to retain their value more readily than owned vehicles. A vehicle retains value in two ways: low mileage and good condition. When it comes to mileage, lease companies do their utmost to preserve a vehicle's value by tying your mileage to your monthly lease payment. So if you decide to lease rather than buy, what you pay later in mileage adjustment fees (if anything) will depend largely on how well you’re able to estimate your average mileage up front. Over-estimate and you pay for more car than you use. Underestimate and you get charged a hefty penalty per excess mile when you turn in the vehicle.
Tips to avoid paying: First, carefully review your driving record in years past to get a sense of your typical mileage both monthly and annually. Now, add a small percentage to that to ensure you don't go over your allotted mileage. This should be the mileage you take to the leasing agent to calculate your monthly payment. You can also calculate what you’ll pay in fees if you exceed this mileage estimate—just add 20-30 cents per mile for every mile over your limit.
2. Vehicle-condition fee
The second facet of a vehicle's ability to retain value relates to its condition. When it comes to leased vehicles, this means any dings, scratches, fender benders or more serious incidents will cost you. Here’s a list of damages you want to avoid at all costs—each one comes with a fee attached.
- Dents, scratches and other damages to interior or exterior.
- Cuts, tears, burns or stains in fabric or leather.
- Scratches, chips or cracks in glass.
- Very worn tire tread.
- Broken accessories.
- No maintenance done or providing only a spotty maintenance record.
- Repairs completed by an uncertified mechanic or body shop.
- Poor quality repairs (even if done by a certified shop).
Tips to avoid paying: Clearly, you need to treat your lease car with kid gloves. Keep precise records of all repairs and maintenance. Select mechanics and body shops carefully. Don’t eat or drink in your car or allow passengers to do so. Never smoke in the lease car. Put down protective mats and seat covers. Replace the tires before turning the car back in.
3. No earned equity
While not a fee per se, you should consider that leasing a vehicle means you’ll forfeit earned equity. Basically, you’re signing up for an ongoing series of monthly car payments with no end in sight. This doesn't mean leasing a vehicle is the wrong choice—it’s just something to keep in mind.
4. Termination fees
Sometimes life intervenes and you can't always predict how that will affect your finances. If you need to turn your lease vehicle in earlier than your contract states, you may face penalties, including these:
- Early-termination fee: An early termination fee is simply a financial penalty for turning the car in early.
- Auction fee: If the leasing company sells the car at auction instead of releasing it, you may be charged the difference between the auction proceeds and the remaining value of your lease term.
Tips to avoid paying: Aside from the obvious—doing your level best to anticipate the future—just be sure you know what the penalties are if you need to turn the car in early. Make sure these are clearly outlined in your contract before you sign.
5. Disposition fee
This fee covers the leasing company's costs for disposing of the lease vehicle after you turn it back in. You may be charged for any or all of these items—those that aren’t self-explanatory are defined.
- Administration: This fee covers any administrative overhead and paperwork, which makes it a great place to hide fees you didn't agree to!
- Funding: This fee covers the period of time between when you turn the car in and when the next lessee begins paying for it.
Tips to avoid paying: Find out up front what the leasing company will do with the vehicle once you return it and exactly how much of the expense of that is your responsibility. Don’t be afraid to negotiate here—the disposition fee will typically be presented as a lump sum fee, so ask for an itemized breakdown of exactly what the fee covers before you agree to it.
6. Insurance fee
Finally, there can be a real price differential between what you’ll pay in auto insurance for a car you own and a car you lease. In most cases, auto insurance companies won’t pay for your monthly lease payments and taxes (or associated fees) if you seriously damage or total the lease car. You may be required to purchase a policy called "gap insurance" along with a policy that includes the minimum coverage levels for liability, collision and comprehensive insurance.
Tips to avoid paying: Be sure you know what level of insurance the leasing company requires—many lessors require a zero deductible and maximum (not minimum) coverage for liability, collision and comprehensive insurance. Calculate your total insurance premium, including gap insurance, before you decide to lease a car to make sure you can afford it.
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