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 particular needs.
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 leasing agency.
The 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 lease.
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.
One of the items that is not required to be disclosed is the Money Rate Factor or interest rate on the lease. We have developed a calculator to help you determine these figures for any lease.
- 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 mileage charges.
- 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 tax rate.
- 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 lessor.
- 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.
- Amount Due at Lease Signing or Delivery – This is an itemization of item 2, and the total should be the same.
- 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 doesn’t matter.
- 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 Reduction above.
- 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
Calculate 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 contract.
- 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.