Top 10 Leasing Booby Traps

Just because you're leasing a car instead of buying, don't be any less skeptical about promises that sound too good to be true. After all, leasing is no less a commitment and many consider it far more of one. You're still signing a binding contract, so you can't be any less vigilant about negotiating and checking terms. And when you buy a car, you can always sell it if you don't like it. With a lease, you're pretty much stuck through the lease term.

Here are the 10 biggest booby traps of auto leasing:

1. Mileage

2. Early-termination

3. Residual-value

4. Down-payment

5. Purchase-price

6. Price-doesn't-matter

7. The fee

8. Hidden-cost

9. Tricky-term

10. Interest-rate

Mileage: Most leases are written to allow a certain number of miles each year. Often, dealers offering low-cost leases cash in by setting this mileage limit low -- say, 10,000 miles annually. Typically, the charge for each mile over the limit is 10 cents to 20 cents per mile.

Example: Say you drive 13,000 miles instead of the 10,000 allowed each year for three years. At 20 cents for each extra mile, you'll owe $1,800 at the end of your lease (9,000 excess miles times 20 cents per mile). That's an extra $50 a month.

Early-termination: Some dealers lure customers into a new lease by touting their ability to get you out of your existing lease before its term is up. And they can, but you'll pay dearly. In some cases, you may have to pay the difference between what the car is worth, and what you've already paid for it.

Example: Say you're leasing a $20,000 car. After two years, you've paid $2,400 on it. However, the car has depreciated to $16,000. To terminate the lease, you'll probably need to pay the difference between what you've already paid ($2,400) and the amount that the car has depreciated ($4,000) or $1,600.

What's more, some leases require you to cover any remaining payments. If you have more than just a few months left on your lease, these payments will quickly add up.

While the lessor may talk about "wrapping" or including these fees within a new lease, that's not the smartest way to go. You'll end up paying much more, because you're financing the amounts over a longer time period. In some cases, the manafacturer will rebate you back the remaining payments to get you into a new lease. Which is a good deal!

Residual-value: A critical factor in leasing a car is called the residual value -- how much it will be worth when the lease ends. For instance, the lender may figure that a car selling for $20,000 today will be worth $10,000 three years from now, and will calculate monthly payments to cover that loss in value. Different lenders calculate residuals differently. Ideally, the residual is the average used-car value from a standard like Kelley Blue Book or NADA. A lower residual value means higher monthly payments.

Example: A $15,000 residual value on a $25,000 car would mean your lease payments would have to cover the $10,000 difference. In a 36-month lease this would mean monthly payments of $277.77 ($10,000 divided by 36), not including interest, taxes and other fees. If another lender predicts that the same car will be worth only $13,000, your monthly payments will be $333.33 ($12,000 divided by 36).

A lower residual value is not always bad, however. If you decide to purchase the car at the end of the lease, you'll pay the lower residual value, plus any purchase-option fee.

Down-payment: Many lease ads boast about low monthly payments while hiding a huge down payment figure in the fine print. Remember, your real lease payment isn't just the amount you write on your check each month. You also need to factor in the down payment.

Example: If you put down $4,000 on a 36-month lease, you should understand your real cost per month is about $111 more than your monthly payment ($4,000 divided by 36 months). A dealer, then, could set the monthly payment on a car incredibly low just by jacking up the down payment. After all, if you made a big enough down payment, you wouldn't have to make any monthly payments at all.

Purchase-price: Some dealers try to entice you into a contract by comparing the payments you would make under a lease agreement to the payments you would make to purchase the car. Remember, there should be a big difference because at the end of a purchase term, you own the car. At the end of a lease, you own nothing. Make sure the terms i.e. 24, 36, 48 months are the same.

The fee: Before you sign on the dotted line, you'll want to know the amount of fees, in addition to your monthly payments. These can include acquisition, purchase option and disposition fees.
• Acquisition fees, sometimes referred to as document fees, are charged at the beginning of a lease. They typically run about $500.
• A disposition fee is charged when you return the car. As its name implies, this covers the dealer's cost to dispose of the car. These fees usually are several hundred dollars.
• A purchase-option fee is the amount it will cost to purchase the car at the end of the lease. The exact amount can vary.

Hidden-cost: Don't automatically assume the monthly lease payment you're quoted is the amount you'll actually be paying. It may be quoted without sales tax or license. Make sure you understand that whatever the payment is, multiply it times your tax rate to get your total payment.

Tricky-term: Manipulating the term of the lease is one of the easiest ways for the dealer to get you to accept their deal at an inflated price.

Example: Let's say you have your eyes on a small SUV with a sticker price of $25,000. You negotiate the selling price down to $22,000 and the dealer says the residual value is $12,000. That means your 36 monthly payments -- not counting taxes, interest and fees -- would be $277.77. But you try to get the price down by telling the salesman you can only afford $250 per month. He goes and talks to his manager and comes back a half-hour later with the good news -- $250 it is. But the term of the lease has gone from 36 months to 40 months -- make sure you are comfortable with a longer term to get the payment you wanted.