Leasing Glossary

In order to get a good leasing deal, you need to understand leasing jargon. Read through this leasing glossary to get an overview of the basics:

Acquisition fee: A fee charged by a leasing company to begin a lease. Not all leasing companies charge an acquisition fee but if charge it starts at about $300 and is seldom negotiable.

Capitalised cost: The total selling price of the leased vehicle This also accounts for taxes, title, license fees, acquisition fee and any optional insurance and warranty items you elect to fold into the lease and pay overtime rather  than upfront.

Depreciation fee:
Forms part of the monthly lease payment charge and accounts for the loss in the value of the car at the end of the lease. The vehicle’s list price minus the expected residual value at lease end is divided by the number of months in the lease to give the depreciation fee. Suppose you decide to lease a vehicle with a retail price of $23,500. The leasing company estimates that after a three year lease, the vehicle will be worth 35% of its original retail value, or $8,225. The difference, $15,275, divided by the number of months in the lease, 36 months, gives us the depreciation fee ($424)

GAP insurance Pays off the lease balanced if the vehicle is wrecked, stolen or totalled.

Inception fees any fees that are due at the beginning of a lease. These typically include a security deposit, acquisition fee, first monthly payment, taxes and title fees.

Mileage allowance The maximum number of miles a leased vehicle can be driven a year without incurring an excess mileage penalty. A typical mileage allowance is 12,000 to 15,000 miles a year, although this is negotiable with your leasing company.

Mileage charges a penalty that you incur if you exceed your mileage allowance on a leased vehicle. Typical mileage charges are 10 to 20 cents per excess mile.

Money-factor A fractional number, such as 0.00043, used in calculating your monthly lease payments. You can get a rough estimate of the annual percentage rate on your lease by multiplying the money factor by 2,400. If a dealer quotes a money factor such as 3.4 than you can get the equivalent APR, 8.16, if you multiply by 2.4.

Residual value Residual value is the amount of money the leasing company says your leased vehicle will be worth when your lease ends. Higher residual values lead to lower monthly payments but higher lease-end purchase cost if you decide to keep the vehicle.

Security deposits an up-front amount that your leasing company required at the beginning of a lease to safeguard against non-payment. This is generally refundable at the end of your lease. Termination or Disposition fee The amount you have to pay the leasing company at the end of your lease if you decide not to purchase the vehicle.

Wear-and-tear charges Extra charges you have to pay at the end of your lease for any wear and use the leasing company considers above normal.

Leasing and your credit score

Your credit score is part of the leasing decision. When you apply for a lease, your lease company will typically look at your credit score to decide whether you to approve the application.

The leasing contract stipulates that you make regular, monthly payments over your lease term. The credit score you lease company requests identifies how likely you are to make such payments. It is simply a number
calculated according to a model that takes into account your payment history, any amounts you owe and credit currently in use.  

It is very important to keep a good credit-score, usually above 700, to qualify for a lease or any other lending decision. Start by ordering your credit report from Fair Isaac Corp, the company that creates your credit score. If erroneous data is held about you, then contact the creditor responsible and get such information corrected.
Your payment history is the single most important factor in determining your credit score, so get in the habit of paying everything you owe on time and keep the balances low in your credit cards.

Fees involved in leasing

Mention auto-leasing and most people will automatically assume a low-monthly payment. There is actually more than what meets the eye, and a number of fees are involved at various stages of the lease process.

At the beginning of the lease, you have to pay a refundable security deposit, typically equivalent to one monthly payment, to safeguard against non-payment and any incidental damage done to the car at the end of the lease. You are also required to pay an administrative charge, called acquisition fee. Other fees include licenses, registration, title and any state or local taxes.

During your lease, and you expected to honour your monthly payment obligations. Any failure to do so will result in late-payment charges. You have to pay any traffic tickets, emission and safety inspections and ongoing maintenance costs.  Ending your lease early will result in substantial early termination charges.

At the end of the lease, expect to pay any excess mileage costs, charged at 10 to 20 p a mile. Any incidental damage done to the car, and deemed to be above normal, will result in excess tear-and-wear charges. Finally, if you choose not to purchase the vehicle, then you have to pay a disposition fee.

Dealer Leasing Tricks

Too often when it comes to auto-leasing, people get so dazzled by the myriad terms and the jargon thrown their way that they end-up paying through the nose, relying on a dealer’s “help” than their own informed decision.

Here is a look at some of the tricks dealers use to pad their profits and leave the customers shelling hundreds of dollars more than the deal should be worth.

Trick 1: Leasing always a better deal than buying

Dealers use the lure of lower-monthly payments to entice customers to sign for long-term loans, with terms stretching for five years or more, making the payments even lower. There are two catches with such lengthy contracts:
higher mileage, exceeding the prescribed limit, and hefty repair costs. With leases charging on average 10 to 20 cents a mile for any extra mile over the agreed amount in the contract, and warranties only covering three  years,   you leave yourself wide open for hefty charges for excessive mileage and wear and tear.  

Trick 2: Cheap 2-3% APR rate on your lease

The dealer is not quoting the interest rate you would be paying on your lease; he’s rather giving you the lease money factor. Whilst similar to an interest rate and important in determining your monthly payment, a more accurate rate is calculated by multiplying the money factor by 24. For example a “cheap” 3% money factor is 24 X 0.003 = 7.2%. This gives you a better sense of what your annual interest rate on your lease contract is.

Trick 3: Stress-free early lease termination

Dealers know consumer driving needs change and they would like to have the option of getting out of a lease commitment sometime down the road, before their lease ends. Truth of the matter is, when you sign for a lease, you are effectively saddled with monthly payments for the remainder of the lease term and there is little-choice of getting out early. Lease contracts  carry hefty financial penalties for either defaulting on monthly payments or terminating the lease earlier than the scheduled term.

To avoid being on the receiving end of such tried-and-true tricks, educate yourself about leasing. Get down to the nitty-gritty and understand what the leasing terms used by dealers mean. Crunch the numbers along with him and understand how they arrived at the monthly payment figure. Don’t sign anything until you’ve understood all the terms and your numbers much those of the dealer. Do not let the dealer pressure you into signing; you are the one to determine whether the agreement is right for you.

Benefits of leasing

Despite aggressive low-interest financing, cash-back offers and other purchasing incentives offered by leading auto-makers to buyers, leasing numbers keep increasing steadily over the years. Leasing is not only an attractive financial proposition to most auto-consumers, but also a lifestyle and preference choice.

Benefit Number 1: Keeping up with the latest trends

Leasing is sometimes more of a personal and lifestyle choice than a financial one. Many people are not comfortable with the idea of owning a vehicle over a long period of time. They’d rather keep up with the latest
trends of the industry and drive the latest models every two to three years.

Leasing a car gives you the convenience of having the latest technology and safety innovation, such as an electronic stability system, DVD entertainment systems and advanced stereo equipment. If you are willing to
forego ownership for the latest set of wheels, than leasing is your best option.

Benefit Number 2: Purchasing Flexibility

Leasing also offers purchasing flexibility: it allows you to defer the purchasing decision while using the car. You don’t have to haggle with your mechanic over repair expenses, deal with hefty maintenance bills or worry
about a depreciating asset. Provided you can keep the vehicle in good condition and stay within the contracted mileage allowance, you’re effectively getting a test drive for the length of your lease. At the end of your lease, you can purchase the vehicle or simply turn in the keys and walk away. No questions asked. 

Benefit Number 3: Cash Flow

Leasing offers many short-term benefits. It reduces your initial cash outlay as you do not have to pay the large down payment required for car ownership. You only pay for the depreciation on the car - only the part you will use during your lease, not the entire vehicle. This results in lower monthly payments and frees even more cash. This cash can be put to use more intelligently elsewhere than the questionable investment of owning a  depreciating asset. If you are self-employed or use your car for your job, then you can write off your leasing payment as a business expense.

Benefit Number 4: Negotiating Leverage

Although it may seem a little unorthodox in this industry, almost everything about leasing is negotiable. If you know all the fees involved, you can lower your monthly payments, negotiate the purchase price of the vehicle at the end of the lease and contract additional miles on top of your mileage limit. You can also do some shopping around and compare deals from different auto-insurers to get the cheapest GAP insurance for your
lease.