What is a lease?

The Mathematics of Leasing

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Your obligation with a lease

A lease contract is very similar to a purchase contract with some very significant differences. But most of these differences don’t put an undue burden on you as the lessee. (Remember, bank is lessor, you are the lessee.)

We know about the mileage allowance, the disposition fee, and residual value. These are the significant differences and I’ll explain why. An agreement to purchase a vehicle has no need for a mileage allowance because the bank has not a forehand any plans for ever seeing your vehicle again. They don’t care how many miles you put on it. In fact, if it helps you pay the monthly payments, they would celebrate the more miles you put on. You see, the car is yours, not theirs. They hold a lien on the vehicle, but they don’t want it.

In contract, the lessor or leasing bank, does own the car and has a lien on it, and from all indications, want it back. The fact is that they don’t want it back, but if they are to see it again, they want it in pristine condition.  Wouldn’t you. In reality, they don’t want the car back and that brings us to the next difference. The disposition fee. If you ever wanted proof that a bank wants you to dispose of your car on your own, think “disposition fee”. See, you would think that if someone put so many conditions on you to insure that your care for their property that they are planning on having it back. But that is not the case. It all to protect them, “just in case”, they get it back.

The last difference of any worth is the residual. There are some purchase agreements that have something similar called a “balloon payment”, but that’s as close as it gets. The residual is the estimated, I said “estimated”, value of the car at a predetermined point in time in the future. For example, you lease a car for three years and it has historically been a big seller for years and years. A Mercedes Benz E320 has been a very popular lease car since before the name change, (from 300E). The residual values were high making the payments lower and, when the factory got involved with incentives, they were a steal. Unfortunately, the large number of E320 in the hands of lessee eventually come back to the lessor, and BAM, the bottom falls out of the resale market. The lessor’s three years ago might have been guessing 60% residual, but in reality the number was closer to 50%. The good news to the lessee, it’s the banks problem, not yours.

So to wrap up, you are requested to keep your lease vehicle in tip top shape, keep the miles in line, and please lease another car when you’re done.

There are also statutory rights and responsibilities imposed on you as the lessee by the Federal Reserve Board. There are regulations on the lessor also, but we are talking about you at this point. You should know these before visiting a car dealership or leasing company. These regulations are taken as an excerpt from the Federal Reserve Board website. You can find the link under Government Resources on any page of our website.

When you lease a vehicle, you have the right to

  • Use it for an agreed-upon number of months and miles
  • Turn it in at lease-end, pay any end-of-lease fees and charges, and "walk away"
  • Buy the vehicle if you have a purchase option
  • Take advantage of any warranties, recalls, or other services that apply to the vehicle.

You may be responsible for

  • Excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be.
  • Excessive wear charges when you return the vehicle. The standards for excessive wear, such as for body damage or worn tires, are in your lease agreement.
  • Substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be.

Doesn’t seem so hard does it?


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