O.K., it’s time for a new car, but should you buy or lease? If you decide to lease you will most likely be entering a world with new and sometimes rather confusing jargon. Like a grandparent having a conversation with teenage grandchildren. So protect yourself. For those thinking of leasing their next vehicle, here is a useful glossary of “new” terminology that you should familiarize yourself with BEFORE you negotiate a lease.
- Acquisition Fee: An administrative charge levied by the leasing company for processing a lease. This fee is typically not negotiable and can have a significant bearing on the overall cost of the lease.
- Base Interest Rate: This is the cost of leasing and using a vehicle and is measured by the interest paid over the lease term.
- Buy at end-of-term interest rate: This is the net interest rate for the lease if the lessee, at the end of the lease term, purchases the vehicle at the end-of-lease purchase price.
- Closed-End Lease: Leases in which the lessee’s financial obligation rests only with the negotiated monthly lease payment. The lessee need only return the vehicle at the end of the lease term with no further obligation.
- Disposition Fee: A fee charged by the lessor at the end of a lease to ready the car for sale. The lessor may apply this fee against the deposit made by the lessee at the beginning of the lease term.
- Early Termination Fee: A penalty paid by the lessee for terminating a lease contract early. A lessee pays for the depreciation of a vehicle in equal monthly payments. Since a vehicle’s depreciation is highest in the first months of a lease, terminating a lease early may subject the lessee to a penalty.
- End-of-Lease Purchase Price: Also known as the residual value. This is the price at which the lessee may purchase the vehicle at the end of the lease term.
- Mileage Allowance: Lease agreements establish a maximum mileage allowance that the car may be driven over the life of the lease. The agreement will also specify the cost per mile if the car is driven over and above the allowance mileage figure.
- Net Interest Rate: This is the total interest rate for a lease and represents the true cost of the lease. The lower the net interest rate, the lower the cost of the lease.
- Purchase Option: Option extended to the lessee, at the end of a lease contract, to purchase the vehicle at a pre-determined purchase price.
- Residual Value: This is the expected or pre-determined value of a leased vehicle at the end of the lease contract. The stated residual value on a lease contract is normally the buyout price at the end of a lease term. The residual value also determines whether the lessee should purchase the vehicle at the end of the lease term. If the residual value is less than the actual market value it would be advantageous for the lessee to buy the vehicle.
Good luck, and happy negotiating!
Until Next Time,
Joke of the Week:
Bailiff: “This man was caught speeding.”
Judge: “What’s your excuse?”
Defendant: “I was trying to get my six-figure bonus check to the bank before it closed.”
Judge: “That will be a $500 fine for driving under the affluence.”