Car Lease Contracts: What to Watch For Before Signing
Car lease agreements contain financial terms that are often presented differently from traditional loans, making them harder to compare. Understanding a few key concepts can save you thousands over the life of your lease.
Key Terms to Understand
- Money factor: This is the lease equivalent of an interest rate. Multiply the money factor by 2,400 to get the approximate APR. A money factor of 0.0025 equals roughly 6% APR. Dealers may not volunteer this number, so ask for it directly.
- Residual value: The estimated value of the car at lease end. A higher residual means lower monthly payments. This is set by the leasing company and is generally not negotiable, but it affects your deal significantly.
- Capitalized cost (cap cost): This is the negotiated price of the vehicle. Unlike the money factor and residual, the cap cost is negotiable just like a purchase price. Always negotiate this down.
- Mileage allowance: Standard leases offer 10,000-15,000 miles per year. Excess mileage charges typically range from $0.15-$0.30 per mile, which adds up fast. Be realistic about your driving habits.
- Wear and tear standards: Review the lease company's definition of "normal" wear and tear. Some are stricter than others, and excess wear charges at lease turn-in can be a costly surprise.
Red Flags
- Money factor significantly above the manufacturer's published rate
- Excessive acquisition fees, disposition fees, or dealer add-ons
- Mileage allowance too low for your actual usage
- Missing or vague early termination penalty language
- Mandatory purchase of dealer-installed accessories folded into the cap cost
When to Consult a Lawyer
Most car leases use standard forms, but if you notice unfamiliar fees, are leasing a luxury or specialty vehicle, or are entering a commercial fleet lease, consider having the terms reviewed by an attorney familiar with auto financing.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.