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Car Leasing Tips: What to Know Before Signing a Lease Agreement

Leasing is often a more affordable way to drive a new vehicle than financing a new car purchase. While lower monthly payments are one of the most attractive aspects of leasing a car, it's important to understand the other key components of auto leasing.

Auto lease agreements are legal contracts between you (the lessee) and the lessor (the dealership). Like any other contract, lease agreements outline the terms and conditions both parties must adhere to during the lease period. Understanding this contract is critical for protecting yourself in the leasing process. It may help you save money.

This article shares tips to help you avoid mistakes in the leasing process and get the best deal possible on your car lease.

1. Shop as if You're Buying the Vehicle

An auto lease is a significant financial commitment even if you never plan on buying the car. Make sure you like the vehicle by taking a test drive and carefully examining the car for any defects.

Research how much the car is worth to negotiate the price effectively. Bargaining for a lower sale price on the car will reduce your monthly lease payments.

2. Understand Lease-Specific Terms

Auto leases have a vocabulary different from those used in car buying. Learning these terms is important to understand what you're agreeing to. For example:

  • The "capitalized cost" of the car is the total amount you have to pay, including interest and fees.
  • Conversely, the "capitalized cost reduction" is the industry term for a down payment.
  • The "buyout price" is the predetermined amount you can pay at the end of your lease to purchase the vehicle outright. Your lease agreement should specify the buyout price.
  • "Closed-end" leases describe a lease where the car's value at the end of the lease term is preset. At the end of the lease, you may have to pay some closing costs as you return the car, but that's all.
  • If a lease is "open-ended," an appraiser at the dealership determines the car's value at the end of the lease. If the car's value comes in low, you'll have to pay the difference in addition to the closing costs.

3. Know the Fees You Might Have to Pay

A lease comes with several more fees that may not be immediately obvious. Understanding these fees will give you a better idea of the true cost of the lease:

  • Inception fees: Everything you pay at the beginning of the lease, including the down payment, registration fees, title fees, and sales taxes.
  • Interest rate or money factor: This is the price you pay to use the car. The lower the interest rate, the less the lease will cost overall.
  • Extra mileage charges: The amount you pay for each mile exceeding the miles allowed under the lease.
  • Early termination fees: Penalty fees for ending the lease and returning the car early.
  • Charges for extra wear and tear: Most dealerships expect a car to return with some wear and tear but may differ on the repairs that constitute "normal wear and tear." Ensure you understand what kinds of damage are excessive and how much you must pay for repairs.

4. Watch Out for Hidden Fees

Ensure you know of any hidden fees beyond the standard attendant fees discussed above. These can add up quickly and affect the total price of the vehicle lease.

  • Acquisition fees cover the leasing company's administrative costs. These are sometimes called a bank fee or administrative fee.
  • Disposition fees are charged when returning the leased vehicle. These cover the costs to prepare the car for resale.
  • Security deposits are refundable at the end of the lease term, contingent on certain conditions. Not all leases require security deposits.

5. Research Depreciation Rates

Leasing often covers a vehicle's most rapid depreciation period. Choose a car that retains its value well to get a better deal.

Depreciation rates vary depending on the vehicle's make and model. Online depreciation rate calculators can help you estimate a vehicle's depreciation rate.

6. Negotiate Your Lease Terms

Effective negotiation strategies help you secure lower monthly payments, a better money factor, and more favorable lease terms.

You may be able to negotiate the vehicle's buyout price. This is a good idea if you are likely to buy the car at the end of the lease term. Most dealerships won't negotiate on a buyout price at the end of a lease, so it is beneficial to do this before you sign.

If you have a strong credit score (above 740), you should be able to negotiate a lower money factor.

7. Read the Fine Print on Early Termination Penalties

Ending an auto lease early can have significant financial implications.

Your lease agreement will include early termination conditions, typically including a penalty fee and requirement to make all remaining lease payments. The earlier in your lease you terminate, the more severe the financial impact.

Some leases have clauses for certain life events, like job relocation or financial hardship. Review the conditions allowing for early termination without excessive penalties and discuss them with the dealership before you sign.

Some leases allow for the transfer of the lease to another party. Ask if this is an option for your lease.

8. Ask About Incentives and Lease Deals

Dealerships often run promotions or special lease incentives on certain models. Watch for these deals, as they often offer more favorable terms. If you don't see incentives advertised, ask directly.

Dealerships use three main types of lease incentive programs:

  1. Lease cash (also called cash rebates)
  2. Subsidized interest rates
  3. Subsidized residual values

Securing a lease deal can help you lower your monthly payment and drive a newer car for less. But there can be cons to lease offers. Some incentives require a balloon payment at the of the lease, and some states tax cash rebates.

9. Protect Yourself

Your lease terms should include gap insurance. This type of car insurance pays the difference between your lease contract's residual value and the vehicle's market value. Gap insurance comes into play if your car is lost, stolen, or deemed a total loss.

Also, ensure the manufacturer's warranty extends through the life of the lease and covers all routine repairs and maintenance.

10. Be Realistic About Your Annual Mileage

Think about the maximum number of miles you'll drive. It's better to overestimate this and pay for more mileage up front rather than surpassing your allotted mileage. Besides simply asking yourself how much you drive, consider the following:

  • Daily commuting habits
  • Possible employment changes (like a new job or transitioning from remote to hybrid work)
  • Upcoming travel or trips
  • Life changes, like moving

Consider how willing you are to adjust your driving habits to stay within your predetermined mileage. Are you comfortable carpooling or using public transportation if you are close to exceeding your mileage? If not, it may be better to get a higher limit.

If a weekend getaway or an emergency trip across the state may put you over your mileage limit, consider a higher mileage cap.

Exceeding the mileage cap in your lease agreement can result in steep fees — about 30 cents per mile. For context, exceeding the miles in your agreement by only 2,000 can result in a $600 charge at the end of your lease.

Talk to an Attorney if You Need More Help With an Auto Lease

Most auto lease agreements don't require an attorney. But there are situations where you may benefit from professional legal help.

If you are having issues with a car dealer or leasing company — or the leased vehicle — consider talking to a consumer protection attorney in your area. Consumer protection laws cover auto fraud, lemons, and more. Depending on your situation, you may have a claim.

An experienced attorney familiar with state and federal laws can determine if the dealer used improper sales tactics or deceptive advertising or if your leased vehicle meets the criteria for a lemon. They can negotiate with the dealership or manufacturer on your behalf and help you pursue a lawsuit if necessary.

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