The Car Dealer's Lease Contract

Lease agreements are significantly different from Retail Installment Contracts. First of all, lease contracts to not have to disclose their version of the Interest-Rate (which on a lease is called the Money-Factor). The money-factor is a multiplier used to calculate the rent charge on a lease.  You can compare the “money-factor” to an “interest rate” in that they both are used to calculate the cost of borrowing.

 

A lease is an agreement between the Lessee (Customer) and the Lessor (Bank) which allows the customer to “rent” the vehicle for a period time. At the end of this Term the customer can return the vehicle back to the bank.

 

There are two kinds of leases: the "closed-end" lease and the "open-end" lease. A "closed-end" lease puts no obligation on the customer to purchase the vehicle at the end of the agreement. However, at the end of an "open-end" lease, the customer is responsible for the Residual value of the vehicle. In other words, if the residual value is forecasted to be $10,000 and the actual value is determined to be $5000, the customer must pay the difference.

 

There should be no occasion for a modern new car dealer to attempt to “write” an "open-end" lease but it is good to know the difference.

 

The terminology of a lease is quite different from a normal loan. On a lease agreement “Capitalized Cost” Means “Price”.    “Gross Capitalized Cost” Means “Price before the Down Payment, Trade-in allowance, and Rebates". “Capital Cost Reduction” refers to "the customer's total down payment including cash, trade-in allowance and rebates". Therefore, “Net Capitalized Cost” means “Net Price after the down payment, trade-in and rebates.” This terminology is left over from the days of equipment leasing and really should be converted to adapt to the consumer markets.

 

Unlike a loan, the customer must put more than just a down payment at the beginning of a lease. The lease agreement will require a total amount due at signing. This is often called the “Drive-Off” cost. The “Drive-off” cost will include the customer cash down payment, trade Equity, first payment, licensing fees and sometimes a security deposit.

 

A popular strategy for the salesman is to tell you that the price of the vehicle or the cost of the “extras” really doesn’t matter.

The lease agreement must also disclose the monthly payments and the payment schedule. Also, it must total the monthly payments.  For example, it must read “your first monthly payment of $300 is due on 7/19 – followed by 47 payments of $300 on the 19^th of each month. The total of you monthly payments is $14,400”.

 

Most leases will have a disposition fee; this is a fee that will be paid at the end of the lease when the customer returns the vehicle to the bank. This fee is not collected in the "drive-off" but must be disclose in the lease contract.

 

A lease must also disclose the total of money paid by the end of the lease. This is the sum of the monthly payments and the drive off cost. 

 

On a lease, a popular strategy for the salesman and the finance manager is to tell you that the price of the vehicle or the cost of the “extras”  really doesn’t matter; the only thing that matters is your out-of-pocket expense. In other words, they will focus only on the "drive-off" cost and the monthly payment.

 

Customers should reject this logic and negotiate the best price of the vehicle and by using the Leasing Cheat Sheet Calculator and Car Lease Payment Checker .