Closed-end Lease
The most common type of consumer lease and the only type you should consider. With a closed-end lease you have several options and limited financial exposure. The “closed” in closed end lease refers mostly to the relationship between the residual value that is set at lease inception and the actual value of the vehicle at that current time. Should you wish to buy the vehicle, you would in all cases pay the residual value that was set several years prior. If the residual value is lower than the actual value of the vehicle, it would be to your advantage to purchase the car because you could profit. Conversely, should the residual value have been set higher than what the actual value proves to be, you’re still free to buy the vehicle, however you’re clearly at a disadvantage and would decline. Lastly, you could opt to simply walk away and not buy the vehicle at all (which is why a closed-end lease is sometimes referred to as a walk-away lease). In an open-end lease this isn’t the case, in that you would be on the hook to pay the difference between a residual value that proved to be too high relative to the actual value realized at lease end. Furthermore, the lessee is frequently obligated to buy the vehicle and unable to walk away from it should they so choose.
Document Fee (a.k.a. Dealer Services Fee or Dealer Prep Fee)
Fees that a dealership will tack onto the buyer’s order to create extra profit for them. This is most often pre-printed on the form to create the illusion that this fee is non-negotiable and we’ve seen this amount range anywhere from $399 to $599 and up. The dealership will try to justify this fee as payment to cover administrative costs and/or costs to prepare the vehicle for delivery. Refuse to pay this, or at the very least significantly negotiate this fee down to a reasonable amount such as $50 or $75 at most, telling the dealer that this is their cost of doing business.
Down Payment
This is the final sales price of the vehicle which you’ve negotiated with the dealer and the amount that the leasing company will buy the car from the dealership for.
Disposition Fee (a.k.a. Termination Fee)
This is a fee charged by the leasing company when the lease has ended and the vehicle is turned back in. This fee generally doesn’t apply should you opt to buy the vehicle at lease end but some leasing companies sneak this in regardless, which you should vehemently refuse to pay. Even if you do not plan to buy the vehicle at the end of the lease this fee should be negotiated away, because it is what we like to refer to as a “fabricated fee,” as its sole purpose is to pad the leasing company’s profit margin. The leasing companies try to justify this fee by contending that there are costs to recondition the vehicle and take it through the sales process. Respond to this by telling them that this is their cost of doing business. Furthermore, also tell them you’ve already agreed to be responsible for any excess wear and tear in the original lease contract and would be held to this provision should there be any damage or extensive wear so this charge is clearly redundant. There are leasing companies which do not charge this fee.
Early Termination
This is a charge for getting out of your lease prior to the end of the agreed up contract term. This is a hefty charge (possibly into the thousands) and therefore early termination of a lease should be avoided.
Gap Insurance
This is coverage insures against the loss you would sustain in the event your vehicle was stolen or totaled in an accident. It covers the difference between what is owed on the vehicle and what your insurance company would pay based on the then market value of the vehicle (usually much less in the early part of the lease). Many leasing companies include GAP insurance as a built-in part of the contract, but you need to be certain that this is the case. If your lease does not, we strongly recommend that you secure this type of coverage through an outside insurer. Insurers such as XYZ provide gap insurance should your contract not include it.
Inception Fee
This encompasses various charges, fees (tag and registration), sales tax on any down payment made, the first month’s payment and any security deposits which are incorporated into the lease agreement (typical and usually equal to one month’s payment). Dealer document fees (a.k.a. administration fees or “doc” fees) would typically be included in this fee, but this fee should be negotiated almost completely away (see document fees in the Negotiate Like a Pro section).
Lease
An arrangement where a leasing company buys the vehicle and leases, or rents it to you.
Lease Term
The length of time that the lessee will be in the lease contract. Typical lease terms are for 24 and 36 months, although we frequently see more terms being offered for 39 months. The caveat here is that the lessee should be sure their vehicle’s manufacturer warranty is for at least the same period (or longer) than the lease term. If it’s shorter, in the case of a 39 month lease with a 36 month manufacturer warranty, there’s the exposure of being liable for expensive repairs during a significant period of time at the end of the lease.
Lessee
You.
Lessor
The leasing company who bought and owns the vehicle and is now leasing it to you.
Money Factor
The money factor is the rate that the leasing company charges you (also referred to as rent charge) for use of their vehicle, as they were the one to purchase it from the dealer. The lower the money factor, the lower your monthly payments will be, just as a lower APR would translate into a lower monthly payment on a purchase. Money factors are expressed as a decimal figure (such as .0028) and can easily be converted into a comparable APR rate by multiplying by 2400. By doing just that we see our .0028 money factor would compute to a fairly accurate 6.72% APR.
This is where a prospective lessee needs to have a good handle on their credit score to be certain they’re getting the best rate they should be qualifying for by obtaining it through providers such as myFICO.com, Equifax and freecreditreport.com prior to entering the dealership.
MSRP Manufacturer’s Suggested Retail Price
This is the large bold number on the window sticker that all options add up to. If there is average or below average demand for the car you shouldn’t be paying this amount or anything close to it. Be careful of a dealer trying to stick it to you by writing up a lease up for MSRP (or even greater) and telling you that it doesn’t matter what the price of the car is because the leasing company is buying it not you. Negotiate as you would if you were buying.
Net Capitalized Cost
See Capitalized Cost Reduction above.
Normal Wear and Tear (a.k.a. Excess Wear and Tear)
Most leasing companies charge extra for any wear and tear on the vehicle which exceeds that which the vehicle should be reasonably subjected to. A good lease contract will offer guidelines on what is acceptable, but others can be obscure and ambiguous in this regard. Ask for clarification on this should it not be clear.
Open-end Lease
With an open-end lease you have an increased financial exposure as compared with a closed-end lease (see above). The “open” in open-end lease refers mostly to the relationship between the residual value that is set at lease inception and what the actual value of the vehicle at lease end proves to be. The financial exposure here is that should the residual value have been set higher than what the actual value proves to be at lease end, you’re on the hook to pay the difference. As such, an open-end lease is usually not chosen by or offered to the consumer, but rather to large companies or fleets, where the exposure to a higher than predicated residual value is lessened by the volume of vehicles being leased and the nice tax and accounting benefits leasing offers.
Rent Charge
See Money Factor.
Residual Value
This is one of the main determinates of your monthly payment and is the amount that the leasing company says, or projects the vehicle to be worth at the end of your lease and should be prominently disclosed on the contract. You want this figure to be as high as possible to get the lowest monthly payment. The residual value is what allows a lease payment to be generally lower than what the payment would be had you purchased to vehicle because this is the portion of the vehicle’s value which you are not paying for but would have paid for in a purchase. The residual is represented as a percentage of the vehicles current value, hence a 47% residual value at 3 years means that a vehicle worth $20,000 today will be projected to be worth $9,400 36 months from now. For more on residual value, refer to the section devoted to it above.
Security Deposit
A fee usually equal to one month’s payment which is included as part of the inception fee. This fee is returned at lease end provided there is no excessive wear and tear to the vehicle.
Subsidized Lease
As a prospective lessee, keep in mind that on occasion a manufacturer’s captive leasing company will offer a subsidized or subvented lease, where the residual value is set artificially high to make payments more attractive on a particularly slow moving model. This is in essence the equivalent of offering a factory to consumer cash incentive on a vehicle purchase. Ask the dealer if such a program is in effect for your model.
Subvented Lease
See subsidized lease.
Termination Fee
See Disposition Fee. |
