The number of leased vehicles on the road has doubled over the last five years. Assuming the trend continues, consumers can expect vehicle leasing to become a more common way to get behind the wheel of a new vehicle.
If you’re considering leasing for the first time, it pays to digest as much information about the process as possible before signing any dotted lines. Jamie Page Deaton, managing editor of US News and World Report Cars, points out that consumers who sign a lease agreement without completely understanding the terms are in for a rude awakening.
“It’s such a different process than buying a new car,” says Deaton. “It’s easy to get taken advantage of because many people don’t understand what they’re agreeing to.”
While many lease offers may sound tempting at first (zero interest, no money down, extended warranty), too many consumers realize too late that leasing comes with hidden costs that are not clearly mentioned in the sales pitch.
Here are some hidden fees you may encounter if you decide to lease a vehicle.
Before you agree to lease a vehicle, Deaton recommends researching the applicable excise tax rate of the community where you plan to have it registered. The excise tax is calculated based on the vehicle’s value, so newer vehicles will have a higher excise tax rate.
“This tax is something that can shock people who are buying or leasing,” says Deaton.
The bad news is there’s no way to avoid an excise tax without getting into trouble with your local or state government. But the good news is, it only has to be paid once a year and the fee declines with the value of car. Just be sure to factor the cost of an excise tax into your annual car budget.
When you sign a lease, you’re agreeing to limit your driving to a certain number of miles for the duration of the contract, such as up to 10,000 miles a year. But if you return a leased a car with more miles on the odometer than expected, it can hurt the vehicle’s resale potential. As a result, the dealer may hit you with an overage charge to recover some of the vehicle’s lost value.
Deaton points out that overage fees are a way for leasing companies to protect their investments.
“Effectively you’re leasing from a company that owns a car, and the lease rate is the projected value of the vehicle at the end of lease,” says Deaton.
While lower-mileage leases can save you on monthly payments, you run the risk of exceeding the limit and getting hit by overage fees that can range from 10 to 30 cents per mile.
That might not seem like much at first, but it can add up quickly and come back to sting you in the wallet. For example, if your lease agreement includes an overage rate of 25 cents per mile and you drive 1,000 miles over your limit, you will be looking at an overage fee of $250.
The best way to avoid an overage fee entirely is to carefully consider how many miles you are likely to drive each year. Agreeing to a higher-mileage lease may cost you more monthly, but you’re not going to save any money if you frequently exceed your limit and incur overage costs.
When leasing a vehicle, it’s important to remember that you have to return the vehicle in good shape. You could be on the hook for any significant damage the car suffers while in your custody.
“This is another way leasing companies are protecting their investments,” says Deaton. “If you return it and it’s all banged up, they’ve lost money on it.”
Deaton says the good news is many dealerships can be lenient and won’t go overboard for “reasonable wear and tear” that comes with using a car as a daily driver. But, before signing a lease agreement, it’s important to understand exactly what kind of damage you’re responsible for fixing.
“If you frequently transport your dog without putting mats down, or if you consistently spill coffee or smoke, you’re likely going to incur damage,” says Deaton.
But consumers can take steps to protect a leased vehicle. For example, if you expect to use your vehicle to chauffeur a kid’s soccer team or a furry companion, consider buying a seat cover or an all-weather floor mat to protect the upholstery from dirt and mud. Once the lease is over, you can keep the protective covers and use them in your next car.
When you sign a lease, you will also have to make sure to register with your state’s department of motor vehicles. This requires some paperwork and a registration fee that typically isn’t included in the price of the car.
But this is an area where you might want to let the dealer step in and take care of filing the necessary state paperwork. For one thing, the dealership staff is probably very familiar with what forms and fees are needed to get the car registered. Plus, allowing the dealership team to process your paperwork can save you the headache of waiting in a long line at the DMV.
The rate of sales tax you pay on a lease will depend heavily on what state you live in and where you plan to register your vehicle. If you live near another state with a lower sales tax, you might be able to save money if you shop across your state’s border.
But Deaton cautions that leasing a car across two different states requires plenty of research and lots of questions for the dealer.
“Make sure the dealer can handle the bureaucracy of the state where the car will be registered,” says Deaton. “You also need to make sure the dealer is being clear about what you’re being charged for and the implications of [leasing] in one state and [keeping] it in another one.”
Deaton points out that many dealers, especially ones that belong to larger dealer networks, are used to doing business with their neighboring states.
Deaton says it’s important to remember that leasing a car is a very different process from purchasing a car.
“You’re not buying a car,” says Deaton. “The leasing company is buying the car and you’re paying to use it.”
An acquisition fee, sometimes known as a bank or processing fee, is an administrative charge that covers the cost of doing business with a leasing company. The exact amount of the acquisition fee can vary depending on the dealership and the value of the leased vehicle.
Consumers are ultimately responsible for paying the acquisition fee. But to make sure you don’t pay too much, you should research the acquisition fees in place at other dealerships to make sure you’re not getting overcharged.