How Vehicle Lease Contracts And Agreements Work
While lease contracts may vary from dealer to dealer and state to state, they will all contain the same basic elements. It’s a good idea to understand the basics of vehicle lease contracts before you sign one. This way you can be sure that you’ll avoid costly mistakes.
Some dealers may even provide you with a blank lease agreement before you sign so that you can get a better understanding of the contract.
Disclosure
Federal law in Canada and the United States require that certain information must be included, along with the figures that must be disclosed to you.
The following sections are what is required in a lease contract:
- Amount due at signing
- Amount due at lease signing
- Early Termination statement
- Monthly Payment
- How Monthly Payment is determined
- Other charges
- Total number of payments
- Total finance charges
- Wear and tear explanation
Ensure that you give the lease contract a thorough look before signing.
Right To Cancel
It’s a popular misconception that you have the right to cancel or there’s a “cooling off” period when buying a vehicle. This is NOT true. There is no cooling off period and once a contact to buy or lease a vehicle is signed, you are obligated to follow through with the agreement.
Because of this, we’ll say it again.. Make sure you read and double check everything on your contract before signing.
Early Termination
A lease contract will outline the conditions under which the lease contract can be terminated early. The way a lease termination is handled will vary depending on the leasing company.
The cost to terminate early will also vary depending on the company.
If you need to get out of your lease early, some dealers may offer to buy out the value of your lease to get you into a new vehicle. You also have the option to transfer the lease to a different person using a service like Lease Busters.
Terminating a lease early can be extremely costly. You may have to pay out the remaining months on your lease as well as other penalties. Getting out of a lease early is the part of leasing that usually gets people into trouble.
Destroyed or Stolen Vehicle
If your vehicle is written off because of an accident or is stolen than the lease will be terminated early. When leasing a vehicle it’s important to have GAP coverage, also known as a loss waiver, to protect the full value of your vehicle.
GAP coverage will cover any additional amount that you might owe to the leasing company if your vehicle is written off.
While leasing companies will offer GAP protection coverage, we recommend checking with your auto insurance company. They may be able to add the coverage for a cheaper amount than the leasing company can.
Excessive Mileage Penalty
When you lease a vehicle, part of the contract will state your allowable mileage for the duration of the lease. While it varies from manufacturer to manufacturer, you’ll typically see allowable mileage at 12,000 miles/year or 20,000 km/year.
Ensure that you select the right mileage based on your driving needs.
If you go over your allowable mileage, you’ll face penalties at the end of the lease. You’ll typically be looking at $0.20c/mile or $0.12c/km. So if you go over your mileage allowance by 10,000 miles you’ll face a $2,000 penalty at the end of your lease.
It’s always better to buy more up front than have to pay at the end.
Excessive Wear and Tear Penalty
When you return the vehicle it should have no more than normal wear and tear. Your leasing contract will define what is considered normal wear and tear. This means that you take reasonably good care of the vehicle and keep it maintained.
Many first time lease buyers choose not to lease for the fear of penalties at the end of the contract term. There’s an unfounded fear that the leasing company will look over the vehicle with a fine tooth comb and count every little ding when the vehicle is brought in at the end of the lease. This is generally not the case. Leasing companies can be fairly lenient and understand that small dings and dents are part of regular city and highway driving.
What they will penalize you for is excessive wear and tear. Excessive wear and tear can include (but is not limited to):
- damage from an accident
- deep scratches
- obvious paint damage
- tires that are too worn
It’s always cheaper dealing with these issues yourself rather than waiting for a bill from the leasing company.
Auto Insurance
Lease agreements will require you to carry certain insurance coverage that you don’t have to carry with a vehicle owned outright.
It’s coverage that’s normally higher than what you would normally buy. Be sure to shop around for insurance before you sign for your lease.
What’s NOT in Your Lease Contract
- Lease acquisition fee – this is typically included as part of the Net Cap Cost
- Early termination details and amounts – while the lease will outline general details about early termination, it will not tell you exactly what you’ll pay if you choose to terminate early. That’s determined by a large number of factors and based on the time remaining on your lease contract.
Summary
Make sure you understand lease contracts and the details of your lease before you sign on the dotted line. Once you sign for your lease, there’s no cooling off period for you to change your mind.
