Auto Leases

A lease is a contract allowing a party to convey property to another party for a specified time, usually in return for a periodic payment. A car lease allows a person to drive a car for a fixed period of time as they make a down payment as well as monthly lease payments until the lease ends. It can help to think of a car lease as a long-term car rental; while car rentals generally last for as little as a day or even just a few hours, car leases average between two and four years. Many leases allow the purchase of the leased vehicles through a purchase option agreement at a specified price once the lease ends. It is important to note that choosing to add such an option at the beginning of a lease will add a small amount to the monthly lease payment. Most car leases can be found at dealerships or private car dealers.

Several variables are required to calculate the monthly lease on any vehicle:

• Auto Price—Also known as capitalized cost, it refers to the retail price of the car. It is possible to negotiate this figure down (the same strategy used for buying cars) for a more affordable lease. Actually, many experts claim it is better to negotiate with car salesmen as if buying the car outright, and only when the desired figure is reached should a potential lessee reveal that they intend to lease the car and not buy.
• Money Factor—This is the interest rate expressed differently and used specifically in the context of car leases. Lessors use the money factor as a way to determine lease rates that correspond to each lessee’s credit history. They generally work very similarly: the poorer the credit history of the lessee, the higher their money factor, and the pricier the lease. To get the money factor, divide the APR on the lease by 24 or 2400, depending on whether it is expressed as a decimal or percent.
• Lease Term—This is the length of the lease. Most leases run between 2 to 4 years.
• Residual Value—Sometimes called lease-end value. In essence, the residual value of a car is the amount it can be bought for at the end of the lease. Financial institutions that issue lease contracts, not the dealers, set residual values on vehicles. It is an estimation of the worth of the car at the end of the lease period. The difference between the price of the car minus residual value will result in the depreciation of the car after a lease, which is amortized throughout the lease loan. Therefore, auto leases tend to be more affordable for slowly-depreciating vehicles because they hold their residual values well.

Mileage

Most leases will have a mileage cap, which is the maximum number of miles the car can be driven during the life of the lease. In the U.S., standard auto leases generally allow annual mileage limits of 10,000 to 15,000, with most coming in at 12,000. If the lessee exceeds this limit, there will be a penalty charge per mile over the limit when the lease ends. In the U.S., the average cost is between 5 to 20 cents per mile over.

There exist certain car leases called “high mileage leases,” which give lessees several thousand additional miles to work with annually. Although the monthly lease payments for high mileage leases tend to cost more than the standard leases, they may be helpful to those who are prone to racking up a ton of miles. Keep in mind that the average American drives around 18,000 miles a year. Lessees that go over their mileage limits have the option to avoid the penalties by buying the vehicle at the end of the lease.

Wear and Tear

It is expected that leased vehicles are returned to lessors in reasonable condition at the end of the lease period. When returned, vehicles will go through thorough inspections (usually a contracted third-party) to ensure that there is nothing out of the ordinary given the mileage accrued. As should be stated more specifically in each individual lease contract, any pertinent damage or faults accrued during the use of leased vehicles that are attributed to the lessee (such as collisions of their doing) will most likely come out of their own pocket. On the other hand, wear and tear can be the financial responsibility of either party, depending on whether visual inspection shows that it was “normal” wear and tear or “excessive” wear and tear. The two are explained in detail below.

• Normal—Normal wear and tear is not the financial responsibility of the lessee. Each lessor’s definition of “normal” is different, but they tend to follow a basic pattern. Minor physical damage that has a diameter of less than half an inch is considered normal. This may include exterior dings and scratches that can be easily buffed out, interior stains or damage that can be removed, minor nicks or scuffs on the wheel covers, and no broken parts or missing equipment. Also, the routine replacement of items that match the manufacturer’s recommended guidelines, such as tires, brakes, and light bulbs, is considered normal.
• Excessive—Excessive wear and tear is the financial responsibility of the lessee. While lessors generally do not gouge lessees for every single little dent or ding, any broken or missing parts will be considered excessive, such as frame damage that impacts the structural integrity of a vehicle, bent or broken rims, or mechanical or electrical components that no longer function properly. Excessive wear and tear may also refer to punctures to the exterior body larger than two inches that significantly hampers the appearance of a vehicle or reduces its marketability. If the cost to repair excessive wear and tear exceeds the cost to replace the whole vehicle (an example being engine failure due to accident), the lessee can be held liable for either cost, whichever one is cheaper.

Lessees can potentially avoid excessive wear and tear charges by taking good care of their leased vehicles. This can include adding protection such as car door guards, or assuring that small children are properly attended to. In the days prior to the return of the vehicle to the lessor, it can work in the lessee’s favor to ensure that the car has as much curb appeal as possible. Giving it a wash, buffing out any scratches, replacing small broken parts, and removing stains from upholstery can help. Wear and tear insurance is available for lessees who feel that they might need it to cover excessive wear and tear. Lessees with too much excessive wear and tear have the option to avoid penalties if they buy the vehicle at the end of the lease.

Maintenance

Most lease contracts will require the lessee to perform regular upkeep of the vehicle, such as servicing it (with proof) on a regular basis. Failure to do so can result in penalties and/or void warranties. Maintenance of leased vehicles generally includes routine jobs such as changing the engine oil, tires, brakes, and topping up fluids where necessary. Be sure to read the lease terms carefully as maintenance rules from lease to lease can differ greatly.