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Leasing A Vehicle

motor vehicles

Just as if you purchase a vehicle, a lease is negotiable. While you should always do thorough research before getting a new or used vehicle, leasing is much more complex. You should never lease unless you understand all the benefits and disadvantages of leasing. If you are considering a lease, make sure you understand the following concepts:

Lease term - the length of time the car is leased. Typical examples of leases are 24, 36 and 48 months. If you lease for more than 36 months, you should seriously consider purchasing rather than leasing. The need for major vehicle repairs tend to surface in the fourth or fifth year – after the typical new car warranty expires. If your lease term extends beyond the warranty period you are liable for any repairs that need to be made on a vehicle that you don’t even own.

Capitalized cost – the amount of money being financed through a lease. This includes the negotiated price and any add-on fees or taxes paid through financing. The capitalized cost (or "cap cost") is similar to the purchase price of a vehicle. The cap cost does not need to be the manufacturer’s suggested retail price (MSRP). In fact, unless it is a highly desirable vehicle, it should be under MSRP.

Capitalized cost reduction – the amount of a down payment that reduces the amount being financed. The cap cost can be reduced by rebates, factory-to-dealer incentives, a down payment or a trade-in value.

Money factor – (also known as a lease factor) is comparable in a lease to what an interest rate is to financing. A money factor is typically shown as a small decimal number. You want the lowest money factor you can negotiate. You can convert a money factor to APR by multiplying it by 2400. For example, a money factor of 0.00297 would equal 7.13% APR. Lease money factors, when converted to APR, should be comparable to if not lower than average interest rates for financing the purchase of a new car.

Residual value – the projected market value of a vehicle at the end of the lease term is up. The residual value is based on the estimated depreciation of the vehicle and one of the factors in calculating a monthly lease payment. The higher the residual value, the lower your lease payments.

GAP insurance – During the early years of a lease, the amount you owe is typically more than the actual market value of the vehicle. If a vehicle is stolen or totaled in a collision, an insurance company will only pay the actual market value of the vehicle. Guaranteed asset protection (GAP) insurance, covers the remaining balance owed on the lease. Some leases automatically add GAP insurance into the lease payments. If not, shop around for the best rates. Dealers will try to sell you GAP insurance but many motor vehicle insurance companies also offer it and may be available for less as an option with your regular car insurance. Furthermore, after the first year or two, the gap between the actual market value and what you owe on the lease may disappear and paying for gap coverage may be unnecessary. Do the math every year to make sure GAP insurance is something you still need.

Acquisition fee - as it relates to car leasing, refers to an administrative fee that is included in all leases. An acquisition fee, also sometimes known as a "bank fee" or "assignment fee”, is charged by lease companies, not dealers. Generally, acquisition fees range from a few hundred to a thousand dollars. The acquisition fee is not always disclosed in a lease contract.

Early termination fee - is a penalty charged for breaking the terms of an agreement or long-term contract.

Make sure you understand all of the up-front fees, and what fees you will pay for early termination or if you decide to purchase the vehicle after the lease expires.

Beware of any dealer who says you can get out of your lease without any penalty. Leases almost always have early termination fees and it will cost you to end a lease early. Read the fine print so you know how much you will pay if you go over the mileage limit and what maintenance you are required to do on the vehicle.

Driving habits. Another extremely important factor to consider in choosing a lease is how many miles you typically drive each year. While the annual mileage allowed in a lease is always negotiable, the average lease is for 12,000 miles per year, which is 1000 miles a month. If you use your car for anything more than local driving on a regular basis, it is likely that you may exceed your mileage limitation. Any excessive mileage will be charged to you at the end of your lease, usually at a very expensive rate per mile.

Other products. Most new vehicles come with at least a three year / 36,000 mile bumper to bumper warranty and manufacturer roadside assistance programs. Some dealers try to sell many after-market products that are unnecessary if you intend to lease for only two or three years and then return the vehicle. These include service contracts, paint and fabric protection, roadside assistance and other similar products or insurance.

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