Car leasing is a popular type of car financing that allows you to “rent” a car from a dealership for a set period of time and a set number of miles. Typically, you’ll make monthly lease payments on a vehicle, and in exchange, the dealer will let you drive it.
At the end of the car lease agreement, you will return the vehicle to the dealer or cancel your lease if you want to keep the car if that is an option in your car lease agreement.
Car Lease agreements are often filled with specific jargon that first-time renters may not be comfortable with. When you lease a car, you’re basically paying the leasing company (or lessor) to drive a car they own for a set period of time, usually two or three years.
You will be limited to how much you can drive and what you can do with the vehicle. Leasing a car instead of buying it can be a much more expensive option, especially when you consider how fees impact the total cost.
What is a Car Lease Agreement?
A car lease agreement allows you to drive a vehicle at a dealership for an agreed-upon amount of time and miles, and pay for your use rather than the full purchase price of the vehicle.
You make monthly payments to be able to drive the car. Monthly payments are based on the projected depreciation value of the car over the term of the car lease agreement.
What is in the Car Lease Agreement?
The first few sections of your car lease agreement will likely focus on what you’re expected to pay as part of the deal, including how your monthly payment is calculated. It will then provide information on early termination, mileage limits, end-of-lease options, and more.
Keep an eye out for these items:
Acquisition Fee: An acquisition fee is the fee leasing companies charge to arrange the lease. It’s typically non-negotiable and costs between $395 and $895, according to Edmunds. You can also expect to pay a higher acquisition fee for higher priced cars and luxury vehicles.
Amount Due at Signing: The amount you will be required to pay at signing. It includes your down payment, but the agreement will also break down any fees, credits or refunds that influence the total amount owed. For example, trading in another vehicle will reduce the amount owed.
Purchase price: Find the amount you could purchase the vehicle for, along with related fees, at the end of your lease period.
Capitalized cost: Also called maximum cost, this is the sales price of the vehicle that is used to calculate depreciation and how much you owe.
Capital Cost Reduction: This includes any down payments, trade-ins and dealer rebates that reduce the cost amount being financed.
Disposal Fee: The disposition fee covers the costs the dealer incurs to prepare the car you leased for resale. Expect to pay between $300 and $400 to cover this fee, Edmunds notes. However, you can often get the fee waived if you sign a new car lease agreement.
Early termination fee: The agreement should explain the fees you will be charged if you need to end your lease early. Ending a car lease agreement early is usually expensive and may require you to make all payments despite returning the vehicle.
Excessive use: Your car lease agreement will show you how many miles you can drive each year. You’ll be charged a fee based on how many miles you drive over that limit, sometimes up to 30 cents per additional mile. It can also refer to damage to the vehicle that you will have to pay for when the lease ends.
Money factor: This helps determine the interest rate on the loan. To find your interest rate, multiply the money factor by 2400. For example, a money factor of 0.0032 multiplied by 2400 gives an interest rate of 7.68 percent.
Monthly Payments: The agreement should state the amount you will pay each month and include a detailed breakdown of the factors, including sales tax and estimated depreciation, that were used to determine that amount.
Residual value: It is the estimated value of the vehicle at the end of the lease due to depreciation. Cars that depreciate more slowly than others have a higher residual value and lower monthly payments.
Essential Provisions Included in a Car Lease Agreement
The car lease agreement outlines various terms and conditions that both parties must comply with during the lease period. These terms include:
Vehicle Details Specification: The agreement includes specific details about the vehicle being rented, such as make, model, year, identification number, and any additional features or accessories.
Including the lease term: The car lease agreement specifies the length of the lease, including the start and end dates. You may also describe any renewal or extension options, if applicable.
Lease Payment Statement: The agreement states the amount of lease payments, the frequency of payments (for example, monthly), and due dates. You may also include details about any security deposit or initial fees.
Imposing mileage limitations: Most leases impose mileage restrictions, which define the maximum number of miles the lessee can drive the vehicle during the lease term. Exceeding the mileage limit may result in additional charges.
Consideration of wear and tear: The lease generally outlines the lessee’s responsibility to maintain the vehicle and return it in good condition, taking into account normal wear and tear.
Maintaining Insurance Requirements: The lessee must generally maintain adequate insurance coverage on the leased vehicle, with the lessor naming an additional insured party.
Determining Early Termination: The agreement specifies the conditions under which either party may terminate the lease prior to the scheduled termination date. It may describe any penalties or fees associated with early termination.
Clarification of ownership and return of vehicle: The car lease agreement clarifies that the lessor retains ownership of the vehicle and the lessee must return it at the end of the lease term, subject to any excess mileage or damage.
What are the Restrictions Include in the Car Leasing Agreement
Part of the purpose of the agreement is to explain the restrictions placed on automobile use. Look for these factors:
Customization: Because the leased vehicle does not belong to you, you cannot make any customizations, such as adding a new stereo system or painting the vehicle.
Early Termination: If you’re not sure if leasing is right for you, you’d better buy. If you end the lease early, you will be charged a fee. The sooner the deal ends, the more expensive it will be. You can also take over a leased car. Learn about the pros and cons of car lease takeover.
Excessive wear and tear: Your agreement likely says you must return the car at the end of the lease with no more than “normal” wear and tear. Please read this section carefully to clearly understand the condition that the car must maintain.
Maintenance: The car you are leasing will almost certainly need some maintenance over the period of use, and might even need major repairs. Be sure to read the section of your agreement that explains your responsibility to cover these costs.
Mileage Charges: Your agreement will stipulate a certain number of miles, usually 15,000 or less, that you can drive each year at no additional charge. It will also indicate the amount you will be charged per mile if you exceed this threshold.
What happens when the auto lease ends?
You have three options when your car lease agreement ends:
- Trade it in: With this option, you’re basically replacing your just-ended lease with a new one for a different car.
- Walk away: If you don’t want to lease a new vehicle right away or would rather purchase your next car, you can return the vehicle and simply walk away.
- Buy the car: If you like the car you have been driving and want to buy it, you can go for this option. The purchase price will already appear on your vehicle lease, so you can compare prices and determine if it’s right for you. Some lenders offer specialized auto loans specifically for lease purchases. Learn how to buy out a leased car.
As you approach the end of your lease term, you can start listening to the dealer about how they want to proceed. Take your time to consider each option carefully and determine the most suitable one for you.
Steps to Terminate a Vehicle Lease Agreement
Terminating a vehicle lease before the scheduled end date can be complex, but it is possible under certain circumstances. Below are some general steps to consider when terminating a vehicle lease:
Explore transferring or purchasing the lease: In some cases, it is possible to transfer the lease to another party. This is known as lease assumption or lease transfer. Alternatively, you can explore the option of canceling the lease by paying off the remaining balance on the vehicle.
Negotiate with Lease Terms: Depending on your circumstances, you may be able to negotiate with the landlord to reach a mutually acceptable solution. They may be open to modifying the terms, adjusting the payment structure, or offering alternatives to termination. Learn how to negotiate a car lease.
Consideration of lease termination services: Certain companies and online platforms specialize in lease termination services. They can help you find someone to take over your lease or provide guidance on the process. However, please note that these services may involve additional fees.
Document the termination: Once the landlord has reached an agreement, make sure all details of the termination are documented in writing. This includes any revised terms, financial agreements or other agreements made during the termination process.
Return of the vehicle: If the termination is approved, return the vehicle to the lessor according to the lessor’s instructions. Thoroughly clean the vehicle and remove any personal items. Take note of any required documentation, such as the vehicle condition report or odometer reading.
Understanding lease agreement terminology
Before you commit to leasing a vehicle, it is essential to understand the agreement. Common elements in a car lease agreement include:
Down Payment: The down payment on a lease may include the first and last month’s payment and a security deposit.
Lease length: Vehicle leases typically last between 24 and 48 months. Although some may last longer.
Acquisition Fee: These are fees you pay to enter into a lease. These include administrative costs, such as verifying insurance or obtaining your credit report.
Disposal Fees: When the lease ends, costs may be incurred to prepare and sell the vehicle.
Money factor: The money factor of a lease is the interest rate you pay during the lease.
Monthly lease payments and how they are calculated: Your monthly payments cover the cost of using the vehicle. Monthly lease payments are based on the difference between the MSRP and the expected value of the car at the end of the lease. Payments may also include additional costs, such as sales tax, GAP insurance, and other fees.
Mileage limits: These are the fixed number of miles you are allowed to drive the car based on the lease term.
Penalties for Exceeding Mileage Limits: Renters who exceed the permitted mileage are subject to a charge for each mile they drive over the limit.
Late Payment Penalties: Your lease may provide a few days or weeks of grace period for you to make your payment. But if you don’t make a monthly lease payment, you could be in breach of your car lease agreement. If you don’t cure the default by making the late payment, a lender could legally repossess your vehicle. Additionally, you may be charged an early termination fee depending on your lease.
Maintenance Responsibilities: The lease specifies who pays for repairs and maintenance during the life of the lease. The owner may pay certain maintenance costs; However, when you rent a car, you are generally responsible for excessive wear and tear on the vehicle.
Penalties for early termination: You may be penalized if you end the lease before the end date of the car lease agreement. Your early termination fee may be the difference between the amount still owed under the lease minus the current value of the vehicle.
End-of-lease purchase option: Many leases include a lease-purchase option. This is the amount you would pay the dealer to purchase the car at the end of the lease.
What Credit Score Do I Need To Lease A Car?
The average credit score of people who lease cars is 745. A good credit score is required to lease a car, and dealers generally like to see a score of 650 or higher. Know the minimum credit score needed to lease a car.
If you have poor credit then it’s better to check out the easiest car to lease with bad credit. You will easily lease these cars with poor credit score.
A good credit score often makes it easier to lease your favorite car. So before taking any car lease, you should improve your credit score.
Can I Lease a Car with Bad Credit?
Yes, it is possible to lease a car with bad credit, as long as you meet the dealership’s credit score requirements and they allow it. However, some dealers may not approve. For that, you can check out some places to lease a car with bad credit.
There are some basic income requirements to lease a car. Lenders consider people with low credit scores to be at higher risk of defaulting on their loans and charging higher interest rates.
Is It Better to Leasing or Buying a Car?
The decision between leasing or buying a car depends on your individual preferences, your financial situation, and your driving habits. Both options have their advantages and disadvantages, and what may be best for one person may not be best for another.
Learn more about Leasing vs Buying a Car
If you value lower monthly payments and the ability to drive a new car every few years, leasing might be a better option. If you prefer long-term ownership, want the flexibility to customize your vehicle, and don’t mind higher monthly payments, purchasing may be the best option.
You can also buying out a leased car at affordable price. Learn about the process of buying out a leased car.
Conclusion
Understanding lease terms, financial considerations, maintenance responsibilities, mileage restrictions, and termination options are important aspects to consider in a vehicle lease agreement.
It is important to thoroughly review the lease, communicate effectively with the landlord, and explore available options regarding termination or possible transfer of the lease.
Frequently Asked Questions (FAQs) about Car Lease Agreement
What is a car lease agreement?
A car lease is a legal contract between a lessor and a lessee. It describes the terms and conditions under which the lessee can use the car for a specific period, usually in exchange for monthly lease payments.
How does car leasing work?
In car leasing, the lessee pays a monthly fee to use the vehicle for a set period, usually 2 to 3 years. The lease includes details such as mileage limits, maintenance responsibilities, and additional charges. At the end of the lease term, the lessee can choose to buy the car, return it, or lease a new one.
What happens if I exceed the mileage limit?
Exceeding the mileage limit may result in additional charges at the end of the lease. It’s important to accurately estimate your annual mileage and negotiate a reasonable limit in the lease.
Can I terminate a lease early?
Early termination of a lease generally results in penalties and the tenant may be responsible for paying the remaining lease payments. Some leases may offer options such as lease transfer or early purchase, but they have their own terms and conditions.
What should I do before signing a car lease?
Before signing, carefully review all terms, conditions and costs associated with the lease. Understand your rights and responsibilities, negotiate terms if possible, and ask questions to clarify any uncertainties.