Anatomy of an Auto Lease Contract

Car leasing is a form of financing a new or used vehicle, where the person leasing the vehicle pays for the expected depreciation over the terms of the lease. The lessor does not does not build any equity in the vehicle, nor does she have any ownership interest in the vehicle. Leasing contracts have some specific components that make them significantly different from a financing contract.

Up-Front Costs

A leasing contract will specify the up-front costs associated with acquiring the vehicle. Leases, much like purchase contracts, often require a down payment. This reduces the lease payments due to a smaller amount being paid over the term. Many leases also have a security deposit, which is collected to make certain that the vehicle is returned in good condition. A lease may also have a lease ending fee, which is usually equal to the security deposit.

Wear and Tear

A lease contract has provisions for the vehicle to be returned in the same condition that it was in when the lease was originated, less normal wear and tear. The contract should specify what normal wear and tear consist of, because different people have different ideas about this. The contract may specify the amount of tire tread that must be left on the tires and may require that the vehicle passes your state's inspection when turned in. Many lease contracts also specify the maintenance schedule that you must use while driving the car. The contract may also require you to pay for any maintenance that you missed.

Mileage

Because a vehicle decreases in value as it is driven more miles, a lease contract will specify the vehicle will be driven less than a certain number of miles per year. Common mileage amounts are 12,000 to 15,000 miles per year. The contract will probably specify a penalty per mile for every mile that you go over the limit. If the mileage offered at lease origination is not sufficient for your needs, you can generally purchase additional miles at the beginning of the term for much less money than if you exceed the mileage at the end of the lease.

Ending the Lease

Your leasing company will usually notify you when your lease is almost over. It will want to arrange for a place to drop the vehicle off or make arrangements to pick it up. The contract will detail many of these terms. You will also have the option to purchase the vehicle for the residual value. This purchase price is specified in the contract when you originate your lease. You may also be able to extend your lease for a limited amount of time, or re-lease your vehicle as a used car lease.