How to avoid extra costs at the end of your lease
and $200 to replace the light bulb and the worn tyres—lease agents
constantly nickel-and-dime consumers when their lease runs out.
Here’s a rundown of what can trigger those fees, and some steps to take in
self-defense.
Disposition fee: leasing companies charge you if you choose not to buy the
vehicle at the end of your lease. This fee is set as compensation for the
expenses of selling, or otherwise disposing of the vehicle. It typically
includes administrative charges; the dealer’s cost to prepare the car for
resale and any other penalties. Make sure this fee is stated clearly in the
contract and is agreeable by you before signing on the dotted line. At
lease-end, you are left in no position to negotiate as the dealer can apply
your refundable security deposit towards this fee.
Excess mileage charges: Almost all leasing companies will charge a premium
for each mile over the agreed upon mileage stated in your contract. This
penalty can be as high as 25 cents per mile and can add up quickly. To
avoid the risk of running thousands of dollars in excess mileage penalties
at the end of your lease, always check the “per mile” charges in your
contract and be realistic about your mileage before you sign any contract.
If you think the limit is unrealistic given your commutation needs, then
negotiate with the dealer to get a higher mileage or contract for
additional miles.
Excess tear-and-wear charges: Another potential cost at the end of the
lease is any incidental damage done to the car during the lease. This is
deemed any excessive damage done to the normal tear and wear of the vehicle.
Notice the use of the terms “deemed”, “excessive” and “normal”. There is no
standard formula to define what’s “excessive” and “normal” and it’s up to
the leasing company to assess – or deem – the damage and determine what
they are going to charge. This leaves you at the mercy of unscrupulous
leasing agents who set stringent tear-and-wear standards. Make sure you
read the description of these standards, understand them and agree to them.
If your leased vehicle is damaged prior to the end of the lease, you may
find it cheaper to repair the damage yourself than pay the excessive charges
of the leasing agent. In the event of a dispute over the charges at the end
of your lease, get an independent third party to do a professional appraisal
detailing the amount required to repair any damaged parts or the amount by
which tear-and-wear reduces the value of the vehicle
.
How to calculate your lease payment
Understanding how to calculate your monthly lease payment makes it easier
for you to make an informed decision. Yet, most of us shy away from the
“complicated” math on our lease contract, leaving it up to the dealer to
do the payment formula.
Actually, it’s not that difficult! Once you understand all the figures
involved in calculating your monthly payments, everything else falls into
place. These key figures are:
MSRP (short for Manufacturer’s Suggested Retail Price): This is the list
price of the vehicle or the window sticker price.
Money Factor: This determines the interest rate on your lease. Insist on
your dealer to disclose this rate before entering into a lease.
Lease Term: The number of months the dealer rents the vehicle.
Residual Value: The value of the vehicle at the end of the lease. Again,
you can get this figure from the dealer.
Now, let us calculate a sample lease payment based on a vehicle with an
MSRP (sticker price) value of $25,000 and a money factor of 0.0034 (this is
usually quoted as 3.4%). The scheduled-lease is over 3 years and the
estimated residual percentage is 55%.
The first step is to calculate the residual value of the car. You multiply
the MSRP by the residual percentage:
$20,000 X .55 = $11,000.
The car will be worth $13,750 at the end of the lease, so you'll be using:
$20,000 – $11,000 = $9,000
This amount of $9,000 will be used over a 36 month lease period giving us a
monthly payment of:
$9,000 / 36 = $250.
This is the first part of the monthly payment, called the monthly
depreciation charge.
The second part of the monthly payment, called the money factor payment,
factors the interest charge. It is calculated by adding the MSRP figure to
the residual value and multiplying this by the money factor:
($20,000 + $11,000) * 0.0034 = $105.4
Finally, we get the approximate monthly payment by adding the two figures
together:
$250 + $105.4 = $355.4
To recapitulate, the sample formula looks like this:
1- Monthly Depreciation Charge:
MSRP X Depreciation Percentage = Residual Value
MSRP – Residual Value = Depreciation over lease term
Depreciation over lease term / lease term (number of months in the lease) =
monthly depreciation charge
2- Monthly factor money charge
(MSRP + Residual value) X Money factor = money factor payment
3- Sample Monthly Payment:
depreciation charge + money factor payment = monthly payment
Keep in mind that this is a simplified calculation that does not take into
account taxes, fees, rebates or any other incentives. The calculation gives
you a ballpark figure or a rough idea of what your lease payments for the
vehicle in question should be.
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