Leasing a car is a great way to drive a brand new car (think new car smell and clear odometer) without paying too much. Leasing accounts for one-third of the new car market. With a leased car, you can drive a new car for a previously agreed upon number of years and miles. At the end of the lease, you have the option of giving the car back or buying it.
However, there are some things you should be aware of before leasing a car. These are described below.
Leasing Affects Your Credit
Making your lease payments on time positively affects your credit. Conversely, missing a payment will drop your credit score. When you first lease a car, you may see a small drop in your credit because a new account has opened. Don’t worry, with regular payments you can build your credit score back up quickly.
Another way a lease affects your credit is if you terminate your lease early. This is similar to defaulting on your student loans or closing an account. If you want to get out of your lease early, make sure you check with the lease agreement if you can have someone take over your lease.
You, Will, Have to Pay a Down Payment
The down payment is the amount due at signing. Paying a certain amount takes money off the total money owed- lowering your monthly payments. For example, say the MSRP of the car you are leasing is $30,000 and you put $2000 down. You now owe lease payments for the remaining $28,000.
Putting money down before starting monthly payments is beneficial because it decreases the amount you will have to pay each month.
Know-How Many Miles You Drive
When you sign your leasing contract you agree to drive a certain number of miles each year. Usually, this is 10,000-12,000 miles per year. If you go over the agreed upon mileage the leasing company will charge you about $0.25 for every mile you go over.
Before leasing a car make you should know how much you drive on average to request the appropriate number of miles from your leasing company. The more you need, the higher your monthly payments will be. However, if you will drive that number of miles anyway, you will save money when you return your car by not paying extra per mile.
Besides the mileage fee, there are several other fees you can expect when leasing a car. One of these fees is called the acquisition fee. This is the price for the leasing company to set up the lease. It is also known as the bank fee or administration fee. This fee can be paid upfront or added to your monthly lease payment.
A disposition fee is the cost of cleaning and selling your car after you return your lease.
Some leases require a security deposit. This is usually the amount of your monthly payment and will be returned to you when you return your lease. You can usually negotiate this fee away, especially if you have good credit.
When leasing a car, you are still responsible for the maintenance of your car. If something goes wrong with the car while it is in your possession, it is your responsibility to pay for it.
Most leasing companies offer free oil changes and tire rotations. However, the good news is that new cars don’t require much maintenance.
Wear and Tear
Some wear and tear are considered normal, however, when returning your lease you will be required to pay for anything that is considered more than normal wear and tear. Make sure you know what your leasing company defines as normal wear and tear. This can include scratches on the car or overuse of the tires.
Know the length of the lease you are agreeing to. Normally, the lease length is around 24-36 months. As mentioned above, if you terminate the lease early it may affect your credit. Leasing allows you to have a brand new car without paying too much. Within two or three years you can return the car and get your next brand new car.
Gap insurance protects you in the situation that your car is totaled or damaged. Your new car depreciates value as soon as you drive it off the lot. In the case that your car is totaled, your insurance will pay for the market value of the car at the time of the accident. You will then be responsible for the “gap” or the difference between the value of the car at the time and the residual value. The residual value is how much the car is worth at the end of your lease.
Gap insurance protects you from having to pay this difference. Usually, it will only add an extra $20 to your monthly payment.
You Can Negotiate
Just as you would if you were buying a car, you can negotiate the money down you are willing to put and the monthly payments you want to make. Usually, to lower your monthly payments you would have to put more money down. Be upfront with your leasing company about how much you can afford and your leasing company should be able to work with you.
Do Your Lease-End Research
At the end of your lease, you have three options: walk away, buy the car, or trade in. If you just return your car back to the dealership, you will have to pay the disposition fee mentioned above, for damages and any extra mileage. If you choose to buy the car you pay the remaining amount after your monthly payments.
You can also trade in your vehicle in exchange for a different vehicle from the same dealership. The fees from your first lease will be rolled into your new contract. This is also an option for ending your lease early, as some dealerships will allow you to trade in for a new car before your lease period is over.