Up-Front Costs of leasing a vehicle may include the first month’s payment, a refundable security deposit, a capitalized cost reduction (like a down payment or trade-in value), registration fees, taxes, and other charges due at lease signing or delivery.

Up-front costs of buying a vehicle may include the cash price, a down payment or trade-in cash value, taxes, registration fees, and other charges.

Capitalized Cost Reduction

A capitalized cost reduction is the sum of any cash down payment, net trade-in allowance, or rebate that is subtracted from the gross capitalized cost.

The remainder is the adjusted capitalized cost of the lease.  A capitalized cost reduction reduces your monthly payment by (1) decreasing the amount of depreciation and any amortized amounts that you pay as part of your monthly payment and (2) decreasing the total rent charges by lowering the beginning lease balance (the adjusted capitalized cost), thereby reducing the average lease balance over the term.

Cash Price or Down Payment

The full cash price must be paid when you purchase the vehicle, unless you obtain financing.  If the vehicle is financed by either the seller or a third party, a down payment is often required.

The remaining cash you must pay for the purchase or the amount you must finance may be reduced by a net trade-in allowance or a rebate.

Taxes

Several types of taxes may be due at lease signing, depending on the taxation rules of the state and the policies of the lessor, such as:

- State sales tax on any capitalized cost reduction
- County or other local taxes
- State sales tax on the adjusted capitalized cost
- State property tax on the vehicle.

Instead of paying for these taxes at lease signing, you may have the option of having the lessor include them in the gross capitalized cost, thereby increasing your monthly payment.

Taxes

State and local sales taxes are typically assessed on the full purchase price.  However, if a vehicle is traded as part of the purchase, sales tax may be assessed on only the purchase price minus the trade-in value, depending on state law.

You may have the option of having the creditor pay the sales tax and include it in the amount financed, thereby increasing your monthly payment.

Other Taxes

Several other types of taxes may be due at purchase, depending on the taxation rules of the states, such as:

- County or other local taxes
- State property tax on the vehicle.

You may have the option of having the creditor pay these taxes and include them in the amount financed.

Other Charges

Several other types of charges may be assessed at lease signing, such as:

- Vehicle license and registration fees
- Vehicle title fee
- Documentation fee
- Lessor acquisition fee.

Other Charges

Several other types of charges may be assessed at purchase, such as:

- Vehicle license and registration fees
- Vehicle title fee
- Dealership documentation fee
- Credit application fee.

Optional Insurance and Services

You may be offered optional insurance products and other services when you lease a vehicle:

- Credit life and disability insurance
- Unemployment insurance
- Gap coverage (may already be included)
- Vehicle maintenance services
- Vehicle service contract or mechanical breakdown protection
- Other services or insurance coverage's.

For any products or services you select, you may be able to purchase them from the lessor or from a third party.

If you purchase them from the lessor, you may have the option of including them in the gross capitalized cost (and paying a rent charge on them) or paying for them at lease signing.

Optional Insurance and Services

You may be offered optional insurance products and other services when you purchase a vehicle:

- Credit life and disability insurance
- Unemployment insurance
- Gap coverage (usually not included)
- Vehicle maintenance services
- Vehicle service contract or mechanical breakdown protection
- Other services or insurance coverage's.

For any products or services you select, you can purchase them from a third party or from the creditor.

If you purchase them from the creditor, you may have the option of including them in the amount financed (and paying interest on them) or paying for them at purchase.

First Monthly Payment

Most leases (other than single-payment leases) require you to make monthly payments in advance at the beginning of each monthly period.

That stipulation is why the first monthly payment is typically due at lease signing.  Some leases require that the last monthly payment or several of the last monthly payments of the term be paid at lease signing.

In a special type of lease called a single-payment lease, you pay a single large payment at lease signing instead of making monthly payments over the term of the lease.

First Monthly Payment

Most finance agreements require you to make monthly payments at the end of each monthly period.

That stipulation is why the first payment is not made at purchase.

Refundable Security Deposit

Most leases require a security deposit at lease signing. However, lessors may waive the security deposit for repeat customers or for those paying a higher rent charge.

The security deposit may be used by the lessor in case you default or at the end of the lease to offset any amounts you owe under the lease agreement.  Security deposits are often set by rounding the first monthly payment to the next higher $25 or $50, although the security deposit may be any amount the lessor establishes.

Some lessors offer the option of obtaining lower rent charges and a lower monthly payment if you pay a higher security deposit. Security deposits usually do not earn interest.

Refundable Security Deposit

Finance agreements do not require security deposits.

Prior Lease Balance - If Applicable

The balance due under a previous lease agreement (after the value of the vehicle has been calculated) will have to be paid or rolled into the new lease - if that amount is allowable with the new lease agreement.

Prior Lease Balance - If applicable

The balance due under a previous lease agreement (after the value of the vehicle has been calculated) will have to be paid or rolled into the new finance agreement - if that amount is allowable with the new finance agreement.

Prior Credit Balance - If Applicable

The balance due under a previous finance agreement (after the value of the vehicle has been calculated) will have to be paid or rolled into the new lease - if that amount is allowable with the new lease agreement.

Prior Credit Balance - If Applicable

The balance due under a previous finance agreement (after the value of the vehicle has been calculated) will have to be paid or rolled into the new finance agreement - if that amount is allowable with the new finance agreement.

Gap Coverage is often included in lease agreements.  If it is not, it can be purchased.

Gap Coverage is usually not included in finance agreements, but it can be purchased.

Gap Coverage

Gap coverage is an agreement by the lessor or a third party to cover the gap amount if your vehicle is stolen or totaled.

Gap Coverage

Gap coverage is an agreement by the lender or a third party to cover the gap amount if your vehicle is stolen or totaled.

Gap Amount

The gap amount is typically the amount by which the early termination payoff, not including any past-due amounts, exceeds the insured value of your vehicle.  If gap coverage is not included in your lease, you may be able to buy it separately.  If you do, gap coverage usually has a one-time charge, or premium.

Gap Amount

The gap amount is typically the amount by which the early payoff, not including any past-due amounts, exceeds the insured value of your vehicle.  Gap coverage is usually not included in finance agreements, but you may be able to buy it separately.  If you do, gap coverage usually has a one-time charge, or premium.

Reason for Gap Amount

The gap amount exists because your vehicle usually depreciates faster at the beginning of the lease than as you pay down your lease balance.  Gap coverage is designed to cover the gap amount of your early termination liability if your vehicle is stolen or totaled.

However, gap does not cover any capitalized cost reduction or initial fees you have paid.  Nor does it cover any past-due amounts you owe under the lease or other lease amounts you are responsible for, such as personal property taxes or unpaid parking tickets.  In most cases, gap coverage does not cover your insurance deductible, any insurance policy deductions for past-due premiums, excess wear and use of the vehicle, and so forth.

Reason for Gap Amount

The gap amount exists because your vehicle usually depreciates faster at the beginning of the loan than as you pay down your loan balance.  Gap coverage is designed to cover the gap amount of your prepayment liability if your vehicle is stolen or totaled.

However, gap coverage does not reimburse you for any down payment or monthly payments you have made.  It does not cover past-due amounts you owe under the finance agreement or other amounts you are responsible for, such as personal property taxes or unpaid parking tickets.  In most cases, gap coverage does not cover your insurance deductible, any insurance policy deductions for past-due premiums, and so forth.

Example of Gap Coverage

Assume that -

- You paid a $3,000 capitalized cost reduction at the beginning of the lease
- Your vehicle is stolen and the current lease payoff is $14,000
- The insured value of the vehicle is $12,000
- Your insurance deductible is $500
- You have no other insurance policy deductions, such as for past-due premiums or excess mileage
- You don’t owe any other amounts.

The gap amount is $2,000 ($14,000 minus $12,000).  The gap amount does not include the $3,000 capitalized cost reduction you paid.  The insurance proceeds to be paid to the lessor are $11,500 ($12,000 minus $500).  If you have gap coverage, you will have to pay the $500 insurance deductible to the lessor to fulfill your lease early termination responsibility.  If you don’t have gap coverage, you will have to pay the full $2,500.

Example of Gap Coverage

Assume that -

- You paid a $3,000 down payment at the beginning of the loan
- Your vehicle is stolen and the current loan payoff is $14,000
- The insured value of the vehicle is $12,000
- Your insurance deductible is $500
- You have no other insurance policy deductions, such as for past-due premiums
- You don’t owe any other amounts.

The gap amount is $2,000 ($14,000 minus $12,000).  The gap amount does not include the $3,000 down payment you paid.  The insurance proceeds to be paid to the creditor are $11,500 ($12,000 minus $500).  If you have gap coverage, you will have to pay the $500 insurance deductible to the creditor to fulfill your loan prepayment responsibility.  If you don’t have gap coverage, you will have to pay the full $2,500.

Taxes

In states in which sales and use tax is paid at lease inception, gap coverage does not reimburse the tax you paid unless it is part of the adjusted capitalized cost.  In those states, you will incur initial sales tax again when you lease a replacement vehicle.

Taxes

Gap coverage in a finance agreement does not include reimbursement to you of the sales tax you paid at vehicle purchase unless it is part of the amount you financed.  You will incur sales tax again when you purchase a replacement vehicle.

Inclusion in Lease agreements

Many lease agreements include gap coverage as a standard feature of the lease without a separate charge.  Other leases offer gap coverage as an optional feature for an additional charge.

Inclusion in Finance Agreements

Because gap coverage is not typically included in finance agreements, you generally have a risk of early termination liability if the vehicle is stolen or totaled.  In finance agreements that do not include gap coverage, you may have the option of purchasing it for an additional charge.

Requirements to Maintain Gap Coverage

Leases that include gap coverage often require you to maintain your vehicle insurance and not be in default at the time of the loss of your vehicle to receive the gap coverage.

Requirements to Maintain Gap Coverage

Finance agreements that include gap coverage often require you to maintain your vehicle insurance and not be in default at the time of the loss of your vehicle to receive the gap coverage.

Variations in Gap Coverage

How the gap amount is determined may vary among states, lease agreements, or third-party providers.  Procedures for documenting the loss and obtaining the gap coverage may also vary.

Variations in Gap Coverage

How the gap amount is determined may vary among states, finance agreements, or third-party providers.  Procedures for documenting the loss and obtaining the gap coverage may also vary.

Most leases limit the number of miles you may drive (often 12,000 or 15,000 miles per year). You can negotiate a higher mileage limit and pay a higher monthly payment.  You will likely have to pay charges for exceeding the limit, if you return the vehicle.

You may drive as many miles as you want, but higher mileage will reduce the vehicle’s trade-in value or resale value.

Reasons for Mileage Limit

Vehicle leases include a mileage limit because the residual value is based on the expected mileage.  Driving more miles reduces the value of the vehicle.  Generally, excess mileage charges are the way lessors recover the expected decrease in value from the additional use.

Reducing Excess Mileage Charges

To reduce or avoid end-of-term mileage charges, consider negotiating the lease to include the extra miles you expect to drive during the term.  The lessor will likely reduce the residual value to reflect the higher expected mileage.  This reduction will increase your monthly payment and decrease the likelihood that you will have to pay an end-of-term charge for excess miles.  Some lessors refund the charge for any extra miles you purchase above the standard 15,000 miles per year if you don’t drive the extra miles.

Excess mileage charges typically range from 10 cents to 25 cents per mile.  The higher charges are often on more expensive vehicles because the decline in value for these vehicles is generally greater than for less expensive vehicles.
It often costs less for you to negotiate a higher mileage limit for your lease (thereby increasing your monthly payment) than to pay for excess miles at lease-end.  Increasing your mileage limit and your monthly payment can reduce or eliminate large (and often unbudgeted) end-of-term expenses.  A higher mileage allowance, and the resulting lower residual value, should reduce the total rent charge because the average lease balance is reduced.

Effect of More Miles

If you drive more miles than you expect, you will not owe the creditor for an excess mileage charge, but the vehicle will be worth less when you trade or sell it.

Effect of Fewer Miles

If you drive fewer miles than you expect, the vehicle will usually be worth more when you trade or sell it.

Most leases limit the amount of wear to the vehicle.  You will likely have to pay extra charges if you exceed those limits, if you return the vehicle.

There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle’s trade-in or resale value.

Excessive-Wear-and-Tear Standards

Excessive wear and tear is wear and tear that exceeds the standards stated in your lease agreement.  In many leases, excessive-wear-and-tear standards are defined in specific terms.  Any standards must be reasonable.  Just like excess mileage, excessive wear and tear will decrease the value of the vehicle, whether it is purchased or leased.

The residual value in your lease assumes that your vehicle is returned in a certain condition.  You should be aware of the lessor’s wear-and-tear standards and follow them if you want to return the vehicle at scheduled lease termination without an excessive-wear-and-tear charge.

Examples of excessive wear and tear include

- Broken or missing parts
- Dented or damaged body panels or trim
- Cuts, tears, burns, or permanent stains in the fabric or carpet
- Excessively worn tires
- Cracked or broken glass
- Poor-quality repairs.

Effect of Excessive Wear and Tear

The condition of the vehicle is a primary determinant of its resale value.  The more wear and damage, the lower the vehicle’s trade-in or resale value.  If you purchase the vehicle and do not maintain it according to the manufacturer’s recommendations or do not repair any damage that occurs, the value of the vehicle may be lower. When you purchase a vehicle, the creditor does not take the risk of the end-of-term value of the vehicle.

Maintenance Requirements

Most lessors require the vehicle to be maintained according to the manufacturer’s recommendations.  This requirement does not mean that the vehicle has to be serviced by the manufacturer’s franchise dealerships.

However, you should be prepared to document that the required service was provided by an auto service professional.  If you can’t show that the vehicle was properly maintained, you may be charged for excessive wear resulting from the lack of proper maintenance or for the cost of performing past-due service.

Charges that the lessor assesses for returning the vehicle to the condition stated in your lease may be limited by state law to either actual repair costs or reasonable estimates of the costs of repairing the damage or excessive wear.

Maintenance Requirements

Although creditors may legally require you to properly maintain the vehicle and keep it in good condition and repair, there is no charge for excessive wear and tear at the end of the term because the vehicle is not being returned to the creditor.

You will be affected by the reduced value only when you trade or sell the vehicle.

You may have to pay a Disposition Fee if you return the vehicle at lease-end.

There is no Disposition Fee.

Lease-End Disposition Fee

If you return the vehicle, you may be charged a disposition, or disposal, fee to defray the lessor’s expenses of preparing and selling the vehicle.  These expenses may include vehicle cleaning and reconditioning costs, vehicle inspection fees, transportation costs, storage fees, auction fees, administrative costs, and funding costs until the vehicle is finally sold.

No End-of-Term Disposition Fee

When you finance the purchase of a vehicle, you do not have to pay a disposition fee at the end of your finance agreement (because you do not return the vehicle).

Reasons for Disposition Fee

Most lessors charge a disposition fee to defray the cost of reconditioning and selling the vehicle at the end of the lease (either scheduled or early termination) if the vehicle is returned.  The fee usually recoups only a portion of the expenses the lessor incurs for vehicle inspection, transportation, storage, reconditioning, auction fees, administrative costs, and funding costs until the vehicle is sold.

Potential Sale Costs

If you want to sell the vehicle and get the best price, you may have to advertise it for sale.  If you have not finished paying for the vehicle, you will have to continue to make payments while you are trying to sell it.  If you own the vehicle and decide to sell or trade it, you may choose to recondition the vehicle to get a better resale or trade-in price.  You pay any costs involved in reconditioning and selling the vehicle.

You do not own the vehicle.  You get to use it but must return it at the end of the lease, unless you choose to buy it.

You own the vehicle and get to keep it at the end of the financing term.

Achieving full ownership.

When buying a vehicle with cash, you receive immediate ownership of the vehicle.  When purchasing a vehicle with an installment sales contract or loan, you pay down the loan balance and eventually build equity in the vehicle.  You receive full ownership of the vehicle after you make your final payment.

Conditions on vehicle use.

A lease agreement gives you the right to use a vehicle for a specified period, subject to various conditions.  Those conditions typically state:

- The maximum mileage allowed without further payments
- Insurance requirements for the vehicle
- Maintenance and use requirements
- Limitations on vehicle alterations
- Restrictions on subleasing
- Limitations on drivers
- Other restrictions designed to ensure that the vehicle will be in good operating condition at the end of the lease.

Conditions on vehicle use.

The finance agreement typically has conditions designed to protect the creditor's security interest in the vehicle.  Those conditions state:

- Insurance requirements for the vehicle
- Maintenance and use requirements
- Restrictions on renting or leasing and other restrictions designed to ensure that the creditor's security interest is protected and the vehicle's value is not impaired during the term of the finance agreement.

Right to purchase.

Most leases give you the right to purchase the vehicle at lease-end.  The purchase price, or method of determining the price, is stated in the lease agreement.  Otherwise, there must be a statement in the lease disclosure that you do not have a purchase option at lease-end.

Duty to return the vehicle.  If you do not purchase the vehicle at the end of the lease, you must return the vehicle to the lessor (the leasing company) or to the party designated by the holder of the lease agreement.

Loan options.

A vehicle's loan balance or installment sale balance may be repaid before the end of the term, subject to any stated prepayment charge.  At the end of the term, you own the vehicle.  You may sell it, trade it, or keep it.

Registration and titling.

You are responsible for registering the vehicle according to the specific requirements of the lessor and those of the state in which the vehicle is garaged.  However, the title to the vehicle remains in the name of the lessor or the company to which the lease is assigned (the assignee).  If you purchase the vehicle, it will be re-titled in your name and the new title will note any lien-holder that provides financing for the purchase.

Registration and titling.

The title to the vehicle is in your name but notes the lien-holder during the term of the finance agreement.  When all payment obligations are met, the creditor will release the lien.

You may return the vehicle at lease-end, pay any end-of-lease costs, and "walk away."

You may have to sell or trade the vehicle when you decide you want a different vehicle.

End-of-Term Responsibilities

In a closed-end lease, you return the vehicle at the end of the lease unless you buy it (usually by exercising your purchase option, if any).  You are responsible for any excess mileage and excess wear-and-tear charges if you return the vehicle, plus any disclosed vehicle disposition fee.  You are also responsible for any amounts due under the lease, such as parking tickets paid by the lessor, personal property taxes, or late charges.

End-of-Term Responsibilities

If you own your vehicle and decide to sell or trade it, you negotiate the sale or trade-in price of the vehicle.  You also decide when, where, and how to sell or trade the vehicle to get the best possible price.  Selling it may involve reconditioning the vehicle, advertising it for sale, and obtaining different sale bids or trade-in offers.

Gain or Loss at Lease-End

In a closed-end lease, if the market value of the vehicle is less than the residual value stated in your lease agreement for reasons other than excess mileage or excess wear (that is, the actual depreciation is greater than the depreciation shown in your lease), you are not responsible for the difference.

If the market value of the vehicle is more than the residual value stated in your lease (that is, the actual depreciation is less than the depreciation shown in your lease), there may be equity in the vehicle.  You don’t receive this equity in the vehicle if you return it at the end of the lease.

However, you may be able to acquire equity in two ways:

- Exercise your purchase option
- Negotiate the vehicle's value and the transfer of your purchase option to a dealership or other third party you choose.

Gain or Loss at Sale or Trade-In

The trade-in or sale price of the vehicle will not be known until you negotiate it.  If the value of the vehicle is greater than your loan payoff, you receive this equity.  If the value of the vehicle is less than your loan payoff, you are responsible for the difference.

Where You Return The Vehicle

You should check your lease agreement or contact the lessor to determine where you may return the vehicle.  You may be charged an additional fee if you do not return the vehicle to the location designated by the lessor.

Other Options at Lease-End

At the end of the lease, you may also have other options.  For example, most lessors will permit you to extend your lease on a month-to-month basis for up to 6 months if you haven’t made a decision about getting a replacement vehicle.  Some lessors will permit you to re-lease your vehicle on terms you negotiate.

End-of-Lease Costs

If you are returning the vehicle to a dealership and have a question or concern about your end-of-lease costs, you should contact the company holding the lease agreement.

For more information related to vehicle return, see the following sections:

- Turn-In Fee's
- Wear & Tear
- Excess Mileage Fee's

At the end of the lease (typically after 2–4 years), you probably will have a payment again - options include leasing another vehicle or financing or re-leasing the existing vehicle.

At the end of the finance term (typically after 4–6 years), you have no more loan payments.

Options at end of term

At the end of the lease, you do not own the vehicle, so you must return the vehicle unless:

- You buy it
- You re-lease it
- If the lessor agrees, you arrange for a dealership or another third party to buy it.

Options at end of term

At the end of the Loan Term, you own the vehicle - You finally get the Title.  You can sell it, trade it, or keep it.

Cash Needs

You can buy the leased vehicle outright (which I recommend you never do) or you can lease or buy another.

Your new lease or loan will probably require that you have some cash.

Cash Needs

At the end of the finance term, you own the vehicle and do not make any further monthly payments.  However, if you trade the vehicle for a different vehicle and finance the purchase of the different vehicle, you will have new monthly payments.

Monthly Payments

Monthly lease payments are usually lower than monthly finance payments because you are not paying for the entire value of the vehicle.  See Car Lease Payments to find out how to get the absolute lowest lease payments.

Monthly Payments

Monthly finance payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest, other finance charges, and taxes.  Lenders may offer special rates that can lower your monthly cost.

Achieving Full Ownership

Alternatively, if you lease for a short term (for example, 2 years) and then purchase the vehicle through a short-term finance agreement, (for example, 2 years), you can achieve full ownership in a period comparable to financing the vehicle for the combined terms (that is, 4 years).

Comparison to Buying

In the lease-loan combination, the lease payment is likely to be lower (depending on the residual value), and the loan payment is likely to be higher, than the payment if you were to purchase the vehicle with a 4-year loan only.  You will have to pay a rent charge for the lease term and finance charges for the loan term, compared with paying finance charges for the full 4-year loan-only term.

With the lease-loan combination, you can wait until the end of the lease term to decide whether you want to buy the vehicle and gain full ownership.  However, if you want to finance your end-of-lease purchase, you will have to obtain used-car financing, which usually has a higher interest rate than new-car financing.

Achieving Full Ownership

When buying a vehicle with cash, you receive immediate ownership of the vehicle.  When purchasing a vehicle with an installment sales contract or loan, you pay down the loan balance, eventually building some form or equity in the vehicle.  You receive full ownership of the vehicle after you make your final payment.