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.