Part 8: Lease Contracts If
you are familiar with the contract,
it won't be so mysterious
In order to understand how leasing works,
it will be helpful to get comfortable with what a leasing contract
looks like and become familiar with certain terms. Then with
that knowledge, you'll be ready to negotiate the best deal for your
Let us point out here that when we say "negotiate," we're not picturing
a knock-down-drag-out fight with a car salesman. Even if the lessor is
your best friend, there are lots of choices, and you need to be informed as
to what those choices are before signing a lease. Besides, contrary to
what you might think, salesmen are much more likely to help you get the best
possible deal if you are upfront with them, if you are prepared, and if you
take the time to openly compare prices at more than one dealership or
1998 Federal Consumer Leasing Act, Schedule M, gives you the right to
information that you understand and negotiate your lease, and because of
this law, most lease contracts are very similar. However, each
contract will be slightly different. We recommend that you
pick up a blank lease contract in advance so that you can make
yourself familiar with the important items prior to signing the
To the right is a sample of the Federal Consumer Leasing Act Disclosures
section of a lease contract. Click on it for a full sized version.
Although the regulations go a long way, there is still room for improvement.
The following items are required to be disclosed on a lease contract:
Lessee - You are the lessee. The car dealer or leasing company
is the lessor.
Amount Due at Signing or Delivery - This is the amount you must pay
upfront before driving the vehicle off the lot. This amount must
also be itemized in the contract.
Monthly Payments - Your monthly payment includes the basic cost of
the lease plus taxes and other fees. Later in the contract there
will be a place where the monthly payment is itemized for you.
Other Charges - These are charges you will incur in addition to
your down payment and monthly payments. In other words, charges
that you can expect to pay when you return the vehicle. Usually,
there is only one item in this list, a vehicle return fee, sometimes
called a disposition fee. It is intended to cover the lessor's
cost of selling the vehicle when you return it.
Total of Payments - This is the total amount of money you will have
paid by the end of the lease. Not included are your security
deposit (refunded to you at the end of the lease), any costs like repair
work, taxes incurred by you during the lease, or any amount you
may owe the lessor at the end for excess wear and tear, or excess
Itemization of Amount Due at Lease Signing or Delivery - This
section breaks down the amount you owe upfront and how you will be
paying for it.
Amount Due at Lease Signing or Delivery
- This is an itemization of item 2, and the total should be the same.
The itemization will include the following:
Capitalized Cost Reduction - This is the amount that
you are paying upfront, including actual cash, the value of your
trade-in any rebates on the vehicle. This is basically your down
payment, excluding taxes and fees.
Sales/Use Tax on Capitalized Cost Reduction - The
sales or use tax varies from state to state. In most cases this
will be equal to the Capitalized cap cost reduction times the sales/use
First Monthly Payment - It is standard for the first
monthly lease payment to be due at the time of signing or delivery.
Title, Registration and License - These are set by the
local and state governments and my include an admin fee charged by the
Refundable Security Deposits - The lessor may require
a one month security deposit up front. This deposit is sometimes
waived if you have good credit or are a previous customer. It can
also sometimes be waived in exchange for a higher bank admin fee.
Other - If there is an amount on the other line,
make sure that you understand what it is for.
How the Amount Due at Lease Signing or Delivery will be paid - This is a
breakdown of how the down payment is being calculated. Pay careful
attention to the amount the lessor is crediting you for your trade-in
and make sure it correlates to what you were promised:
Net Trade-in Allowance - This is where the value of
your trade-in will be calculated.
Rebates and Noncash Credits - You will get the factory
rebate even though you're leasing the vehicle. On this line, the
lessor will also note any other credit or rebate you are entitled to.
Amount to be Paid in Cash - This is the part of the
down payment that is actually coming out of your pocket.
Lessee's monthly payment is determined as shown below - This
section shows how the monthly payment is calculated:
Gross Capitalized Cost - This is a fancy term for the agreed price
of the vehicle. This is similar to the purchase price of a vehicle
that is purchased. Beware of lessors who say that Gross Cap Cost
Capitalized Cost Reduction - As we mentioned above, the
capitalized cost reduction is in essence a down payment. So, like
a down payment, this amount is subtracted from the gross capitalized
cost. It is the same amount listed under Capitalized Cost
Adjusted Capitalized Cost - This is the remaining cost of the vehicle,
after your down payment. This is the amount of the vehicle that
you will be financing, less the residual amount.
Residual Value - This is what the vehicle is estimated to be worth at
the end of the lease. For a closed-end lease the lessor guarantees
this amount. You can purchase the vehicle for this amount at the
end of the lease.
Depreciation and any amortized amounts - This is simply the portion of
the vehicle that you are using, and is equal to the adjusted capitalized
cost minus the residual value.
Rent Charge - This is the interest that you are paying over the lease
term. As we mentioned above, the money factor or the interest rate
on the lease is not required to be disclosed. However you can
easily calculate it using our
Money Factor calculator.
Total of base monthly payments - This is the total of the
depreciation and the rent charges.
Lease Term - This is the number of months in your lease
Base Monthly Payment - This is your monthly payment not
including sales tax. Equal to the total of base monthly payments
divided by the lease term.
Monthly sales/use tax -
These are taxes added to your base monthly payments that are included in
the gross capitalized cost. Equivalent to sales tax for a purchase.
In addition to these monthly taxes, you may have to pay annual personal
property taxes, registration fees, and other items as you would if you
were purchasing the vehicle.
Other - If there is an amount under other, ask why and make
sure that it is appropriate.
Total Monthly Payment - This is the amount that you will
actually have to send to the lessor each month. The total of the
base monthly payment, monthly sales/use tax, and anything in other.
Early termination - This is the fee you will charged if you
terminate the lease early. The explanation for how the charge will
be calculated is usually on the back of the contract. This is
probably the most complicated part of a lease. Read the back of
the contract carefully to understand how any early termination charges
will be calculated. Each financial institution determines
differently how the fees will be handled if you terminate early, and the
effective fees can vary widely.
Excess Wear and Use - Since the lessor is expecting to get this vehicle
back from you when the lease is over, they need some way to protect
their investment. The lessor expects the vehicle to come back with only
normal wear and tear and a certain amount of miles.
Excessive Wear - This is anything from four bald tires
that meet the 1/8 inch minimum specifications, to a scratch that's
longer than 2 inches, to burn marks in the carpet. A general
rule of thumb is, if there is something that would reduce the value
if you were to resell the vehicle yourself, then the lessor is going
to charge for it.
Mileage Limits - Your contract will specify how many
miles per year you are allowed to drive, and what you will be
charged per mile if you go over the mileage limit. Try to have
the mileage limits match your driving needs. The mileage
charge is typically between 10 and 25 cents.
Purchase Option at End of Lease Term -
This is the amount that you can purchase the vehicle for at the end of
the lease. It is equal to the residual value plus a small fee,
usually equal to the lease turn in-fee.