Vehicle leasing is the leasing (or the use) of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term (usually 2, 3 or 4 years) the vehicle has to either be returned to the leasing company or purchased for the residual value.
What are the basic elements of a car lease agreement?
Say you’ve decided to lease a car instead of purchasing one. Once you pick out a car you’ll be presented with a lease agreement that’s filled with jargon you may not fully understand.Before you seal the deal, familiarize yourself with the basic elements that make up such a document. Here’s what you need to know to make an informed decision.
How leasing works
When you lease a car you are essentially paying a company for the right to drive a car they own for a set period of time, usually two or three years. Your payments are meant to cover the depreciation of the car during that period, so they are often cheaper than an auto loan on an equivalent vehicle would be. Leasing can also be a good way to drive a newer model car for relatively little cost.
However, the major downside of leasing is that you will likely end up spending more over the long-term than you would if you bought a car and used it for many years. Moreover, since you don’t own the vehicle, your use of the car must be in line with the restrictions laid out in your lease agreement, which is why it’s important to read that document closely.
The financing agreement
The first sections of your lease agreement will likely be focused on what you’ll be expected to pay as part of the deal. Look out for these elements:
- Amount due at signing: One of the first sections of the agreement states exactly how much you will need to pay when you sign. That amount includes your down payment, but the agreement will also breakdown any fees, credits or rebates that factor into the total amount due. For example, trading in an older vehicle will lower the amount due.
- Monthly payments: The agreement should state the amount you’ll pay each month and include a detailed breakdown of the factors—including sales tax and estimated depreciation—that were used to determine that amount.
- Purchase option: Look for the amount you may be able to purchase the vehicle for—along with any related fees—at the end of your lease period.
- Early termination fee: The agreement should explain any fees you’ll be charged if you need to get out of your lease early. Ending a lease early usually comes at a steep cost.
Restrictions in the car lease agreement
Part of the purpose of the agreement is to explain the restrictions that are placed on your use of the car. Look for these factors:
- Mileage charges: Your agreement will stipulate a certain number of miles, usually 15,000 or less, that you are allowed to drive each year with no extra charge. It will also state the amount you will be charged per mile if you exceed this number.
- Maintenance: The car you’re leasing is sure to need some maintenance during the period you’re using it, and it might even need significant repairs. Make sure you read the section of your agreement that explains your responsibility for covering these costs.
- Excessive wear: Your agreement will likely say that you must return the car at the end of the lease with no more than “normal” wear. Read this section closely so you clearly understand the condition you must maintain for the car.