A Brief Introduction About the Car Lease Agreement
When you don’t have money to buy an expensive car, you can opt for a lease. A car lease is a very convenient way to be able to drive and use a new car. The money spent each month when you buy a car is much more than the monthly installments of the lease. Thus car lease has become a very popular way of auto financing. It should be noted that when you sign a lease with the dealer or lessor, you don’t own the car. You only get to drive it for a particular time period. An agreement signed between the lessee and lessor is known as Car Lease Agreement.
A Car Lease Agreement should have all the details pertaining to the lease. The lessor or the dealer can also give the option of buying the car by the end of the lease, but such a detail should be drafted in the agreement. This lease works like any other lease. More and more people are opting for car lease as they get to drive luxury cars every few years. During the lease period, you only pay for the depreciation, fee, and sometimes, interest rates too.
Another name for the Car Lease Agreement is a Vehicle Lease Agreement or Car Rental Lease Agreement.
Who Takes the Car Lease Agreement – People Involved
As mentioned above, the agreement is signed between lessee and lessor. A lessee can be any individual who can pay money on time, and the lessor is mostly the dealer. Lessors can also be organizations or independent entities. Both parties can take the help of their attorney to draft the agreement. The agreement is legally binding, so in case of any breach, courts can also participate.
Purpose of the Car Lease Agreement – Why Do You Need It
Imagine a car priced at USD 40,000. If you buy a car, this is the amount you will have to pay. However, if you lease the car for a certain period, you will pay the difference between the current value of the car and the value of the car at the end of the term. So if the price of the car at the end of term is USD 30,000, then you will only have to pay 10,000 depreciation, fee, and interest rate.
Leasing is definitely cheaper, and this is one of the most convincing reasons to opt for Car Lease. The other reason is that you get to drive new luxury cars of your choice every one or two years.
Here are some of the reasons to sign the agreement –
- The agreement legally binds both parties.
- It gives dispute resolution methods.
- It contains all the details about the lease.
- It contains all the information about lease term, fee, security, interest rate if applicable.
- It gives a solution for early termination.
- It puts forward the rules regarding wear and tear of the car.
- It contains details about GAP coverage.
- It can be referred in case of an accident or unforeseeable situation.
Contents of the Car Lease Agreement – Inclusions
A Car Lease Agreement will have the basic details of the lessee and lessor. The basic details include the name, address, phone numbers, photographs, or official identity card. Further, it will have all the details related to the car. These details may include car model, color, accessories, average, etc. It should also have car identification numbers. Both parties should check the car’s condition and then rightfully mention all the details.
Further, the agreement needs to have all the necessary details about payments. It will have details of the down payment. It should be noted that there can be two types of a car lease, one in which the future price of the car is already assumed, which means the depreciation is known while drafting the agreement, and the second, in which future price is not known, so the depreciation can be calculated only at the end of the lease term.
Moving forward, it should also add monthly payment details. Any information regarding taxes should be clearly mentioned in the agreement. If the lessor wants, he can also mention the details of the late payment fee or penalty.
The agreement should specify the termination policy and fee. It should also answer crucial questions such as what happens when an unforeseeable situation or accident takes place. Maintenance is another extremely crucial addition in the agreement. How the lessee will take responsibility for maintenance should be clearly mentioned in the agreement. It should also have details of the governing laws.
The agreement should have a section entirely dedicated to the obligations of the lessee. It is the lessee’s responsibility to ensure the car. The agreement must include the details related to insurance. Further, both parties must decide if, by the end of the term, the lessee can keep the vehicle or not. Depending on their decisions, the details must be added to the agreement.
How to Draft the Car Lease Agreement
The process of lease begins with the lessee searching for dealers. There are many dealers available, but the lessee should do proper research to find a suitable one. Further, the lessee must also research for the car he is going to lease. A car is decided based on many crucial factors such as power, looks, comfort, etc. It should also fit into your budget. You should consider all the expenses that come with car leasing. Further, make sure your credit score is strong.
Most dealers prefer clients with a high credit score. Once both parties agree to come together, the negotiation process should start. The lessee should ask about all possible hidden charges and taxes. It is always good to have clarity about each and every clause and condition of the agreement before signing it. Further negotiations are the most crucial aspect of a lease agreement. Both parties want to get the best deal for themselves. Both parties can also take their attorneys’ help to draft the agreement.
It is important to note that some dealers put a cap on mileage, which means beyond a certain mile, you will be charged per mile. You must discuss these details in person before putting them in the agreement. Some lessors also put certain restrictions such as not smoking in the car, not using a car for business purposes, etc. It is lessor’s responsibility to inform the lessee about such details.
The lessee should keep in mind that the manufacturers and dealers often come up with exciting offers when the sales are not satisfactory; in such a situation, they decrease the down payment or monthly installments. You must look out for such good deals. This could be the best time to lease the car.
Negotiation Strategy
Like any other lessee and lessor relationship, a car lease also requires a lot of negotiation. Both parties want the best-suited deal for themselves. If you are not getting any offer or deal on the car, try to negotiate for down payments and monthly installments. In order to do that, the lessee must do his research well and should know the actual cost of the car.
You can also try more than one dealer. You must always remember that salespeople deal with clients every day, but you only get a car once in a while. A salesperson is good at negotiations, but you should also stick to your finances. You must always negotiate the interest rate and security amounts if applicable.
Maintenance and wear-tear are another two crucial factors on which both parties should sit and negotiate. Further, the lessee should also ensure that he gets no bar on mileage. If one dealer doesn’t fulfill all these requirements, you must spend some time finding more dealers.
Benefits & Drawbacks of the Car Lease Agreement
Most lease agreements are for the better. They ensure all details are on one document and can be referred anytime. They are also legally binding, so both parties diligently comply with it.
Here are some benefits of car leasing –
- You get to drive a brand new car without actually purchasing it
- You can return the car after the decided period gets over and get another one
- You may get an option of buying the car in the end
- You don’t get ownership rights, so you don’t have to do registration and a lot of other formalities
- You only have to pay the depreciation and monthly charges
- It is cheaper than buying a car
- The monthly cost is less in comparison to buying a car
- You may get maintenance and warranty coverage
- Saves taxes for you
Here are some drawbacks of car leasing –
- You don’t get the ownership of the car even after paying down payment, fee and interest rate
- Dealers put a cap on mileage
- You can’t make any changes in the car such as accessorizing it etc
- Risk of expenses because of wear and tear
- There can be hidden penalties at the end of lease
What Happens in Case of Violation
In case of any breach by the lessee, the lessor can take strict action. First, both parties will refer to the agreement and impose penalties, but if the lessee doesn’t even comply with that, then a third-party intervention will be required. As mentioned above, a Car Lease Agreement is a legally binding agreement. Both parties might have to face the courts if they don’t comply with the agreement and its clauses. The agreement must contain a solution for a dispute.
In case of simple wear and tear, the lessee should pay the penalty and resolve the matter. The lessee should always remember that the leasing comes with a lot of restrictions.
It is convenient for people who can’t own a car to only pay depreciation, which is the sum of capitalized cost and residual value. The best way to lease a car is to do proper market research, different car research, and dealer research. The best time to lease a car is a little after the model has arrived in the market. You must also think ahead of time and see if some offers are likely to run.
The agreement between lessee and lessor is one of the most crucial aspects of their relationship. It ensures both parties are protected by the law and know their rights and obligations. There are many Car Lease Agreement templates available online, but you must ensure that you take the help of your attorney before choosing one.