Leasing could be a cheaper way to drive modern models. This is mainly because monthly payments tend to be lower than car loans. In fact, the average monthly payment for the lease was $600 at the end of 2024, according to data from Experian’s State of the Automotive Finance Market Report. The average payment for the new car loan was $742.
However, there are also some disadvantages to leasing a car. This can outweigh your profits depending on your goals and needs. Unlike owning a car that can be sold if necessary, a lease is a legally binding agreement that locks you at the length of the lease. Additionally, if that cap is exceeded, there may be annual mileage limits associated with leases and costly financial penalties.
10 Traps when leasing a car
The risks when signing a lease will depend on the details of the lease agreement, the car you want to drive, and whether you check the hidden fees. This gives a summary of all the pitfalls you may encounter, as well as some tips on how to avoid them.
1. Potentially expensive mileage limit
Most car leases include a limit on the number of miles you can drive in your car each year. For reference, the latest data from the Federal Highway Administration shows that US drivers average around 13,500 miles per year.
Some car leases, especially those that advertise low monthly payments, include annual mileage caps of less than 10,000 miles. You can also find several leases with mileage caps of up to 15,000 miles per year. Depending on the type of vehicle you are driving, expect to pay a mileage penalty of 10 to 25 cents per mile if you exceed your annual cap.
The higher the price tag of the car, the higher the penalty. If the penalty is 25 cents per mile and exceeds the 3,000-mile limit per year, the additional cost is seen.
2. Early termination fee
If you want to close your lease early, you may need to pay a significant penny to get out of the contract. It depends on the terms of your lease, but you may have to pay the difference between how much the car depreciated and what you have already paid for it. In some cases, this fee can range in the order of thousands of dollars.
Let’s say you’re leasing a $40,000 car. Three years later, I paid $18,000. However, the car is depreciated by $21,000. If so, you may need to pay the difference of what you have already paid, $18,000, and the amount your car has depreciated, $21,000. This means you’re on the hook for $3,000.
Early termination costs may include taxes and vehicle disposal fees. This helps lenders offset the cost of selling the vehicle. You are also responsible for repaying late fees, parking tickets and unpaid monthly payments.
3. Low residue values
Residual value is how valuable the car is at the end of the lease term. Let’s say your lender estimates that the $30,000 car you lease today is worth $15,000 over three years. Monthly payments are calculated to cover their value of $15,000 losses. So a 36-month lease is equivalent to a monthly payment of $416.67, without any interest or taxes or fees.
If the selected vehicle is a vehicle that historically retains its value and therefore has a higher residual value at the end of the lease, the monthly lease payment will be lower. However, if the lease company determines that the car has a low residual value at the end of the lease, even if it is not really the case, then monthly lease payments will be even more expensive.
4. Advertising prices that require a huge down payment
If you see monthly lease payments advertised in the $200-$300 range, do your homework and find out what you’re doing. In many cases, these low prices amount to massive down payments. You need to see how much you are putting to qualify for such a low monthly payment.
Leasing a car is not like buying a car. You can make the mistake of offering a big down payment on a lease, and then if your car is added up early, you can lose a lot of money. Your car insurance will refund your vehicle to the leasing company, but you will not be able to get your down payment back. This means you will be out of the car and you will lose your down payment as well.
5. Compare monthly payments only for purchases and lease purchases
Some dealers may try to seduce a lease by comparing monthly payments for lease vs. purchases. There are also how low your payments will be if you go to a lease route. Remember: When you buy a car, you can own it at the end of your loan term. If you use a lease, you will need to return the car.
However, when you buy it you will also forget the additional costs such as wear and tear fees associated with the lease. If you are purchasing, compare car loan fees to ensure you get the best deal.
6. Ignore the cost of the car
Just because you lease doesn’t mean you can ignore the price tag of your car. That remains important as what you pay to lease depends heavily on the cost of the vehicle, residual value, and depreciation rate.
Luxury cars with high purchase prices will lead to monthly lease payments. You don’t build stocks in your car or own it at the end of the lease, so the additional monthly fee may feel like you’re pouring money into the drain.
7. Don’t look at all prices
General fees for leasing a car’s van caly, but may include:
- Acquisition fees: It is also called a managed fee or a bank fee. This is a one-time fee charged by the lender to bundle the lease. The amount can be run anywhere from a few hundred dollars to over $1,000.
- Sales tax and license fees: Read the fine print as this may not be included in your monthly payments based on your state and individual contract.
- Purchase price: Once the lease is over, you have the option to buy the car rather than return it to the lender.
- Lease end fee: If you decide to return your car, you are responsible for paying the lease termination fee, also known as the temperament fee. This may include vehicle inspection, cleaning and reconditioning, storage, transportation costs and management fees.
- Wear fee: You may be charged for lost equipment. Alternatively, your car may wear or tear beyond what is covered by the lease agreement. Read the contract and pay attention to the language that means “normal wear and tear.” Also, once the lease is finished, check for repairs and maintenance that may be your responsibility.
8. Take longer to lower monthly payments
A long lease term means paying less monthly, but you’re committed to your car for a long time without building equity on your vehicle. Monthly payments for car loans or leases can be operated by extending the term.
Like any other loan, the longer the lease period, the more you can pay overall. Using a lease can also face additional charges of wear and excessive mileage. A long lease period will rarely save you money. And it may actually cost you more.
9. No comparison of financial factors
Auto leases do not have an annual rate (APR), but they do have funding fees. These are known as “money factors.” Money factors are very similar to interest rates, which determines how much you pay in your financial fees. As you can imagine, the higher the money factor, the more payments you make.
There are no APRs listed for leases, but that doesn’t mean you’re free from paying interest. Money factors work in determining how much you pay in your financial fees. Unlike interest rates, money factors are expressed as decimals. To determine your financial fees as a percentage, multiply the money factor by 2,400. So if your money element is .0025, it is 6%. Your money factor also depends on your credit score, so individuals with good or good credits can generally pay less for leases.
10. Don’t negotiate a lease
While it cannot reduce the cost of the entire lease agreement, including acquisition fees, disposal fees, and residual value, there is still area where you can receive the transaction. For example, if you purchase a vehicle at the end of a lease, the dealer can lower the acquisition price.
You can also negotiate the selling price or mileage allowance for the vehicle. And if you have good credit, you may also be able to get a lower money factor.
Conclusion
By understanding how a car lease works and being aware of the costs, you can avoid common lease straps and save money. In addition to staying vigilant when it comes to pitfall leases, it is always wise to be able to get into the lease office with knowledge and confidence, with pre-calculation of the expected lease costs.
