Understand How Car Lease Contracts and Agreements Work Before You Lease
Car lease contracts, or “lease agreements,” from different dealers and finance companies can vary in detail, but contain the same common elements. Some are easier to read and understand than others. There are no “standard” car lease contracts.
You should know and understand at least the basics of car lease contracts before you lease. Doing so will allow you to make informed decisions and avoid costly mistakes.
In fact, if possible, you should pick up a blank lease contract form from your dealer before you actually plan to lease to allow yourself plenty of time to examine it. Seeing a contract for the first time as you’re sitting tired under the hot lights in the dealer finance manager’s office is not the ideal time to study it.
Our Lease Kit contains a Sample Car Lease Contract form, each section of which is annotated and explained in detail. This is a typical standard lease contract form but may not look like the exact form that your dealer uses. It is meant to serve as an educational tool and is not meant to substitute for the actual contract that you’ll receive from your car dealer.
Let’s now look at some of the elements of a typical auto lease contract.
Disclosure Statement
Federal law requires that automobile lease contracts contain specific sections in which certain facts and figures are disclosed to you. This part of a leasing contract is often titled, “FEDERAL CONSUMER LEASING ACT DISCLOSURES.” The following sections are among those required:
- Amount due at signing
- Monthly payment
- Other charges
- Total of payments
- Total of finance charges
- Amount due at lease signing
- How monthly payment is determined
- Early termination statement
- Wear and tear explanation
Although the regulations certainly go a long way in the right direction, there is still much room for improvement. For example, the law does not regulate the actual figures in the contract, such as the amount you are credited for your trade-in, the vehicle’s price, the finance rate, or whether the monthly payment figure was even calculated correctly.
Lease contracts are often written by dealers with mistakes in them — either legitimate or intended — and there’s no law or punishment to help prevent it, unless it can be proven to be out-and-out fraud.
You must be able to catch and correct problems before you sign your contract. Afterwards is too late.
There is no 3-day “right to cancel” or “cooling off period” law for automobile purchases or leases, as many people mistakenly believe. This is why it is important that you read your contract and be able to verify the monthly payment figures yourself, before signing.
Our Lease Kit includes a Sample Lease Contract with easy to understand explanations, as well as an itemized Contract Checklist, Lease Inspector calculator, and Payment Worksheets to help you make sure your contract is correct before you sign.
Required Auto Insurance
Most auto lease agreements require you to maintain insurance coverage: Bodily injury or death liability: $100,000 per person / $300,000 per occurrence, property damage liability: $50,000, comprehensive and collision for actual value with no more than $500 deductible. In Canada, $1,000,000 in liability coverage is required.
While this may be more coverage than you might buy normally, it’s always smart to have maximum protection in these times of expensive repairs and huge lawsuits, regardless of whether you’re leasing or buying.
Don’t assume your current insurance company has the best rates for a leased vehicle. It’s always a good idea to check around for the best rates before you lease. Read our article, Car Lease Insurance for more details.
Excessive Wear and Tear Penalty
Leasing contracts specify that you must return the car at lease-end with no more than “normal” wear and tear. Most contracts do a good job of spelling out exactly what “normal” means. Basically, it means you have to take reasonably good care of the car and keep it repaired and maintained.
Of course, if you actually have accident damage, significant dents, obvious paint damage, seriously worn tires, or deep scratches, you should get it repaired before your return the car — or you’ll be billed after you return the car. It’s nearly always cheaper if you get the repairs done yourself rather than waiting to be billed by the lease company.
Excessive Mileage Penalty
Leasing agreements specify the maximum average annual mileage you’re allowed without paying a penalty. The most common mileage allowance is 12,000 miles per year, although 10,000 or 15,000 miles are often seen.
Make sure that when you lease, you select the limit that best fits your driving needs because the penalty at lease-end for exceeding the limit can be expensive — typically in the range of $0.20-$0.30 per mile. If you know you’ll drive more miles, you can “buy” the extra miles at the time you lease for a better rate.
Early Termination
Lease contracts spell out the conditions under which the contract may be terminated. Some lease companies do not allow termination in the first few months or last few months of the lease. The way in which an early termination is handled varies by lease company. Costs can also vary depending on the method used to calculate remaining lease balance.
Terminating a lease contract early can be very costly, and should be avoided if at all possible. As stated before, this is the part of leasing that gets the most people in trouble.
If you’re already in a lease and need to end it early, there are options available to you that may allow you to eliminate or minimize your early termination costs. See the Early Termination Guide in our Lease Kit for details and instructions on choosing the right option.
Destroyed or Stolen Vehicle
Having your leased vehicle totally destroyed or stolen is a form of early termination and, unless you have GAP protection, you are exposed to the same penalties and payments as described above. GAP protection, sometimes called GAP insurance or ” loss waiver”, covers any additional amount that you might owe after your insurance company pays off.
If your lease contract doesn’t automatically provide GAP coverage, and it isn’t offered by your dealer, check with your auto insurance company or bank.
What is NOT in Your Car Lease Contract
Lease contracts do not show you the finance rate (money factor) you are paying. However, it is required that you be shown total finance charges (typically called “rent/lease charge”) — but not the rate that results in those charges.
You may not be shown the lease acquisition fee (see Lease Fees and Taxes) as a separate line item in your lease contract. The fee is typically added to the cost of the vehicle and included as part of Net Cap Cost, although not always identified separately. In some contracts, the lease company requires the payment of this fee up-front in cash, in which case it is specifically identified.
Also not contained in your lease contract are early termination details and amounts. Although your contract form will explain the early termination process in very general terms, it does not and can not tell you exactly what you’ll pay if you decide to end your lease early. The amount you pay depends on a number of factors that will be determined at the actual time of termination, which can be provided by your lease company. However, you can be assured that the amount will be larger than you would have expected.
Summary
It is important to know and understand what your car lease contract contains before you actually lease. It’s too late if you find mistakes later.
Please read the next section, Prepare to Lease.