A Guide to Lease Agreements                                           How leases work and whether or not you’re           ...
DepreciationThe loss of value of the car over time. Cars depreciate quickly: as soon as you drive it off the lot, its valu...
LessorThe company who’s leasing the car to you. Not necessarily the dealer or the car company, it’s whomever you makeyour ...
Subsidized or Subvented LeasesTo get more customers to lease, companies have come up with two ways to lower monthly paymen...
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A Guide to Lease Agreements - How leases work and whether or not you’re ready to sign on the dotted line.

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Despite how common they are, car leases are actually very complex legal agreements. Lease documents are long and full of complicated language that can be difficult to navigate and understand.

We’ve put together this short glossary of common terms used in leases to help you better understand how they work, what you pay for, and whether or not you’re ready to sign on the dotted line.

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A Guide to Lease Agreements - How leases work and whether or not you’re ready to sign on the dotted line.

  1. 1. A Guide to Lease Agreements How leases work and whether or not you’re ready to sign on the dotted line Despite how common they are, car leases are actually very complex legal agreements. Lease documents are long and full of complicated language that can be difficult to navigate and understand. We’ve put together this short glossary of common terms used in leases to help you better understand how they work, what you pay for, and whether or not you’re ready to sign on the dotted line. Acquisition Fee An added fee you pay covers the cost of drawing up the lease & all other paperwork.Allowable MileageThe number of miles you’re allowed to put on the car during the term of the lease. Most companies allow about12,000 miles per year. If you go over your total allowed mileage, you’ll have to pay between 12-15 cents per mile.Watch out; it adds up fast.Bank FeeA fee added by the leasing company to cover their costs.Base Monthly PaymentThis is the portion of your monthly payment that covers the car’s depreciation or, in other words, how much of the car’svalue you’re “using up” by driving it. The Base Monthly Payment plus interest plus tax is your total monthly cost forleasing the car.Capitalized CostThe selling price of the car at the beginning of your lease including everything from the base price of the car to all theextras that go along with it. This number is used a lot in leases to calculate all kinds of values and costs.Closed End LeaseThe most popular kind of lease in the US and the only kind you should enter into. It allows you to return the car afterthe term is over and gives you the option to purchase it if you wish to. These kinds of leases require lots of insurance -- usually more than youd need to get if you bought. 1
  2. 2. DepreciationThe loss of value of the car over time. Cars depreciate quickly: as soon as you drive it off the lot, its value dropssharply because it’s no longer “new.”Disposition FeeA fee added by the dealership to prepare the car for resale after it’s returned. You may be able to negotiate this feeout of your lease. If you go into your lease negotiation well prepared and confident, you can often get fees like thisone knocked off.Drive-off FeeThis is the amount you pay in cash to drive off with the car. It includes fees from the DMV, all your leasing fees, plus asecurity deposit. If you want to reduce your monthly payments and have extra cash on hand, you can also pay a cap-reduction fee, which is just a lease version of a downpayment.Early TerminationIf you decide you no longer want the car or can’t afford your payments anymore, you can get out of the lease. But thepenalties for doing so make it very difficult for most people. If you can’t afford it, there are new companies online thathelp people sell their leases to others.Excess Wear and TearWhen you return your car at the end of your lease, you’ll be required to pay for any “excess wear and tear” that hasdamaged the car outside of what’s normally expected after using it for a few years. The definition of excess wear andtear is fuzzy on purpose; make sure you understand what they mean by it and that it’s spelled out clearly. Always havea car washed & detailed before you return it: it can save you big.Finance FeeThis is also called a Lease Charge or Rent Charge. It’s the additional money you pay on top of the value of the carduring the lease. The car loan equivalent is interest. This is how car leasing companies make their money.Gap insuranceAn essential and sometimes included kind of insurance that covers the difference between what the car is worth andhow much you owe on your lease in case it gets totaled. Gap insurance is a must. Check out our article about it here.LesseeThe person who’s leasing the car. That’s you. 2
  3. 3. LessorThe company who’s leasing the car to you. Not necessarily the dealer or the car company, it’s whomever you makeyour check out to each month.Money FactorThis is the lease version of an interest rate and it’s used to calculate your monthly payments. To figure out how muchinterest your money factor costs you, multiply it by 2,400. For example, a money factor of .0027 is equal to an interestrate of 6.5%MSRPMSRP stands for Manufacturer’s Suggested Retail Price. It’s also called “sticker price.” This is the number dealerswill try to base your lease on. It’s also the number you should try to negotiate down. Dealers anticipate having tobring this number down, so don’t be shy about asking for a better price.Payoff or Buyout AmountIf you choose to buy the car after your lease, this is the amount you’ll have to pay.Purchase OptionThis is the option you’re given to buy your car after your lease is over. Ideally, you would have gotten a car loan andbought the car from the get-go, because buying after leasing costs more in the long run.Residual ValueThis is what the lease company predicts the car will be worth after your lease is up. The higher the residual value ofthe car relative to its price new, the lower your monthly payments will be.Sales TaxOne of the great parts about leasing is the way you pay sales tax on your car. Instead of having to pay sales tax onthe value of the entire vehicle, you only pay tax on the part of the car’s value you use up during the lease. So if youlease a car that costs $20,000 new in a state that has 7% sales tax and your lease costs a total of $8,000, you payonly $560 in sales tax, instead of $1400.Security DepositJust like a security deposit on an apartment you rent, you’re usually required to write a check for one month’s paymentupfront. The company will use this money in case they need to repair damage to the car when you return it. If theydon’t, you’ll get the money back. 3
  4. 4. Subsidized or Subvented LeasesTo get more customers to lease, companies have come up with two ways to lower monthly payments: they’ll eitherlower the interest rate on the lease or they’ll artificially inflate the residual value of the car after the lease ends. Theseare subsidized and subvented leases, respectively.TermThe length of your lease. Most leases are 36 months long (three years). But shorter and longer-term leases are alsocommon. 4

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