If you can’t resist the allure of a shiny new car or simply don’t want to be tied to a car contract for more than a couple years, a short-term car lease might be worth exploring

Short-term car leasing is exactly what it sounds like — a lease agreement for a relatively short period of time.

Short-term leases can offer some advantages, like being able to drive a brand-new car with less of a commitment — but there are a few big drawbacks, too. Let’s take a look at what a short-term lease is, and the potential pros and cons.

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Is leasing ever a smart option?

Source: Gifer.com

Source: Gifer.com

Here’s the ugly truth: for most people, leasing doesn’t make financial sense. “Buying a car is almost always better than leasing a car,” Baumeister stresses.

There are some exceptions for business owners or others who can deduct certain vehicle costs. For everyone else, leasing a car should be considered a luxury.

Lease a car if you simply love driving a new car every three years and the cost is worth it to you. As long as you’re aware, it’s fine to make a conscious decision to spend more on your cars than might be necessary.

How Does The Kilometers Limit Affect My Payments?

Leases generally impose a limit on how much you can drive the leased vehicle per year, with additional payments as penalties if you surpass it. This is because the amount driven affects Depreciation, so more kilometres on the odometer will cause it to be worthless. Since the Depreciation for the leased vehicle is set at the start to determine your payments, it will be based off of a forecasted amount driven over the term of the lease.

For someone who lives in Toronto and doesn’t really drive much outside of the city, staying below this limit would not usually be difficult. But for someone who lives in the suburban areas around it, like Mississauga, or in more rural areas and need to use their car for greater distances they are more likely to surpass the usual limit number.

Useful Tip! if you want to save another $10 or $20 on your monthly payments and you know that you won’t actually be using your car very much, ask to have the annual limit lowered by a few thousand kilometres. Make sure you still set the limit to an amount you would not surpass or you will pay even more in penalties.

36-month car leasing deals

The typical length of a car lease contract is over 36 months, with around 40% of Leasing.com users opting for this plan. It is also worth adding that the most popular payment profile in 2020 is a 3-month initial payment over 36 months.

This is considered the sweet spot of leasing. Why? The monthly repayments are usually cheaper due to them being spread out over 36 months, as well as most manufacturers’ vehicles are offered with a three-year warranty which could be a major pulling-power to customers as they will benefit from a brand-new car without having to worry about a hefty bill.

It gets better, due to the car being less than three years old, it isn’t your responsibility to worry about the MoT, which means it isn’t your responsibility to pay for the vehicle to be tested and serviced at an approved garage.

Compare all 36-month lease deals

Cons of Leasing a Car

1. You Don’t Own the Car

The obvious downside to leasing a car is that you don’t own the car at the end of the lease. That means you don’t have a trade-in if you decide to purchase a car. Consumers who routinely lease cars over many years may end up paying more than they would if they had initially bought the car.

2. It Might Not Save You Money

Another thing to consider: you can break an auto lease, but it typically will cost you a hefty fee. Yes, you can sign a long-term lease, but that may negate the monetary benefits of leasing instead of buying a car. That’s because leasing typically costs you more than what you might have taken out in a long-term car loan. Do the math to figure out if the numbers work in your favor to sign a long-term lease.Similarly, some carmakers offer discounted leases to generate interest in their models. Be careful to read the fine print to make sure your savings isn’t offset by additional fees that the dealer may require. For example, the discounted price may not include the sales tax or various “drive-off” fees. Be skeptical of any deal that sounds too good to be true.

3. Leasing Can Be More Complicated than Buying

Buying a car is straightforward compared to leasing. When leasing a car, you are typically paying for the car’s lost value over the term of the agreement, plus a set of fees. Lease contracts can be complex. To find a good deal, study your contract carefully and ask questions about anything you don’t understand.

4. Leased Cars Are Restricted to a Limited Number of Miles

Every lease agreement has a stated number of miles you’re allowed to drive without paying a penalty. This limit typically is 12,000 to 15,000 miles.4 If you exceed your limit, you’ll be hit with an excess mileage penalty that can add up fast.

5. Increased Insurance Premiums

Typically, leasing a car does increase your insurance premiums because you are required to purchase full coverage to ensure there are sufficient funds available to repair the car in the event of an accident. The entity financing the vehicle typically requires this because they have a financial stake in the car.5 Full coverage includes collision coverage and comprehensive coverage. These not only provide coverage in the event of accidental damage, but also theft or vandalism, should the car be damaged during the term of your lease.

Another consideration is gap insurance, which covers the difference between the current value of your car versus the remaining balance owed. Many leased cars have this type of insurance factored into the cost.

What to Consider Before Leasing a Car

The language in a car lease agreement may be new to you and can sometimes be confusing. Here are some of the common terms and their definitions:

  • Acquisition fee: Some dealerships or leasing companies charge an upfront fee for arranging the lease. You may be able to negotiate this fee or find a lease without an acquisition fee.
  • Buyout price: You may be able to end the lease at any time by buying the car outright. The buyout price may decrease over time as the car depreciates.
  • Capitalized cost: Often shortened to cap cost, this is the initial price of the car. You can negotiate the cap cost just as you would when buying a car.
  • Cap cost reductions: You may be able to reduce your cap cost in various ways, such as negotiating the price, trading in a car or making a down payment. Because you pay for the depreciation between the cap cost and the residual value (the value of the car at the end of the lease), cap cost reductions can lead to lower monthly payments.
  • Disposition fee: You may have to pay a disposition fee at the end of your lease to help cover the dealership’s costs for getting the car ready to sell. Even if you can’t negotiate the fee upfront, you may be able to negotiate it down when you return the car if you offer to buy the car, buy a car or start a new lease with the dealership.
  • Gap insurance: Insurance that covers the difference between a car’s residual value and what your auto insurance company pays out if the car is totaled. Some lessors require you purchase this and include the insurance premiums in your monthly payment.
  • Lease term: The length of the lease, which is often two to four years.
  • Mileage allowance: How many miles you’re allowed to drive each year before the per-mile penalty begins. You can sometimes negotiate a higher mileage allowance, but may have to pay more each month as a result.
  • Money factor: Also called a lease factor, lease rate or rent charge, the money factor determines part of your monthly payment. The money factor is often shown as a small decimal fraction, but you can convert it into an interest rate by multiplying the number by 2,400. For example, a cap rate of .0025 equals an interest rate of 6%.
  • Purchase option agreement: Your lease may specify how much you can purchase the car for once your lease ends.
  • Residual value: The value of the car at the end of the lease, which may be determined by a third party.
  • Security deposit: You may have to pay a security deposit, which the lessor holds on to and can use to cover damage or extra-mileage charges when you return the car. If you don’t owe any extra fees, you’ll receive the full security deposit back.

What is Residual Value Depreciation?

The Residual Value and the Depreciation of the vehicle are closely tied together. Both are determined by the leasing company before you sign the lease using historical data for that make and model as well as future projections. The Residual Value represents how much the car is worth at the end of the lease, and the Depreciation represents how much value the vehicle lost by the time the lease ends. Here is basic rundown of how they work to determine your lease payments:

  • The Selling Price of a vehicle you want to lease is $30,000
  • By the end of a three year lease the vehicle is now worth $17,000 – this is the Residual Value
  • The Selling Price ($30,000) minus the Residual Value ($17,000) leaves $13,000 – this is the Depreciation
  • Your lease payments are mostly to cover the $13,000 in Depreciation on a monthly basis over the term of the lease

It is important to keep in mind that the Residual Value and Depreciation are determined before you actually lease the vehicle, not after the lease is over. They are both set using historical data of previous versions of the same model as well as forecasting future trends. Other factors that are considered include reliability, the cost and frequency of repairs and parts, fuel economy, size, condition, mileage, consumer trends in desirability, and so on.

Useful Tip! If you want to pay less in monthly payments, you should find ways to cut depreciation costs. The easiest way to do this is to buy vehicle brands and models that depreciate less than average.

Final considerations

car lease is a way to “borrow” a car instead of buying a new or used car. A car lease typically comes with a three-year or four-year contract, so there are many factors to consider before signing off. But choosing to lease instead of buying a car can be a great way to drive a newer car with the latest technology and features for less money per month.  

To calculate your monthly payment amount, the dealer will analyze the value of the new car versus its residual value. Like with any purchase involving financing, the higher your credit score, the lower your interest rate. You’ll also have to pay a small amount of money before you drive off the lot to cover taxes and a range of fees. If you want to lock in lower monthly payments throughout the lease, you can consider putting additional money down.

Mistakes to avoid when leasing a car

Leasing can lower your payments, but it can wind up being very costly if you don’t pay attention to the fine print. Avoid these five common mistakes if you decide to lease your next vehicle.

1. Paying too much money upfront

Car dealers advertise low monthly lease payments on new vehicles, but you may have to pay several thousand dollars upfront to get that affordable payment. That money covers a portion of the lease in advance.

If the car is wrecked or stolen within the first few months, your insurance company would reimburse the leasing company for the value of the car, but the money you paid in advance likely would not be refunded to you. You’d be out of a car, and that upfront money you handed over to the leasing company would essentially disappear.

It’s recommended you spend no more than about $2,000 upfront when you lease a car. In some cases, it may make sense to put nothing down and roll all of your fee costs into the monthly lease payment. If something happens to the vehicle before the end of the term, at least the leasing company doesn’t have a big chunk of your cash.

2. Not buying gap insurance

If you drive a leased car, you should pay for gap insurance. The “gap” refers to the difference in what you still owe on your lease and the value of the car.

Let’s say your contract states that at the end of the lease, you have the option of buying the car for $13,000. If you total the car before the lease expires, your insurance company will determine the current market value of the car and pay that amount to the dealership which owns the vehicle.

If the insurance company says that the market value is only $9,000, you’ll probably have to pay $4,000 out of pocket to cover the difference between the lease contract’s residual value and the true market value — unless you have gap insurance. The gap coverage will cover the difference.

Many leases include gap insurance. The dealer may offer to sell you gap insurance, but you may find a cheaper policy option with a traditional insurance company. Regardless, the coverage is well worth the small investment.

3. Underestimating how many miles you’ll put on a car

To avoid extra charges, know your driving habits before leasing a car. Consider your daily commute and how often you take long trips. If you know that you’ll probably drive more miles than the agreement allows, you could ask for a higher mileage limit. However, that will probably increase your monthly payment, because additional miles will result in greater depreciation.

It’s common for leasing contracts to have annual mileage limits of 10,000, 12,000 or 15,000 miles. If you exceed those mileage limits, you could be charged up to 30 cents per additional mile at the end of the lease.

For example, if you exceed the mileage limit by 5,000 miles, you could end up owing an extra $1,500 — at 30 cents per mile — when you turn the car in at the end of the lease.

4. Not maintaining the car

If your car has damage that goes beyond normal wear and tear, you could be on the hook for additional fees when it’s time to return it to the dealer.

If a car has a scratch but the mark is less than the width of the edge of a driver’s license or business card, many companies may consider it normal use and probably won’t charge a penalty. If the leasing company considers any damage excessive, it can charge additional fees.

The definition of normal use can vary from dealer to dealer. Your lessor will inspect the car before you turn it in and look for dents and scrapes on the body and wheels, damage to the windshield and windows, excessive wear on the tires and tears or stains in the interior upholstery. Don’t assume that your inspector will be lenient.

Before leasing a car, ask about the guidelines on the lease-end condition. These guidelines specify the types of damage you would have to pay for before you return your car.

If the car is significantly damaged, drivers can expect to be charged full market prices for repairs.

5. Leasing a car for too long

If you lease a car, make sure that the lease period either matches or is shorter than the car’s warranty period. Warranties vary from manufacturer to manufacturer, but they typically last up to three years or 36,000 miles, whichever comes first.

If you keep the car for longer than the warranty period, you may have to consider an extended warranty. Otherwise, you could be responsible for maintenance and repair costs for a car you don’t own while still making monthly lease payments.

If you do plan to lease a car for an extended time, it’s probably better to buy it, says Barbara Terry, a Texas-based automobile expert and columnist.

“If the driver owns the car, he’d have to pay for the car and pay for maintenance, but then he could continue to drive it for several years without having to worry about a required monthly lease payment,” Terry says.

Use an auto lease calculator to figure out whether leasing or buying a car will save you more money over the long haul.

What are the disadvantages of leasing?

The main disadvantage of leasing is that you don't build equity in the vehicle as you make lease payments. Lease terms can be anywhere from 2 – 5 years but can be ended early, though early termination typically involves a cancellation fee.

How to Lease a Car

If you’re thinking of leasing a car, review car dealership websites, then call or visit the dealership to inquire about lease specials and selections.

Typically, consumers looking to buy a car are interested in getting the lowest sale price. That price, combined with the annual percentage rate (APR) of the interest on the car loan as well as taxes on the vehicle, will be spread out over the course of a multi-year loan. However, since the term of the lease is typically shorter than a car loan term when leasing a car, you’ll likely want to seek the best overall lease price with the lowest possible payment that includes all taxes and fees.2

Shop at different dealerships before you select a car to lease, just as you would if you were buying a car.

Where can you get a short-term car lease?

You have two main options for getting a short-term lease.

Head to a car dealership

If you’re looking for a term of 24 months, many car dealerships offer this option. Just be aware that this might be the shortest term available, and you might not be able to get such a short term at all dealerships.  Lease programs at dealerships vary by location but generally range from 24 to 60 months.

Take over someone else’s car lease

Sites like SwapALease.com or LeaseTrader.com can put you in touch with drivers who want to exit their lease contracts early. If you’re looking for a term shorter than 24 months, you might find some options this way. It’s important to note that both of these sites require a credit check to be eligible to take over a lease, and so applying may generate a hard inquiry and lower your credit score.

As you research your lease takeover options for each car, be sure to note the monthly payment the original lessee had, because you’ll be inheriting it. Pay attention to all the terms, including the remaining miles on the lease, too — you may be left with fewer miles than you need. When you take over someone else’s car lease, you are responsible for all of the obligations included in the lease, so review everything carefully before jumping in.

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