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A lease is a contract by which the owner of a
property (the lessor) allows another individual
(the lessee) to use the property for a specific
period of time. Unlike buying, you do not own
the vehicle and you must return the vehicle
when the lease term ends.
Use the Leasing And Buying Comparison Chart
to see how leasing differs from buying.
Most dealerships offer balloon notes as
well as leases. Balloon notes are similar
to a lease but the vehicle is in the
customer’s name. Balloon notes offer low
monthly payments with a large final payment
due at the end of the loan term.
You must take the time to understand and negotiate
the best lease for you.
Lease Offers And Terms
You can lease from a new-vehicle dealership or from
an independent leasing company. Compare lease terms
and costs because they vary significantly from lessor
to lessor. Avoid focusing exclusively on monthly payments.
Closed-End Lease
All private party leases today are closed-end contracts.
A closed-end lease gives you the option to buy the
vehicle at the end of the leasing period or return
it and walk away. If you want the most flexibility
and are not sure whether you will eventually buy the
vehicle, choose a closed-end lease.
Open-End Lease
Open-end leases are primarily for commercial business
leasing. Open-end leases require you to buy the vehicle
at the end of the lease period. These contracts
generally have lower monthly payments but obligate
you to buy the vehicle at a predetermined, fixed
residual value when the lease ends. You may get a
bargain if the fair market value at the end of the
lease is higher than the fixed residual value.
But if the fair market value of your vehicle is
lower than the fixed residual value when the lease
ends, you incur a loss. Either way, you buy the vehicle.
Calculating Residual Value
The residual value is usually set by the leasing
company. You do not have the option to negotiate
the residual value up or down. Residual value is
determined by the vehicle’s estimated rate of
depreciation. The higher the vehicle’s residual
value or down payment, the lower your monthly payment.
If you expect to buy the vehicle at the end of
the lease, negotiate the lowest residual value
possible. If you do not expect to buy the vehicle
at the end of the lease, negotiate the highest
possible residual value because it will lower
your monthly payments. Understand all lease
terms and costs.
- How is normal wear and tear defined in the contract?
- Are there restrictions on who does maintenance and repair?
- How is the buyout price — what you must pay at the end of the
lease to buy the vehicle — determined?
- How is the total cost of the vehicle lease computed?
Mileage Limits
Most lease contracts specify a mileage allowance — the
maximum number of miles that you can drive during the
term of the lease without incurring a penalty or excess
mileage charge. Generally, annual mileage allowances
range from 10,000 miles to 15,000 miles. If you exceed
this allowance, expect to pay 10 cents to 15 cents for
each mile over the allowed mileage. Consider negotiating
a higher mileage allowance before you sign the lease
agreement if you know that you will drive more than the
maximum allowed.
Lease Terms
Most lease terms run from 24 months to 60 months.
If the term offered does not meet your needs, you
might be able to negotiate a different term.
Remember that the shorter the lease term, the
higher your monthly payment. If your lease is for 3 years
or less, your vehicle will always be under warranty without
purchasing additional protection.
GAP Insurance
GAP insurance pays the difference between the insured
value of the vehicle and the costs for early termination
of the lease if the vehicle is stolen or damaged beyond
repair in an accident. Usually, the dealer or lease
company will include the charge for GAP coverage in
the lease. Read your lease agreement carefully. Make
sure the coverage is sufficient to protect you in case
of a total loss.
Acquisition Fee
An acquisition fee, assignment fee or bank fee is an
administration fee charged by the leasing company, much
like points on a mortgage. This fee may not be explicitly
specified in your contract but is included in your Cap Cost
when calculating monthly payments. Ask about it if you do not
see it noted. This fee typically ranges from $250 to $900,
depending on the value of the vehicle. High-end vehicles have
higher acquisition fees. You may be able to negotiate the fee.
Disposition Fees
Look for a disposition fee — what you may be charged when
you return the vehicle to get the vehicle ready for resale.
Like most lease fees, this one is negotiable and can even be waived completely.
Early Termination Fees
If you need to end your lease early, you may be required to
pay an early termination charge to satisfy your lease
obligations. The earlier you end your lease, the greater
the early termination charge is likely to be. The early
termination charge is typically the difference between
the balance remaining on the lease (lease payoff amount)
and the amount credited for the vehicle (realized value of the vehicle).
Negotiate Terms
Negotiate every term possible. You can save considerably by
carefully negotiating the provisions of your lease.
Understand everything before you sign anything. Ask
questions and clarify terms that are unclear. Question
any fee or any provision that seems unreasonable.
Remember that you can walk away from negotiations at
any time before you sign the lease contract.
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