Lease Agreements

Lease agreements are significantly different from Retail Installment Contracts. First, lease contracts do 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 are both used to calculate the cost of borrowing--but they are completely different financial instruments.

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

Closed End Lease

There are two kinds of leases: the “closed-end” and the “open-end” lease.

A “closed-end” lease does not obligate 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 $5,000, 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.

Lease Terminology

The terminology of a lease is quite different from that of 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,” and “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 current consumer markets.

Unlike a loan, the customer must pay 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’s cash down payment, trade Equity, first payment, licensing fees and sometimes a security deposit.

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 19th of each month. The total of your 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 disclosed in the lease contract.

A lease must also disclose the total amount 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 expenses. In other words, they will focus only on the “drive-off” cost and the monthly payment. 

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