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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

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 Mileage

The number of miles you’re allowed to put on the car during the term of the lease. Most companies allow about

12,000 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 Fee

A fee added by the leasing company to cover their costs.

Base Monthly Payment

This is the portion of your monthly payment that covers the car’s depreciation or, in other words, how much of the car’s

value you’re “using up” by driving it. The Base Monthly Payment plus interest plus tax is your total monthly cost for

leasing the car.

Capitalized Cost

The selling price of the car at the beginning of your lease including everything from the base price of the car to all the

extras that go along with it. This number is used a lot in leases to calculate all kinds of values and costs.

Closed End Lease

The most popular kind of lease in the US and the only kind you should enter into. It allows you to return the car after

the 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 you'd need to get if you bought.

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Depreciation

The loss of value of the car over time. Cars depreciate quickly: as soon as you drive it off the lot, its value drops

sharply because it’s no longer “new.”

Disposition Fee

A fee added by the dealership to prepare the car for resale after it’s returned. You may be able to negotiate this fee

out of your lease. If you go into your lease negotiation well prepared and confident, you can often get fees like this

one knocked off.

Drive-off Fee

This is the amount you pay in cash to drive off with the car. It includes fees from the DMV, all your leasing fees, plus a

security 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 Termination

If you decide you no longer want the car or can’t afford your payments anymore, you can get out of the lease. But the

penalties for doing so make it very difficult for most people. If you can’t afford it, there are new companies online that

help people sell their leases to others.

Excess Wear and Tear

When you return your car at the end of your lease, you’ll be required to pay for any “excess wear and tear” that has

damaged the car outside of what’s normally expected after using it for a few years. The definition of excess wear and

tear is fuzzy on purpose; make sure you understand what they mean by it and that it’s spelled out clearly. Always have

a car washed & detailed before you return it: it can save you big.

Finance Fee

This is also called a Lease Charge or Rent Charge. It’s the additional money you pay on top of the value of the car

during the lease. The car loan equivalent is interest. This is how car leasing companies make their money.

Gap insurance

An essential and sometimes included kind of insurance that covers the difference between what the car is worth and

how much you owe on your lease in case it gets totaled. Gap insurance is a must. Check out our article about it here.

Lessee

The person who’s leasing the car. That’s you.

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Lessor

The company who’s leasing the car to you. Not necessarily the dealer or the car company, it’s whomever you make

your check out to each month.

Money Factor

This is the lease version of an interest rate and it’s used to calculate your monthly payments. To figure out how much

interest your money factor costs you, multiply it by 2,400. For example, a money factor of .0027 is equal to an interest

rate of 6.5%

MSRP

MSRP stands for Manufacturer’s Suggested Retail Price. It’s also called “sticker price.” This is the number dealers

will try to base your lease on. It’s also the number you should try to negotiate down. Dealers anticipate having to

bring this number down, so don’t be shy about asking for a better price.

Payoff or Buyout Amount

If you choose to buy the car after your lease, this is the amount you’ll have to pay.

Purchase Option

This is the option you’re given to buy your car after your lease is over. Ideally, you would have gotten a car loan and

bought the car from the get-go, because buying after leasing costs more in the long run.

Residual Value

This is what the lease company predicts the car will be worth after your lease is up. The higher the residual value of

the car relative to its price new, the lower your monthly payments will be.

Sales Tax

One of the great parts about leasing is the way you pay sales tax on your car. Instead of having to pay sales tax on

the 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 you

lease 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 pay

only $560 in sales tax, instead of $1400.

Security Deposit

Just like a security deposit on an apartment you rent, you’re usually required to write a check for one month’s payment

upfront. The company will use this money in case they need to repair damage to the car when you return it. If they

don’t, you’ll get the money back.

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Subsidized or Subvented Leases

To get more customers to lease, companies have come up with two ways to lower monthly payments: they’ll either

lower the interest rate on the lease or they’ll artificially inflate the residual value of the car after the lease ends. These

are subsidized and subvented leases, respectively.

Term

The length of your lease. Most leases are 36 months long (three years). But shorter and longer-term leases are also

common.