Auto Lease Contracts

Auto lease contracts, or "lease agreements," are all slightly different in detail, but contain important common elements that should become familiar to you. In fact, you should pick up a blank contract form from your dealer before you actually plan to lease to allow yourself plenty of time to examine it. Seeing a contract for the first time as you're sitting under the hot lights in the dealer finance manager's office is not the ideal time to study it.

Our Lease Kit contains a sample car lease contract form, each section of which is explained in detail.

Let's look at some of the elements of a typical auto lease contract.

Disclosure Statement

Regulation M

In January 1998, the Federal Consumer Leasing Act, Regulation M, was revised to require that certain key information and figures are in every lease contract. It required that Capitalized Cost, Capitalized Cost Reduction, Residual Value, Lease Charges, Monthly Payments, and other amounts be clearly spelled out. It also required that this information be displayed in a uniform way, and using  standard terminology (although still not simple English). Note that Regulation M did not require that interest rate or money factor be disclosed, although it did require disclosure of total finance charges.

Federal law requires that lease contracts contain a section in which certain facts and figures are disclosed to you. This section in your contract is often titled, "FEDERAL CONSUMER LEASING ACT DISCLOSURES." The following sections are among those required:

• Amount due at signing
• Monthly payment
• Other charges
• Total of payments
• Amount due at lease signing
• How monthly payment is determined
• Early termination statement
• Wear and tear explanation

Although the new regulations certainly go a long way in the right direction, there is still much room for improvement. For example, the changes do not regulate the actual figures in the contract, such as the amount you are credited for your trade-in, the vehicle's price, the finance fee, or whether the monthly payment figure was even calculated correctly.

You would be surprised at the number of lease contracts that have mistakes in them — either legitimate or intended.

You must be able to catch and correct problems before you sign your contract. Afterwards is too late.

There is no 3-day "right to cancel" or "cooling off period" law for automobile purchases or leases, as many people mistakenly believe. This is why it is important that you read your contract and be able to verify the monthly payment figures yourself, before signing.

Insurance

Most auto lease agreements require you to maintain insurance coverage: bodily injury or death liability: $100,000 per person / $300,000 per occurrence, property damage liability: $50,000, comprehensive and collision for actual value with no more than $500 deductible.In Canada, $1,000,000 in liability coverage is required.

While this may be more coverage than you might buy normally, it's always smart to have maximum protection in these times of expensive repairs and huge lawsuits, regardless of whether you're leasing or buying. For more details, read our article, Auto Insurance and Leasing.

Excessive Wear and Tear

Leasing contracts specify that you must return the car at lease-end with no more than "normal" wear and tear. Most new contracts do a pretty good job of spelling out exactly what "normal" means. Basically, it means you have to take reasonably good care of the car and keep it maintained.

It's interesting that this is the part of the leasing contract that is most responsible for "leasing phobia" with many first-time leasers, and causes some people to decide not to lease. These people have a tremendous unfounded fear that, when they return the car, the leasing company will examine it with a fine-tooth comb and penalize them thousands of dollars for minor dings and scrapes.

Of course, if you actually have significant damage, seriously worn tires, and deep scratches, you should get them repaired before your return the car — or pay after you return the car.

Excessive Mileage

Leasing agreements specify the maximum average annual mileage you're allowed without paying a penalty. The most common mileage limit is 15,000 miles per year, although 10,000 or 12,000 miles are often used.

Make sure that when you lease, you select the limit that best fits your driving needs because the penalty at lease-end for exceeding the limit can be expensive — typically in the range of $0.10-$0.25 per mile.

For Canadians, the Kilometer Allowance is most often 24,000 km. Excessive Kilometre charges vary as in the U.S.

Early Termination

Lease contracts spell out the conditions under which the contract may be terminated, by either party. Some lease companies do not allow termination in the first few months or last few months of the lease. The way in which an early termination is handled varies by lease company. Costs can also vary depending on the method used to calculate remaining lease balance.

Terminating a lease contract early can be very costly, and should be avoided if at all possible. As stated before, this is the part of leasing that gets the most people in trouble.

Destroyed or Stolen Vehicle

Having your leased vehicle totally destroyed or stolen is a form of early termination and, unless you have gap protection, you are exposed to the same penalties and payments as described above. Gap protection, sometimes called gap insurance, covers any additional amount that you might owe after your insurance company pays off.

Gap coverage is included in most modern lease contracts. In a few, it's offered as an option — for a fee.

If your lease contract doesn't automatically provide gap coverage, and it isn't offered by your dealer, check with your auto insurance company or bank.

Gap coverage is very important and is strongly recommended. Read the fine print in your contract to find out what protection you may already have, or don't have. In your contract, this protection may be called a waiver.

What is NOT in Your Lease Contract

Lease contracts do not show you the interest rate (money factor) you are paying. However, it is required that you be shown total finance charges ("rent charge") — but not the rate that results in those charges.

You may not be shown the lease acquisition fee (see Lease Fees and Taxes) as a separate line item in your lease contract. The fee is typically added to the cost of the vehicle and shown as part of the Net Cap Cost.