Car Lease Agreement Restrictions

By design, car lease agreements are difficult to terminate and because of this lease companies enjoy a very loyal clientele. Because lease companies retain a stake in the leased vehicle, a number of restrictions are imposed on the lessee. Some of them include the following;

• Vehicle usage

The leased vehicle may not be used as part of a commercial fleet, taxi or livery as this kind of application might accelerate wear and tear and consequently result in a lower residual value at the end of the lease term. Vehicle application restrictions are normally clearly stated in the lease offer and agreement.

• Termination fee

Lease companies design the termination in such a way as to discourage early lease termination. The cost involved in terminating a lease agreement is always substantial and prohibitive. Because of this, many companies have sprung up specializing in buying out leases. It is possible to transfer your lease to another individual without incurring any penalties under the same terms. However, some lease companies may still hold you liable in the event the individual that took over your lease defaults.  

• Excess mileage fee

Lease companies limit on mileage per year to about 10,000 to 15,000 miles. If the you drive miles in excess of this, a charge of about 0.1c to 0.25c (US cents) per mile maybe charged. The rationale of this charge is simple; the higher the mileage, the more the wear and tear which impacts on the residual value of the vehicle at the end of the lease term. If you anticipate to ply more miles, it is prudent to negotiate extra mileage at a cheaper cost but care must be taken not to pay for mileage that you will not use. Nowadays, there are lease companies offering customized lease mileage where you can choose from anywhere between 1000 and 50,000miles per year, in increments of 1000. To get the best deal on mileage, do some research first and compare deal pricing.

• Excessive wear and tear fee

When you return a car at the end of the lease, the dealer asses it for mileage, body damage, tire wear and mechanical problems. If the cost of these repairs exceeds the allowed value as per your lease contract, you pay a penalty fee known as the excessive wear and tear.

Read More

Features of a car lease agreement

A car lease contract agreement terms will vary from manufacturer to manufacturer and from dealer to dealer and also depending on whether the car to be leased is new or used. When you approach a dealer for a car lease be sure to inquire about the following features;

• Capitalized cost or "cap cost"

Capitalized cost of a car is the price of the car to be financed by the lease. This value is negotiable, be sure to negotiate this value with your dealer since the lower this value is, the lower your lease and down payments. The capitalized cost quoted by manufacturer may not necessarily be the same as the price quoted by the dealer. Dealers lump up their markup margins to the manufacturers cap cost. That is why you need to negotiate on the cap cost to get a favorable deal.

• Down payment

Also called a capitalized cost reduction. All car lease arrangements require you to make a down payment in addition to the first lease payment. Down payments will vary from dealer to dealer but ranges anywhere between 11 - 25%, though 11% is the average. Down payments are calculated as a percentage of the capitalized cost. A dealer will specify their minimum down payment but you could choose to pay more to reduce on the size of your monthly payments. Do not deplete all your savings in favor of smaller monthly payments, you never know when you might need emergency cash.

• Residual value

A residual value is the projected market value of the car at the end of the lease period. Residual values provide a basis for estimating the cost of the lease.  A car with a higher residual or resale value will generally attract lower lease and down payments. Be sure to select a car with a higher residual value if you prefer to keep lease payments low. You can look up car residual values from online resources such as cars.com.

• Acquisition fee

Acquisition fee is similar to a loan arrangement fee charged by banks. Lease companies similarly charge a non negotiable administrative fee on every leased vehicle. Acquisition fees may vary from company to company and maybe higher for more expensive vehicles. This fee is added to the capitalized cost to get the gross amount financed by the lease.

• Documentary service fee

A documentary service fee may be charged by the dealer for preparing, handling and processing of paperwork relating to the lease or sale of a motor vehicle. In some instances, this amount is regulated by law and should be itemized and its cost stated explicitly in the contract. Always ask about this fee in advance so that you negotiate more on the cap cost.

• Title and license fees

These are also known as a simply registration fees charged by the state to issue number plates and register the car in the Motor vehicle registry. Always act ahead of time and find out how much it will cost you to do this and budget accordingly.

•  Security deposit

A security deposit fee maybe charged upfront and is refundable at the end of the lease term. Security deposits are imposed on customers with poor credit rating or first time lessees. This amount maybe equivalent to or slightly more than one month lease payment. Generally, this is a discretionary fee based on the lease company's  assessment of the customer.

• Disposition fee

When you return the vehicle to the dealership at the end of the lease term, you are required to pay a disposition fee to take care of the expenses to be incurred by the lease company to sell  off the returned car. If you choose to buy the car or  lease it again at the end of the lease term, you may not be required to pay this fee. Please note that some companies may still charge you this fee regardless of whether you decide to purchase the vehicle. So be sure to negotiate on this fee prior to taking on the lease.  

• Taxes

It is every citizens obligation to pay taxes. The tax policy on car leases varies from state to state(US) and country. In some instances you might be required to pay use taxes upfront for the entire lease term while in most common cases the use taxes are lumped up on the monthly lease payments. Always find out sales tax information from your locality or state.

• Trade-in value

To lease a new vehicle you are required to make a down payment not less than the stipulated value in the lease terms. If you have an old car, you can present it to a lease company for valuation as part of down payment. The value of this car is called your trade in value. Trade-in value is used to offset the total amount of down payment you would otherwise have to pay if you had no trade-in. The same concept may apply if you are renewing a lease. The initial down payment might have been substantial and over the years might have paid more on the lease. In effect you accumulate equity on the leased car which can be used as trade-in value for a new lease.

Read More

Car Leasing

Car leasing, involves using a motor vehicle for a fixed period usually in years at an agreed amount of money for the length of the lease. The period is normally much shorter (24-36 months) than a car loan , though terms of 48-60 months are also available. After the expiry of the lease you return the car to the dealer for disposal. So literally, you can drive a new car every few years! 

Lease payments are usually much lower and the qualification process is easier than obtaining a car loan. The car lease agreement though comes with certain conditions; maximum allowable mileage per year(usually 10,000 miles), allowable wear and tear, early lease termination fee, etc. Beware penalty fees may apply if you violate the lease agreement. Work out what is best for you basing on the projected use and if possible negotiate for a higher mileage for a slightly higher lease payment if necessary to avoid penalties. You can also opt in for a lease with maintenance; excluding fuel and insurance to save yourself the headache of breakdowns and regular maintenance. Newer vehicles, require less maintenance. So it is not worthwhile paying extra unless you make frequent long trips. This option is good for businesses and large companies.

Car leasing still offers a sizeable fraction of revenue for car manufactures around the globe. It is common amongst business companies, which prefer to lease other than an outright purchases of cars, in addition to the luxury cars market where the buying price of a car is prohibitively expensive for everyone to afford. Car leasing may not be good for everyone as revealed shortly, and it may not exactly be cheaper than an outright purchase depending on the vehicle leased. It is best to keep the lease term short, say 24-36 months in order to keep the cost down. Always do a survey on the car prices and lease prices before committing to any one deal. In some instances, it can be cheaper to buy than leasing.

Qualification for a car lease is based on credit rating. A good credit history will earn you a good lease deal while a poor credit rating might prove prohibitive to getting a car lease approval. Most manufacturers nowadays have in-house financing companies, which offer leases to mainly top-tier customers or customers with a proven credit history.  If you have a poor credit rating, chargeable lease and down payments are normally bigger to mitigate the financial risk to the company.

Read More