What to watch out for when leasing a car

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2 min to read

Car companies get your attention with low advertised rates for leases and if you’re like me, you start thinking how cheap that is relative to the value of the car.  Unfortunately when you look a little deeper, you see the price is based on the assumption that you basically never drive it and that you fork over a hefty down payment at signing.

If you divide the down payment over the term of the lease, you’re likely talking an extra $100/month, which suddenly doesn’t look like such a great deal.  The bright side of this is that the other side of the equation is that the advertised rate is also based on an inflated MSRP price, which only a fool would pay.  By negotiating a better price on the vehicle, you can actually drive the car without worrying about putting too many miles on it and still have a reasonable monthly payment.

Choose Good Vehicle

Make sure to pick a manufacturer or vehicle with good resale value, as depreciation cost is the biggest driver of leasing costs, more-so than even the sticker price of the vehicle.  A nice car that holds its value may be cheaper than an average car that sinks like a rock when you drive it off the lot.

Make sure you have enough miles to accommodate your driving habits.  If the per-mile overage rate isn’t too high, it may be better to pay for additional miles at the end of the lease than pay more throughout the lease– depending on how much more the extra miles cost. (You’re probably paying at least $.20/mile for gas, which is certainly manageable for most people).

Asking for more miles than you really need is a good negotiating tactic to be able to concede something on to the dealer so that you’re not just saying “no” to everything they come back with.

In most states you only pay sales tax on the portion of the vehicle’s value consumed during the course of the lease – i.e. what you’re actually paying for.  In Illinois and Texas you must pay sales tax on the full amount of the vehicle.  Residents of Chicago are actually charged an additional 8% tax each month for the privilege of registering their leased vehicle to a Chicago address.  Unfortunately, I learned about this fact the hard way!

Don’t expect any routine maintenance to be included.  A popular misconception is that the dealer owns the car and will take care of it to protect their property for resale.  In reality, leasing is just another financing option and is otherwise no different.

Any major issues should be included in the warranty, but these are rare for a brand new car.  The upside of driving a new car is that you should have relatively low maintenance costs in the first three years.  My first car was a used car, thinking I was smart to save on depreciation.  In the end, I ended up spending quite a bit of time and money fixing various problems that pop up over time.

I had to spend $1,000 about every six months on something until finally, the transmission went out shortly after putting new tires on the car.  Ouch!  It was also just as I was finally paying off the loan!  You will likely have to spend some money on tires or breaks during the course of the lease or else you’ll end up paying to have them replaced after you turn in the vehicle if they are needed at that point.

Make sure you can return the car to any dealership in the event you move.  You don’t want to have to ship your car back across the country in the event you move.

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The usual car buying rules apply

Make sure you drive a hard bargain and aren’t paying too high of an interest rate.  (Multiply the “Money Factor” by 2400 to get the APR.) The first-rate the dealer quotes will likely be inflated with additional markup they get to keep if you accept the first offer.  Negotiate terms with banks and other institutions in addition to the dealer.  Negotiate any trade-in separately.  Don’t be afraid to walk away.  I honestly wanted to check out the dealership next door before I committed to anything, and it ended up saving me about 9% off the monthly payment!

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