A car lease contract is an agreement between the lessee and the car company for the use of a vehicle. The lease contract sets forth the understanding between the parties as to how the car may be used and any penalties and fees that may be imposed if the terms of the lease are not adhered to.
When signing a car lease agreement or contract, there are certain provisions that you should watch for. These provisions are the ones that will control your lease costs. If you do not read them carefully it will result in a higher monthly cost. These include the mileage provision, the clause on normal wear and tear and the payment terms for the lease, including any fees and penalties.
One of the reasons why people lease instead of buying a car is to take advantage of being able to have a new car every several years and not be tied into a long-term commitment with the vehicle. The trade off for the leasee is that the car company places limitations on the number of miles that can be driven annually, usually around 12,000 to 15,000 miles. The reason for these limitations is to ensure the car company that at the end of the lease there is still some value that allows them to sell the car on the used car market and make some money.
If a leasee violates the terms of the mileage limitations, they have to pay a per mile surcharge of anywhere from $0.01 to $0.15 a mile and higher. The surcharge is put in place as a way to incentivize drivers into not violating the terms of the lease.
Provisions for Normal Wear and Tear
It is accepted that over the course of the lease, there will be some wear and tear on the car. This is to be expected and the car company is not going to press an issue with a leasee that returns a car that appears to be driven well over the course of the lease. Where an issue will arise is when the car comes back damaged or indicative of use that is other than what they believe is normal for the vehicle. If the car company deems that the extent of any damage to the vehicle exceeds normal wear and tear, the leasee is liable for any costs associated with repairing or replacing the vehicle.
Payments and Penalties
The lease contract will spell out the terms for the lease payments and any penalties associated with mileage overruns and wear and tear. The leasee should take time to read all fine print concerning the payment and payment schedule in order to make sure they make sense and do not create a situation where the leasee has to come out of pocket for more than what has been agreed upon.
Lease Contract Language
Here are some terms to watch for in a typical car leasing contract.
- Term. This is the length of the lease. The term can be short (12 to 24 months) or long (up to 60 months)
- Miles. This is how many miles you are allowed to drive the car, truck or SUV in your lease
- Price of the car. This is what you pay for the car
- Lease acquisition fee or bank fee. This is the fee that the bank charges to do your lease
- Total out of pocket. This is the amount in check or cash that you pay to the dealership upon purchase
- Capitalized cost reduction. Money that you pay upfront that exceeds the cost of fees and acts like a down payment. It reduces the "starting point" or total capitalized cost
- Total capitalized cost. This is the cost that you will be paying interest on. Take the price of the car plus all fees minus total out of pocket
- Residual. The residual is the amount the bank has set as the value of the vehicle at the end of the term. The bank determines this figure for each car based on the term and number of miles driven
- Depreciation. This is the loss of value that you are paying to use the car. Cap cost minus residual equals depreciation. This should be the major portion of your lease payment
- Rent. Since the bank does not lend money for free, you also pay rent or interest. Think of interest on a lease as payment for "tying up" the bank's money rather than actually borrowing it
- Money factor. Money factor equals the interest rate divided by 2,400. If your lease has a money factor of .002 this equals 4.8 percent interest. If your money factor is .003 this equals 7.2 percent interest
- Assumption. Assumption means the taking over of the lease by another party
- Total rent. This is a valuable piece of information in your lease contract to determine how much interest you are paying, especially if the dealer will not tell you the money factor, or you do not believe them. Divide this figure (total rent) by the number of payments. Now you can see how much interest is in each payment
- Lease payment. Your payment equals the monthly rent plus monthly depreciation. Each payment pays some depreciation and some rent
- Security deposit. Some leases require this and some do not. When negotiating a lease, ask if you can get a better money factor by paying a security deposit. The bank, not the dealer, sets this
- Turn-in fee. Many leases charge at the end to turn in your car. This does not affect your monthly payment