Here you will find information on how to navigate the complexities of a lease contract. For more information, see the FTC’s website. This information is also available in our downloadable leasing, buying, and advertising a vehicle guide (Word).
How to Lease a Vehicle
Here are some basic steps you should follow in leasing a vehicle:
- First, determine the trade-in value of your current vehicle. Check resources such as Edmunds and Kelly Blue Book; also consider selling your vehicle for cash—your trade-in value at the dealership may be lower than what you could get from a private sale.
- Determine the cost for the vehicle you want. Some new-car price guides tell you not only the dealer costs but also factory rebates and all known dealer incentives.
- Next, negotiate a Sale Price for the vehicle you are leasing, just as if you were buying it. Be sure to deduct any applicable rebates. Then ask for monthly payments based on that price, rather than the MSRP or sticker price.
- Ask how much the dealer’s Monthly Lease Rate is (i.e., the cost of the money you are “borrowing”). Sometimes this is referred to as the “Rent Charge” or “Money Factor.” No matter what it is called, the lower the number, the better. Remember: this figure is not a typical interest rate. You can ask the dealer to state it as an Annual Percentage Rate (APR).
- Ask about the Residual Value of the vehicle, (the amount the leasing company estimates the vehicle will be worth when the lease is up). Generally, the higher the Residual Value, the lower your monthly payments will be. A low Residual Value is important only if you intend to buy the vehicle at the end of the lease. But if that is the case, you should consider purchasing rather than leasing.
- Make sure you compare different dealers. Even after you negotiate the terms, you can still walk away if you do not understand the deal or it does not make sense for you financially. Sometimes other dealers will meet or beat another dealership’s terms.
- When you find and agree on the deal you want, get everything in writing on the purchase offer form. That is the form you sign to make your offer official and a manager signs to accept for the dealer. If the sales person writes out a shorthand summary of the deal, do not sign it. You want all the terms of the deal laid out in the purchase offer, as they were when you calculated the lease payment. Then, before you go in to sign the actual lease, check all the numbers.
- Benefits and Drawbacks of Leasing
A lease contract can be very confusing. Before leasing a vehicle, it is important to consider the benefits and drawbacks of leasing.
Benefits of Leasing
- A lease will generally have a lower monthly payment. Your “up front” costs might be more manageable. Also, the vehicle will usually remain under both the manufacturer’s warranty and the Maine Implied Warranty.
- With a lease you do not have to worry about trading-in your vehicle or selling it when you are ready for a new vehicle. You can either lease another new vehicle, exercise your purchase option and buy the vehicle, or, after completing your lease obligations, simply return the vehicle and be done with it. Leasing can sometimes prove very convenient by allowing the driver newer, more reliable vehicles that require fewer trips to the service department for repairs and maintenance.
Drawbacks of Leasing
- A lower up-front cost, or lower monthly payments, can lead to a long-term cost that is higher than purchasing the same vehicle outright, even when compared to a purchase with dealer financing.
- A lease can result in unexpected costs. For example, dealers may charge you when you return the vehicle for minor cosmetic repairs, such as small scratches or dents. Dealers may also charge you for excess wear and tear or if you exceed the allotted mileage, which is usually relatively low.
- You will not own the vehicle. This means you may pay more for your next vehicle, because you will not have any trade in value. It also means that you will need to either purchase the vehicle, or purchase or lease another vehicle, when the lease is up.
- Potential Pitfalls to Watch Out for When Leasing a Vehicle
Leasing a vehicle is complex. Here are some of the issues you should be on the watch for when leasing a vehicle:
- Make sure you know exactly what happens if you want to get out of the lease before it expires. You will likely have Early Termination Liability, or other fees.
- Be wary of lease advertisements. Sometimes these advertisements compare the monthly cost of purchasing the vehicle with the monthly cost of leasing without disclosing the additional lease fees you will have to pay.
- Remember that in Maine you must pay a 5 % sales tax based on your monthly lease payments multiplied by the number of payments.
- Sometimes after you have negotiated on the price for buying a vehicle (and arrived at a good deal), the dealer might suggest that you consider leasing the vehicle instead. If you do lease the vehicle instead of buying, make sure the gross Capitalized Cost is based on the price you negotiated to buy the vehicle and not on the MSRP or sticker price.
- Be careful of purchasing an extended warranty. Most dealers will attempt to sell an extended warranty along with the lease. But the extended warranty is usually offered by a third-party, often with poor service or claims capabilities. Also, most dealers already offer warranties on leased vehicles that make extended warranties redundant.
- Very carefully consider the Mileage Allowance. Many drivers exceed 15,000 miles a year. If you exceed the Mileage Allowance you may find yourself paying 30 cents or more per mile in excess of what is allowed.
- If you have traded in a vehicle, make sure you are getting full credit for its value. A less than honest dealer may inflate the Capitalized Cost of the lease you are negotiating in order to get back some of the money he gave you for your trade-in vehicle.
- Be wary of final “balloon” payments and “Disposition Fees” that some lessors charge when the lease ends. For example, sometimes there will be a Disposition Fee if you decide not to purchase the vehicle at the end of your lease. Find out what it is; negotiate over the amount; insist that it be put into the lease document before you sign.
- Signing the lease is the last step and you should do so only after you understand all the calculations. Before signing it, consider taking the lease home and studying it overnight. Then ask the Lessor to answer any questions you might have. Remember that you cannot revoke a lease. Once you’ve signed it, the deal is final.
- Federal Leasing Act Disclosures
The Federal Rule Regulation M (which implements the Consumer Leasing Act and is found at 12 CFR 1013) requires dealers to make certain disclosures to persons planning to lease a vehicle.
- A description of the vehicle,
- The amount due at lease,
- The payment schedule,
- And itemization of other fees and charges, and
- The total amount you will have paid by the end of the lease.
For more information, visit the federal Consumer Financial Protection Bureau page on consumer leasing.
- Glossary of Lease Terms
Here are short definitions of some of the key terms involved in leasing a vehicle.
Acquisition Fee. Leases usually include an Acquisition Fee. This is a fee that the leasing company charges the dealer, and the dealer passes on to you. These fees can range from $400 to more than $1,200. If you do not pay the Acquisition Fee up front, it is added into your capitalized cost and increases the total purchase price of the vehicle.
Capitalized Cost. The Capitalized Cost is the total dollar amount of your lease – essentially, the purchase price of the vehicle. It includes the cost of the vehicle, sales tax, acquisition fees, and any extended warranties and insurance you decide to include in your lease. Look carefully at a vehicle’s capitalized cost. If it is higher than the price you would have paid had you purchased the vehicle, insist on the lower price to reduce your monthly payments.
Capitalized Cost Reduction. The Capitalized Cost Reduction is the equivalent of a down-payment. This figure is made up of any cash that you paid, trade-in allowance, rebates, or credits. You subtract this amount from the Capitalized Cost to arrive at the Adjusted Capitalized Cost, which is the amount used to calculate your base monthly payment. Remember, not all of the payments made at lease signing will reduce the Capitalized Cost.
Disposition Fee. A Disposition Fee is a charge to offset the cost of preparing and selling the vehicle at the end of the lease if the lessee does not purchase the vehicle.
Depreciation and Amortized Amounts. This is a charge to cover a leased vehicle’s projected decline in value over the lease term. It is calculated as the difference between the Adjusted Capitalized Cost of the vehicle and its Residual Value.
Early Termination Liability. If you break your lease early, you may have to pay a very large cancellation penalty based on the total amount of remaining monthly lease fees, called Early Termination Liability. For example, if there is one year remaining on the lease, you will likely have to pay 12 months of lease payments to cancel the lease. In addition, many leases will require you to also pay a flat cancellation fee.
Excess Wear and Use Charge. When you return a leased vehicle, you may be required to pay for any damage —whether it is mechanical, exterior, interior, glass, tires, or even dirt and grime. This is called an Excess Wear and Use Charge. It is usually cheaper for you to repair the damage yourself than to pay the leasing company. Toward the end of the lease, the leasing company may assess the condition of the vehicle, or require you to bring the vehicle to your dealer for appraisal. If you do not agree with the appraisal, do not sign it. Instead, get your own independent appraisal. Sometimes even very clean vehicles have been charged for Excess Wear and Use.
GAP Coverage. GAP Coverage is insurance that protects you in the event the vehicle is either “totaled” or stolen. If the vehicle is totaled or stolen, you would ordinarily be responsible for paying the difference (the “GAP”) between the lease’s early termination payoff amount and the insured value of the vehicle. GAP Coverage can cover that cost., However, Maine has a law that makes GAP Coverage unnecessary and prohibits a dealer or lessor from charging you for GAP insurance.[1]
Lease Term. The Lease Term is the number of months in your lease – the length of time you will lease the vehicle.
Lessee. The Lessee is the customer leasing the vehicle.
Lessor. Lessors are companies like GMAC, FMCC, and others. They actually finance the lease on behalf of the dealership. The dealership is not the Lessor. It is the Lessor’s representative (sometimes called an “Originator” or “sales outlet”).
Manufacturer’s Suggested Retail Price (MSRP). Also known as “list price” or “sticker price,” the MSRP is the price on the window sticker, which is required to be posted on every new vehicle.[2] The dealer, as an independent business, sets its own price, but you can negotiate a price lower than the MSRP. When advertising a lease deal, dealers are required to disclose in the advertisement certain information (e.g., the fact that the transaction is a lease, the total payment due upon delivery, etc.)
Mileage Allowance. Leases set a mileage limit for the distance you are allowed to drive the car each year – usually 15,000 miles. This is the Mileage Allowance. Lower-mileage and higher-mileage leases are available depending on your needs. If you drive over the allowable miles you will be charged a fee per mile, usually between 15 and 30 cents.
Monthly Depreciation. Your Monthly Depreciation is your Gross Capitalized Cost (less any Capitalized Cost Reduction) minus the Residual Value, divided by the number of months of the lease.
Monthly Lease Rate. This is like interest on a loan. It is also known as the “Rent Charge” or “Lease Charge” or “Money Factor.” The Monthly Lease Rate will appear much lower than an equivalent interest rate because it is calculated differently than an Annual Percentage Rate (APR). If a Lease Rate is given as a percentage in an advertisement or on any lease form, it must also state, “This percentage may not measure the overall cost of financing this lease.”
Residual Value. The Residual Value is the estimated value of the vehicle at the end of the lease. This amount is set at the beginning of the lease and is used to calculate your base monthly payment. Knowing the Residual Value is crucial, because generally the higher the Residual Value, the lower your monthly payments will be, but the more you will pay to purchase the vehicle at the end of the lease (if you choose to do so).
Sale Price. The Sale Price is the negotiated price of the vehicle you are leasing. You and the dealer, before agreeing on a lease, should first negotiate the Sale Price of the vehicle you are leasing, just as if you were buying it. This negotiated Sale Price then becomes the price upon which your lease payment is based.