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How Does a Car Lease Work?

18 Nov

Are you thinking about getting a new car? This is a good time to act because interest rates
are extremely low and there are some great deals and incentives being offered by most car
dealers. If you are considering a new car it might be important to look at leasing a car
instead of purchasing, but it’s important to understand just how a car lease works.

A car lease is a binding legal agreement made between you and a leasing company for the
rental of the car according to specified terms. Although the car dealer handles the
transaction, he is just the middleman acting on behalf of the leasing company. The dealer
will help negotiate the sales price and terms of the lease to get you the best deal possible
that is agreeable to all parties.

Two Types of Leases

Closed-end lease – before the lease is signed, the car’s value at the end of the lease
(residual value) is pre-set. When the lease ends, you can either purchase the car for the
pre-set value or return the car to the dealer. This lease is used by most consumers because
the residual value doesn’t change at the end of the lease.

Open-end lease – before the lease is signed, the car’s value at the end of the lease (residual
value) is only estimated. When the lease ends, the estimated value is compared to the
actual market value, and you must pay the difference which could be substantial.

Understand Important Lease Terms

* Capitalized Cost – the amount that the leasing company pays the dealer for the car. This
figure is based on the dealer’s cost plus a profit margin and can be negotiated.

* Residual Value – the value of the car when the lease ends including depreciation. This
figure is usually 35%-65% of the car’s retail price and it is used to calculate your monthly
payment.

* Cap Reduction – cash payment upon signing the lease (down payment). The higher your
down payment, the lower your monthly payment.

* Money Factor – (Interest Rate) – the interest rate on the lease

* Length of Lease – the number of total months on the lease

* Payment – the monthly payment

* Excess Mileage Fee – a fee paid at the end of the lease for any mileage over the specified
allowance in the lease. Example: allowance is 18,000 miles per year on a 3 year lease =
54,000 miles. Any additional mileage is $.25 per mile. If you drove 65,000 miles, you owe
$.25 x 11,000 miles = $2,750 at the end of the lease.

Extra Charges And Fees To Watch Our For

* Acquisition Fee / Origination Fee / Lease Inception Fee – a fee simply to lease the car, a
fee for paperwork, which is usually $450-500. Ask them to waive or negotiate this fee.

* Disposition Fee – a fee paid at the end of the lease if you do not buy the car which could
be $200-400. Some leases may have a disposition fee plus an acquisition fee totally as
much as $500-600. Think twice about a lease with these fees.

* Early Termination Fee – a fee charged if you terminate the lease earlier than the agreed
date

References:

Lease Guide
Auto Advice: Buy or Lease