Jan 11

Friday, January 11, 2019 

If you’re thinking of leasing your next vehicle, it’s crucial to make an informed decision. Failure to do so could result in financial headaches down the road.

What is a Lease?

A lease is like a long-term car rental - you don’t actually own the vehicle. A leasing agreement typically runs over a series of months (36, 48, 60) with a set monthly payment. Leasing is available for both new and used cars. The dealer and the company that owns the leased vehicle (lessor) are most often not the same organization. The dealer helps arrange the lease and offers other services to the consumer (lessee). Generally, the dealer does not handle the monthly lease payments and is not the organization with which you sign the lease; these functions are performed by an independently owned and operated finance company.

The most popular lease type is an option lease or closed-end lease. This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount (the residual value). You are not required to make any additional payments unless there is physical damage, the kilometres driven are higher than agreed upon, or there is excessive wear and tear. Most manufacturer leases are closed-end.

The SevenTerms

Lessee

The person who leases the vehicle.

Lessor

The company that owns the leased vehicle.

Excess Wear and Tear Fees

This is a cost determined at the end of a lease agreement if damage/wear to a vehicle is beyond what the original agreement detailed. Examples include: dents, paint damage, cracked or chipped glass, mechanical damage, holes, tears or burns to upholstery.

Excess Mileage/Kilometre Fee

Leases typically allow a maximum number of kilometres for the time of the lease – 20,000 per year is common but the amount can vary. If the total distance driven exceeds the agreed amount, the lessee will be charged an excess kilometre fee – 10-20 cents per kilometre is common but the charge can be higher. This is an important factor for consumers considering a lease but who drive more than average distances.

Early Termination Fee

A fee charged to the lessee should a lease agreement be terminated early. These vary and can be significant, so it’s crucial consumers understand the early termination fee (and how it is calculated) before entering into a lease agreement.

Closed-End Lease

The “option lease” also known as a “closed-end lease” is the most popular lease type for new vehicles. This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount. You are not required to make any additional payments unless there is damage, the kilometres driven are higher than agreed upon, or there is excessive wear and tear. Most manufacturer leases are closed-ended.

Open-End Lease

The alternative type of lease is called a “residual obligation lease” or “open-end lease.” Consumers lease the vehicle and make the scheduled payments similar to the closed-end lease; however, at the end of the lease, the consumer is responsible for covering any shortfall between the residual value and the actual price the lessor sells the vehicle for. This type of lease is not as common because of the risk to consumers needing to make additional payments at the end of the lease term.

Important Considerations

Because leasing contracts may be difficult and expensive to get out of, you need to determine whether it is right for you before you sign the contract. For more useful tips on leasing, visit OMVIC’s About Leasing page.

About OMVIC

An educated and informed consumer is a protected consumer Visit OMVIC's website to learn more about your car-buying rights and when they apply, as well as additional tips on buying a car in Ontario

 

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