10 car leasing traps you should avoid
Key takeaways
- Although the monthly cost of leasing a vehicle is often less than financing a car, leasing comes with potential mileage restrictions and costly penalties for exceeding them.
- When deciding whether a car lease is right for you, consider how many miles you drive each year, how much you can afford and how leasing a car would fit your lifestyle.
- If the lender suggests stretching the term of your lease to get you a lower monthly payment, be cautious: You’ll pay more in interest — and potentially fees — over time.
Leasing can be a more inexpensive way to drive the latest models — largely because they tend to have lower monthly payments than a car loan. In fact, the average monthly payment on a 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 a new auto loan was $742.
However, there are also some cons to leasing a car, which may outweigh the benefits depending on your goals and needs. Unlike owning a car, which you can sell if you’d like, leasing is a legally binding agreement that locks you in for the length of the lease. In addition, there may be annual mileage limitations associated with a lease and costly financial penalties if you exceed that cap.
10 traps when leasing a car
The risks you take when signing a lease will depend on the specifics of your lease agreement, the car you want to drive and whether or not you check for hidden fees. Here’s a rundown of all the pitfalls you may run into, plus some tips on how to avoid them.
1. Potentially expensive mileage restrictions
Most car leases include a cap on the number of miles you can put on the car each year. For reference, U.S. drivers average about 13,500 miles per year, according to the most recent data from the Federal Highway Administration.
Some car leases, especially those touting low monthly payments, include annual mileage caps of 10,000 miles or fewer. You may also find some leases with mileage caps up to 15,000 miles per year. Depending on the type of vehicle you are driving, expect to pay a mileage penalty of anywhere from 10 cents to 25 cents per mile if you go over your annual cap.
The higher the price tag of the car, the higher the penalty. If your penalty is 25 cents per mile, and you exceed the cap by 3,000 miles in a year, you’re looking at a hefty $750 in added costs.
Read over your lease agreement for details on exactly how many miles you can drive each year without a penalty. If you get close to your mileage limit, set aside money to cover any fees you are charged.
2. Early termination fees
If you want to end your lease early, you might have to pay a pretty penny to get out of the agreement. It depends on the terms of your lease, but you might have to pay the difference between how much the car has depreciated and what you have already paid for it. In some cases, this charge might be several thousand dollars.
Say you’re leasing a $40,000 car. After three years, you’ve paid $18,000. However, the car has depreciated by $21,000. Should that be the case, you might need to pay the difference between what you’ve already paid, $18,000, and the amount the car has depreciated, $21,000. This means you’d be on the hook for $3,000.
Early termination costs can also include taxes and a vehicle disposition fee, which helps offset the cost for the lender to sell the vehicle. You will also be responsible for paying off any late charges, parking tickets and any outstanding monthly payments.
Don’t lease a car unless you know you can, and will, keep it for the duration of the lease term. If you think there’s a chance you may need to terminate your lease early, prepare to pay early termination fees.
3. Low residual value
The residual value is how much the car is worth at the end of your lease term. Let’s say the lender estimates that the $30,000 car you’re leasing today will be worth $15,000 in three years’ time. Your monthly payments will be calculated to cover that $15,000 loss in value, so a 36-month lease equates to monthly payments of $416.67, not including interest or any taxes and fees.
If the vehicle you choose is one that historically retains its value, and therefore has a higher residual value at the end of the lease, your monthly lease payments will be lower. But if a leasing company decides the car will have a low residual value at the end of the lease — even if that’s not truly the case —your monthly lease payments will be more expensive.
Look for vehicles that maintain their value, and don’t work with leasing companies that set artificially low residual values for vehicles. Research vehicle values over time so you can spot an unreasonably low residual value.
4. An advertised price that requires a huge down payment
When you see a monthly lease payment advertised in the $200 to $300 range, be sure to do your homework and know what you are getting into. Often, these low prices equate to massive down payments. You will want to check how much you are being asked to put down in order to qualify for such low monthly payments.
Remember, leasing a car is not like buying a car. You could lose a lot of money if you make the mistake of providing a big down payment on a lease and then the car is totaled early on. Your car insurance will reimburse the leasing company for the vehicle, but you’re not going to get your down payment back. That means you’ll be out of a car and the down payment will be lost as well.
Review the down payment requirements at the start of your lease. A larger down payment may help you secure a lower monthly payment, but you don’t let a low monthly price trick you into thinking it’s a better deal.
5. Only comparing the monthly payments for buying vs. leasing
Some dealers might try to entice you to lease by comparing the monthly payments for leasing versus buying, and how much lower your payments would be if you went the leasing route. Remember: when you buy a car, you get to own it at the end of your loan term. With leasing, you need to return the car.
However, with buying, you also forgo additional costs like wear and tear fees that can come with leasing. If you intend to buy, compare auto loan rates to ensure you get the best deal.
Leasing does not build equity, while buying lets you own your car outright in the end. If you’re someone who likes trading in for a new car every few years anyway, however, the monthly payment may be what matters most.
6. Ignoring the cost of the car
Just because you are leasing doesn’t mean you can ignore the car’s price tag, or how much a car is actually worth. It still matters because what you pay to lease largely depends on the vehicle’s cost, residual value and depreciation rate.
Luxury cars with a higher purchase price will translate into a higher monthly lease payment. Since you won’t build equity in the car or own it at the end of your lease, the extra monthly charges may feel like pouring money down the drain.
Use sources like Kelley Blue Book to research the depreciation rate and value of the vehicle you intend to buy. A less expensive model that maintains more of its value might make more financial sense.
7. Not examining all fees
Common fees for leasing a car van cary but may include the following:
- Acquisition fee: Also called an administrative or bank fee, this is a one-time fee that lenders charge to put the lease together. The amount can run anywhere from a few hundred dollars to $1,000 or more.
- Sales taxes and license fees: This might not be included in your monthly payment based on the state you live in and the individual contract, so be sure to read the fine print.
- Price to buy out: When your lease ends, you will have the option to purchase the car instead of returning it to the lender.
- End-of-lease fees: If you decide to return the car, you’ll be responsible for paying end-of-lease fees, also known as a disposition fee. This might include vehicle inspection, cleaning and reconditioning, storage, transportation costs and administrative fees.
- Wear-and-tear fees: You might be charged for lost equipment, or if the car suffers wear and tear beyond what’s covered in the lease agreement. Read the contract and pay attention to the language of what “normal wear and tear” actually means. Also, check for any repairs and maintenance that might be your responsibility once the lease ends.
Before you sign a lease, be sure you’re aware of all the fees. This will help you figure out your total lease cost and compare that cost to what you might pay to finance a car instead.
8. Taking a longer term to get a lower monthly payment
While a longer lease term can mean you will pay less each month, you are also committing to the car longer without building equity in a vehicle. The monthly payment on a car loan or lease can be manipulated by extending the term.
Like with any loan, the longer your lease term is, the more you will pay overall. With a lease, you may also face additional fees for wear-and-tear and excessive mileage. A longer lease period is unlikely to save you money — and may actually cost you more.
Factor in the total cost of your lease, including monthly payments for the entire lease term, any fees and the money factor. If you need a lower monthly payment, consider leasing a less expensive vehicle.
9. Not comparing money factors
While there’s no annual percentage rate (APR) for a car lease, there are financing charges. These are known as the “money factor.” The money factor is much like an interest rate, and it determines how much you will pay in finance charges. As you might expect, the higher the money factor, the more you will pay.
Even though there is no APR listed for leases, that does not mean you are free from paying interest. The money factor acts as the interest in that it determines what you will pay in finance charges. Unlike interest rates, the money factor is expressed as a decimal. To determine your finance charges as a percentage, multiply the money factor by 2,400. So, if your money factor is .0025, that’s 6 percent. Your money factor will depend on your credit score as well, so individuals with good or excellent credit can pay less for a lease overall.
Make sure to understand money factor details on leases you’re considering. To get the best money factor possible, especially if you have poor credit, shop around and compare the fine print of each offer.
10. Not negotiating your lease
Although you cannot reduce the cost of the whole lease agreement, like the acquisition fee, disposition fee, or residual value, there are still areas in which you can get a deal. For example, if you intend to purchase the vehicle at the end of the lease, the dealer may lower the buyout price.
You might also negotiate the vehicle’s sales price or the mileage allowance. And if you have good credit, you might also be able to get a lower money factor.
Consider multiple lease options before you strike a deal. Make sure to ask for a lower price, a higher mileage allowance, a lower money factor or all of the above before you sign on the dotted line.
Bottom line
By understanding how leasing a car works and being aware of the costs, you can avoid common leasing traps and save money. Along with remaining vigilant when it comes to leasing pitfalls, it is always wise to calculate your expected lease costs ahead of time so you can enter the leasing office with knowledge and confidence.
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