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Fall 1999 

Introduction to Leasing
Buying vs Leasing
Taxable Benefits
Real Life Example
Common Lease Terms

Common Lease Terms

LEASING HAS A TERMINOLOGY ALL its own. Here are a few terms you will be likely to encounter if or when you lease:

  • capitalized cost: this is the purchase price that has been agreed upon between you and your sales representative. It should include any other costs such as registration fees, sales taxes, etc. that are to be rolled into the lease contract.

  • capitalized cost reduction: this is a payment made from you to the leasing company to reduce the capitalized cost of the of the vehicle. It is not a down payment as no down payments are required when leasing a car. It serves to reduce the outstanding principal and lowers your monthly payments.

  • close-end lease: this type of lease sets a limit on the number of kilometres that the car can be driven over the term of the contract and provides for a surcharge if that amount is exceeded. Usually you will not have an option to purchase the auto when the lease ends, and consequently, the lessor will be responsible for full maintenance of the car and returning it to the dealership at the end of the lease in good condition, other than reasonable wear and tear. The majority of leases are structured in this manner.

  • lessor: the car dealership or the leasing company

  • lessee: the customer

  • open-end lease: this type of lease gives you more flexibility in terms of the agreement, but might cost you more in the long run. The lease will call for fixed monthly payments over its duration and provide for unlimited mileage. When the lease is over, you have two choices: (a) buy the car for the predetermined amount that was stipulated in the lease agreement (residual value) or (b) return the car to the lessor and have them sell it on the open market. If they realize less than the residual value then you will have to make it up, but if they receive more, they are obligated to pay it to you. Ask for documentation of the prices offered for the vehicle and who did the tendering. People or companies bidding on the car should be independent of the leasing company.

  • residual value: this is the projected market value of the automobile at the end of the lease. It is not included in the payments you will be making over the term of the lease but will be the amount that you will have to pay at the end of the contract if you choose to buy the car. Since the amount of the "buyout" is not included in the monthly lease payments, some people think that they should negotiate as high a residual value as possible. The drawback to this approach is that it makes the vehicle harder to sell when the lease expires if the amount that has been guaranteed is higher than its street value. Consequently, you will be forced to pay more than its actually worth at that time. And even if you do not want to buy it yourself, you will have to come up with the difference between the buyout amount and the amount the lessor was able to command when he sold the unit. On the other hand, a low residual value will translate into a lower buyout amount at the end of the lease. Unfortunately, it also means higher monthly payments for you during the term of the contract. Ask yourself what is likely to happen when the lease is up, and determine which is the appropriate strategy for you.

Fall 1999 : Leasing vs Ownership of Business Assets | Introduction to Leasing | Buying vs Leasing | Taxable Benefits | Real Life Example  | Common Lease Terms

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