Understanding Car Leasing: Common Questions

Car leasing can be a great option under the right circumstances. Car leasing offers lower payments than a conventional loan. Car leasing allows consumers to get more car for less money and it provides additional options not available in a traditional loan repayment plan.

Car leasing can be helpful to those seeking a new vehicle more often as well as for those without the financial means to put down a large down payment. Car leasing is appealing to many due to the low payments associated with them, but the terms involved in securing a car lease can be confusing. The confusion can lead many to sign the contract terms even without fully understanding the requirements and stipulations. It seems most people wade into the car leasing waters without examining, understanding, or determining which car lease deal is best. Many only accept the offer from the dealership without questioning or examining all available options. Car leasing can be tailored to individual needs. Here are many common questions answered to help you determine if a car lease is a good option for you:

What is Car Leasing?

It is a contract you enter with a car lessor to drive their vehicle for a certain number of miles for a specified duration of time during which you make agreed-upon monthly payments. It is essentially a long-term rental agreement with the option to buy the vehicle upon completion of the leasing agreement.

Where Can You Find the Best Car Lease Deals?

There are many options each suiting particular credit scores. Car dealerships typically have multiple leasing companies to choose from each specializing in different credit situations. Car dealerships will choose the leasing company best suited to meet your particular financial credit profile. As a consumer, it is important to question the car dealership to understand their car leasing company selection. Overall, typically, the best car lease deals are offered through the car manufacturers’ finance company such as Toyota Financial Services, Lexus Financial Services, BMW Financial Services, etc.

What are the Main Terms and Factors Considered When Car Leasing?

The car leasing payment is based on the price of the car, which is also referred to as the “Capitalized Cost.” When choosing to lease a car, the price is still negotiable. It is no different than if you were seeking to secure a traditional loan or if you were seeking to write a check to pay for the vehicle. Most consumer car leases are a “Closed-End” making the “Residual-Value” fixed. This amount is typically based on the vehicle’s MSRP (Manufacturer Suggested Retail Price). This is usually referred to as the “window sticker.” The Residual Value is not negotiable. It will change based on the allotted miles per year and term chosen. The Residual Value is the value the leasing company has agreed the car will be worth upon fulfilling your lease obligation.

Should the vehicle be worth less than estimated, then you as a consumer have the option to return the vehicle. If the vehicle is worth more than the Residual Value, then you can purchase the vehicle for that price (some car leasing contracts give the first choice to buy the vehicle to the leasing company and NOT the consumer). Also, some dealerships will list a different price on the contract should the customer buy their leased car.

Should you decide to return the vehicle upon completing your leasing obligation, you could face additional charges such as a “Disposition Fee,” along with any excess mileage charges and excess damage to the vehicle. Be sure to read and understand your leasing obligations as well as to understand potential costs associated with returning your leased car before signing a car leasing agreement. As you can see, there are many potential pitfalls to consider when deciding whether to lease a vehicle.

Most car leases have a bank fee known as the “Acquisition Fee” when originating the lease agreement and a “Disposition Fee” when returning your leased vehicle upon completion of your leasing obligations. These fees are non-refundable. Some car leasing contracts require a “Security Deposit.” The Security Deposit is typically equal to your monthly payment rounded up to the nearest $25 or $50 increment. Security Deposits are usually refundable subject to the pre-specified condition of the vehicle when returned. Most car leasing agreements include GAP coverage. Should your vehicle be declared a total loss by your car insurance company, this will cover the difference between the value of your vehicle and the amount owed. Make sure you understand the coverage included or available for your particular situation because certain restrictions may apply to your car leasing agreement.

What If I want to End My Lease Earlier?

Most car leasing periods span between two and three years. If you want to trade the car in for another at a car dealership or sell the vehicle, most leasing companies will allow this without penalty. If you want to simply return the car without fulfilling your car leasing contract, this can be ugly. In cases where you want to end the lease or terminate it early, most leasing companies will charge early termination fees and may also require all remaining payments to be made before returning the vehicle. If you encounter this situation, it may be wise to seek legal advice to learn about your options. On the other hand, some manufacturer leasing companies periodically offer “pull-ahead” programs that waive the last few lease payments to entice consumers to lease a new vehicle. Keep an eye out for these specials.

What Do I Do At the End of My Lease?

In a perfect situation, assuming your vehicle’s condition is compliant with all of the pre-specified limits and conditions outlined in your car leasing agreement including the mileage restriction, then you can pay the disposition fee and return your leased vehicle to your local car dealership.