Although leasing allows people to get a new car model every few years, it has drawbacks that may outweigh the benefits.
Many car lease commercials make leasing appear very appealing to people. However, lease terms and conditions are typically restrictive and come with high costs.
We’ve put together the most important reasons you shouldn’t lease a car in this article.
1. Lease Deals Are Too Complex
Leasing terms are usually complicated when compared to the terms of buying a car.
There are fees at the beginning and end of the lease. These fees include an acquisition fee, sales tax, license fees, and early termination and return charges. There are also many terminologies associated with a lease.
Many people don’t even understand all the lease’s terms and conditions.
Before signing a lease agreement, ensure you’re aware of all the hidden fees. Dealerships are often accused of making the terms confusing to conceal whatever they’ll hold the person liable for. Such things include underlying penalties and fees.
Finally, when you go to return a leased car, you may be shocked to discover hidden costs you didn’t know about.
You can avoid this pitfall by purchasing rather than leasing a vehicle. You can drive it without limits after you’ve paid off the entire amount.
2. No Equity Built Up in the Car
Another major limitation of leasing is that you do not gain any equity on the vehicle.
Unlike a car purchase, you can’t claim the leased car as your own. You pay fees on a monthly basis but have no ownership rights to the vehicle once the lease expires.
Instead, it belongs to the dealership, and you’re required to return the car at the end of the lease term. Unless you pick a purchase option, you’re fated to return the car.
This means people who lease cars can’t sell or trade it in to reduce the cost of their next vehicle. As a result, they are almost always forced to lease another car from the dealership.
The leasing cycle continues as people go directly from one lease into another when their lease ends. This means monthly payments go on forever.
Some people may prefer to sell a car they’ve been driving for several years than to return a leased vehicle. Thus, buying a car gives them more value.
The only way to own a leased car is to purchase it at the residual value when the lease expires.
3. You Can’t Customize a Leased Car
The thrilling part of buying a new car is having the ability to customize it to your desired taste. Unlike a purchased car, you can’t customize a leased vehicle.
Most lease contracts may not allow you to carry out any modifications in the car. This is to enable the dealership to re-lease or sell the car to another customer when you return it.
You can only modify the leased car if your lease agreement allows for customization. You may still be limited as to the parts you can change.
Here, you’re expected to undo the changes made on the car when returning it. However, they’ll hold you liable for damages on the car if there are problems because of your modifications.
You’d have to pay to fix it or you’ll need to file an insurance claim and pay a deductible.
4. Limited Mileage on Leased Cars
When a person buys a car, he or she may drive it as much as they want.
You can drive your own car as much as 20,000 miles or more per year. This is not practical with a leased car.
Lease agreements specify the maximum number of miles you’re allowed to drive. They put this in place to ensure the car doesn’t wear out too quickly.
Most leases limit a person’s annual mileage to between 12,000 and 15,000 miles. Going over the limit means you’ll have to pay an extra mileage fee.
The mileage fee ranges from 10 to 30 cents per mile, depending on the type of vehicle you drive. Mileage restrictions can be costly and the more expensive the car is, the greater the penalty.
Assume the penalty is 25 cents per mile. You’ll be charged a hefty $1,250 if you exceed the limit by 5,000 miles at the end of the lease.
A person leasing a car must carefully estimate their average miles per year. You’d cause yourself a lot of additional expense if you don’t budget your average yearly mileage. Leasing a car restricts your driving freedom by causing your gaze to remain on the odometer always.
Negotiate a contract with a higher mileage limit if you’re still thinking about leasing a car. However, additional miles will cause greater depreciation, and would increase your monthly payments. One way or another, you’ll end up paying huge prices for a car lease.
5. Monthly Payment Trap
Leasing requires you to pay a monthly fee for the duration of the lease. This typically covers the cost of depreciation on the vehicle.
The monthly fee is the difference between the sale price and the estimated residual value. They then divide this by the number of lease months, plus the money factor, use tax, service and insurance fees.
In car leasing, the interest is called a money factor, and is expressed as a decimal. It can be multiplied by 2,400 to get the annual percentage rate on the lease.
A money factor of 0.005 will be 12 percent. The interest rate charged on a lease is higher than the interest rate charged on a car purchase loan.
When car dealerships offer low monthly payments, there is usually a catch: a large down payment.
If the car is wrecked or stolen within the first few months, your insurance company will reimburse the leasing company. However, the money you paid in advance will probably not be refunded to you.
Other companies may offer to lower the lease payments by extending your lease period. While a longer lease term may cause less monthly payments, you will pay more interest at the end.
Car dealerships prefer leasing because it essentially equates to never-ending monthly payments. To ensure the monthly payment continues, they’ll set you up with another lease when one expires, ensuring the trap continues.
However, if you’re unable to continue paying the monthly fee, the dealership repossesses the car and sells it at auction. You’re the only party that can lose.
You are legally obligated to pay the difference if they sell it for less than what you owe on the lease.
6. Early Termination Fees
Car dealers insist monthly leasing payments are cheaper than purchasing a car. They do this to persuade people to lease. Still, they don’t emphasize on the fees they’ll charge if a person ends the lease before the contract ends.
Some people may no longer be able to afford the monthly payments. Others may just wish to end their contract before the lease expires. Such people may have to pay an enormous sum of money to end their lease agreement.
Sometimes, they might be lucky enough to get someone else to complete the lease for them. However, they’ll still be heavily charged if the person defaults. This means they’re still bound to the original contract, no matter what.
You’ll have to pay for the difference between the car’s depreciation and the amount you’ve already paid for it. The termination costs can amount to several thousand dollars depending on the terms of your lease agreement.
Just assume you leased a $30,000 vehicle and have paid $12,000. After three years, the car has lost $16,000 in value. You’d be required to pay the difference between what you’ve already paid and the amount the car has depreciated by.
This means you’d be liable for $4,000.
In addition, you’ll pay late fees, parking tickets, and any outstanding monthly payments. This includes taxes and a car disposition fee to help reduce the lender’s cost of selling the car.
On the other hand, a car owner can sell or trade in their car whenever and however they want. The salvaged capital from the sale can pay off any outstanding loan debt from purchasing the car.
7. End of Lease Fees
A car buyer can simply walk away from the dealership once he pays the loan off. He or she will never have to deal with them again. You may still have to pay fees at the end of a lease contract.
Dealerships often charge people who lease cars a disposition fee at the end of the lease term. This includes administrative fees, car inspection fee, cleaning and reconditioning fee, and lost equipment costs.
They are also responsible for any wear and tear or repairs that aren’t covered by the warranty.
They will thoroughly inspect the car for dents and scratches on the chassis and damage to the windshield and windows. They may also be concerned about excessive tire wear, and stains on the interior furnishings.
If the car suffers damage that goes beyond normal wear and tear, the vehicle’s resale value will drop significantly. Expect the dealership to charge you to pay extra for excess wear-and-tear when you turn the car in.
These charges are not cheap. The definition of a normal wear and tear is subjective and debatable and it also varies from dealer to dealer.
This means dealerships can charge additional fees as they see fit.
Know if leasing is something you can commit to. Do this by examining all the costs, especially any you’d incur if you breach the terms of the lease. Also, keep in mind that you’ll be liable for everything in the car lease contract you sign.
You should note that even if there is an accident, the lease contract amount doesn’t change. Hence, if the vehicle gets totaled, you must still pay the full lease contract amount.
Even if the insurance company returns less than what you owe the dealership, you’ll be responsible for the full amount.
If you still decide to lease, be sure to purchase gap insurance. This will cover the difference between what you owe the dealership and what you actually pay.
Long term, the most cost-effective way to drive is to buy and keep the car until repairing it becomes uneconomical. You get more value out of it this way. Do your homework diligently.