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Understanding Lease Terms

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Acquisition Fee:
You’ve heard the commercials: “No Money Down, Just $299 a Month For 30 Months!” Of course they don’t tell you that you’ll owe the first month and a security deposit when you sign the lease, and you’ll be obligated to pay an acquisition fee, which can be over $500. We thought no money down meant $0, but in this case it obviously means $800 to $1,200 — not including taxes, title and various other add-ons. So what is an acquisition fee? The answer that we cheerfully and honestly serve up is that we don’t know what you get when you pay an acquisition fee! You should also be aware that this fee is from time to time folded into the cap cost of the vehicle, so you pay it as part of your monthly rental.

Adjusted Capitalization Cost, or Adj. Cap. Cost, or Net Capitalization Cost:
The Cap Cost minus the Cap Cost Reduction. This is the value that should be used to figure your monthly payments. It is critical that the consumer perform this bit of simple math, and that the values used in the equation be identical to the values agreed to during the negotiation process.

Capitalization Cost, Cap Cost:
The price at which the vehicle would be sold if the deal were for cash. A finance/leasing company purchases the car from the dealer for this price. It is negotiable and should always be fully negotiated! It should be clearly stated on the lease agreement and should be identical to what was negotiated before you mentioned that you wanted to lease.

Captive Finance Company, or Captive Finance Arm:
The auto makers’ financing companies. Among the domestics, they are GMAC (General Motors Acceptance Company), Ford Credit, and Chrysler Credit. These companies are involved in financial transactions that go well beyond just setting up new car loans. They aid their dealer networks in used car loans, dealer floor planning, vehicle leasing (see subsidized lease), and they offer other financial services such as home mortgages. A number of the foreign manufacturers also operate captive finance companies.

Closed End Lease:
If you’re leasing, this is more than likely the type of lease that you want. It establishes the residual up front, and if the vehicle’s value falls below that at the end of the lease, it is the lease company that eats the excess depreciation. (See also Open End Lease.)

Disposition Fee:
The evil twin brother of the acquisition fee. Hey, we didn’t like that acquisition fee, so it’s no wonder we despise this evil twin. When you pay a disposition fee of say, $300, you’re paying the dealer to take your lease car away from you and “dispose” of it. That’s $300 to push it 150 feet to the used car lot, where they will mark it up 25% over the residual so they can take full advantage of the next uninformed consumer who walks in! Negotiate this out of your contract if at all possible. If not, at least be aware of this cost at lease signing. It’s nothing more than a common lease ploy. The state attorneys general have exposed a lot of the fraud in the leasing end of the business, and have forced the manufacturers to list “out of pocket costs at signing” in advertising. It is perhaps for this reason that a lot of leasing contracts have eliminated the acquisition fee, and substituted this one, which doesn’t show up until the end of the lease. The theory is, out of sight — out of mind. A Fool should never forget: keep this one in mind when you’re looking over your lease contract!

Early Termination Charges:
Stand back and get set for a full financial flogging if you ever decide to turn in a lease vehicle early, that is, before the lease term is up. If you think that there is even a remote chance of this happening, at the very least look the lease agreement over carefully, and negotiate these items until you turn blue. If you really think you might turn in a car early, though, don’t lease.

Excess Mileage Charge:
The rate you pay for any miles above what your lease agreement allows. Today this price ranges from 12-20 cents per extra mile. (See also mileage cap)

Fees (Bank – Dealer – Lease Company):
Charges to provide pure profit for everyone involved in the lease deal except the consumer. They are often shared between the dealership and the financing company that is buying the lease. That nice young man in the white shirt, otherwise known as the F&I MONSTER, may have 101 reasons why you need to pay one of these fees. The simple consumer advice is: Just don’t do it!

Gap, or Gap Insurance:
This is one leasing add-on we recommend. It is a specific insurance that pays off the lease company in the event that the car is totaled or stolen during the lease term. It is smart to insure against this “gap” because when a car is totaled or stolen, the lease becomes an early termination, and the charges for terminating a lease can be significant. Most insurance policies are set up to pay only the market value of the vehicle when calamities like these occur, so you may find yourself without a vehicle and owing significant money. But check with your current insurer to see if they can offer you a better deal on this kind of policy.

Lease Term:
The length of the lease contract between the lessor and the lessee. Most experts say that leasing outside the vehicle’s powertrain and overall warranty is potentially hazardous to your financial health, given the potential magnitude of repairs that you may find yourself liable for on a car you’re “renting.” Most manufacturers’ powertrain warranties extend to 36 months, and some go well beyond. If you plan on leasing a used vehicle, be sure of your warranty length, and be sure that it is applicable to a second owner.

Lemon Laws (lease specific):
Laws dealing with cars that don’t run well. Although all 50 states have lemon laws, some states don’t cover leasing. The best advice is to find out what your state’s lemon law covers with regard to leasing, and determine if this makes any difference to you in your decision. (See also lemon law (new cars).

That’s you, unless of course you work for a leasing company.

This is the finance company that purchases the vehicle and then agrees to “rent” it to the lessee for a stipulated length of time, under a contract agreement known as — you guessed it! — a lease.

Mileage Cap, Mileage Limit:
As part of the lease agreement, the lessee (that’s you) agrees to restrict the mileage on the vehicle to a predetermined number. An example of a mileage cap might be 15,000 miles per 12-month period. (Most leases today have a yearly mileage range of 12,000 to 15,000 miles). In our example, if you return the vehicle with 41,000 miles at the end of a two-year lease, you can expect to see a heavy excess mileage charge, often exceeding 16 cents a mile. (In this particular case you’d be facing a charge of $1,760 at the time you turn the car in.) If you plan on leasing a vehicle and you think you may exceed the mileage limit, renegotiate that portion of the contract. Most lease companies will work this kind of deal to keep a customer; they are merely trying to protect the residual value at the end of the lease, and a higher mileage car will be worth less. Thus, your lease may cost you more per month, but you’ll save at the end of the lease term.

Money Factor:
A number that determines the monthly finance cost of a lease. In other words, it determines how much you pay for the “right” to lease this vehicle.You can calculate it by dividing the lease’s annual percentage rate by 24. Why 24? A team of top-level rocket scientists came up with this number after studying the problem in a hermetically sealed room over the course of a decade. If your salesmen says he got you a great deal on the lease, just 7%, then you better see a Money Factor of 0.002917 (0.07/24). If you see a Money Factor of 0.004167 then you know you’re being charged at an annual percentage rate of 10% (.004167*24=0.1 or 10%). If the lease is for 36 months, do we convert the money factor by multiplying by 36? Nope! The darn thing is always 24, provided that the car’s owner (the lease company) is using the standard constant yield method. To see how this money factor works with the in the context of leasing terms, take a peek at our lease worksheet. Money factors are constant within a lease company, but they can be negotiated by playing off one leasing firm against another.

Monthly Depreciation Fee, or Depreciation Fee:
This is how you figure how much in depreciation costs you are paying as a consumer. Monthly depreciation fee = (Net Cap Cost – Residual Value)/(lease term in months) This is only the depreciation portion of the monthly payment. (See also finance fee, taxes and our sample lease calculations for the full picture.)

Monthly Finance Fee, Finance Fee, Rental Charge, Lease Charge:
The amount that the lease company is charging you to rent the vehicle to you. Again, like all leasing math it appears to be a simple formula: Finance Fee = (Net Cap Cost Residual) Money Factor Did we just say “simple” leasing math? Remember that this money factor is a different way of expressing an interest rate, and is divisible by 24 to get the rate. This thing is just a way of calculating a constant yield method over time. Work the examples several times before trying these “simple” leasing calculations out on the nearest dealer contract.

Open End Lease:
The truly bewitched sister of the Closed End Lease. This is not the one you want! The residual value is not calculated until the end of the lease term. Many states have put the legal kibosh on this bit of tomfoolery.

Purchase Option Price, Purchase Option Value:
Normally, the same price as the residual value. Again, this residual or purchase option price is one that can and should be negotiated by any Foolish consumer.

A predetermined value of the lease vehicle at the end of the lease term. Again, this is a negotiable item, sometimes not within one leasing company, but between leasing concerns. Ford Motor Credit may say that a ’98 Ford Taurus optioned out a particular way is worth X dollars after a 24-month lease, while ABC Quick Cash may say that that same car is worth Y dollars after the same period.

Subsidized Lease:
From time to time manufacturers will use their captive finance arms to offer leases that are below market value. In other words, they will raise the residual value on a particular model, or they will lower the interest rate (money factor), thus offering lower prices to the consumer. This can increase volume sales among the slow sellers. These are often some of the best leases money can buy. Just keep your eyes open and check each and every figure.

Taxes (leasing specific):
Taxes vary from state to state and so do their application to lease agreements. You’re best off consulting your accountant, or talking with several independent sources from the dealership or lease company. Some dealerships have played shenanigans with taxes in the past in regard to leases. Remember that the lease company is probably not paying taxes on the purchase of the car, and you shouldn’t, either. That said, you may have to pay taxes on the portion of the vehicle that you are using — the depreciated amount (some states call this “use tax”). Be careful of taxes being rolled into your capitalization costs, since you may be paying finance fees and depreciation charges on taxes! Know what your state tax laws are, and if they are being applied correctly to your particular lease agreement.

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