Terms to Know Before Leasing A
Semi Truck - Leasing Jargon Simplified
Semi
Truck, Commercial Truck Leasing:
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So, you’ve decided that you want to lease that next semi truck. Can’t
really blame you. With today’s incentives, rebates, and favourable
lease rates why wouldn’t you. Not only do you get to drive a new
truck, but a new truck that you wouldn’t otherwise be able to afford
if you were to purchase and finance it. Buyer beware though. With
leasing comes new and sometimes rather confusing vocabulary. Don’t
get lost in a sea of leasing jargon. Protect yourself. Learn and
understand the industry language. For those seriously thinking of
leasing that next semi truck, here is a useful glossary of “new”
terminology that you should familiarize yourself with BEFORE you
negotiate a lease:
Acquisition Fee: An administrative charge levied by
the leasing company for processing a lease. This fee is typically NOT
negotiable and can have a significant bearing on the overall cost of
the lease.
Base Interest Rate: This is the cost of leasing and
using a semi truck and is measured by the interest paid over the
lease term.
Buy at end-of-term interest rate: This is the net
interest rate for the lease if the lessee, at the end of the lease
term, purchases the semi truck at the end-of-lease purchase price.
Capitalized Cost: This is the total purchase price of
the semi truck. The price includes the cost of all extras such as
semi truck options, extended warranties, life insurance, and
rustproofing. The capitalized cost equals the amount you would pay
for the semi truck if the semi truck were being purchased.
Capitalized Cost Reduction: A capital cost reduction
is a down payment, in the form of cash or trade-in, that is applied
to the final purchase price of the semi truck reducing the monthly
lease payment.
Closed End Lease: Leases in which the lessee’s
financial obligation rests only with the negotiated monthly lease
payment. Since the residual value of the semi truck is stated in the
lease contract, the lessee is not financially responsible if the
actual value of the semi truck is less than the stated residual
value. The lessee need only return the semi truck at the end of the
lease term with no further obligation.
Dealer Participation: A rebate or discount,
contributed by the dealer, reducing the final purchase price of the
semi truck.
Depreciation: The decrease in value of a semi truck
over time. Depreciation in automobile leasing is the difference in
value between the cost of a new semi truck and the value of the semi
truck at the end of the lease term.
Disposition Fee: A fee charged by the lessor at the
end of a lease to ready the truck for sale. The lessor may apply this
fee against the deposit made by the lessee at the beginning of the
lease term.
Down Payment: A sum of money paid at the beginning of
a lease contract, usually at the time of signing, that is applied to
the final purchase price. In leasing, the down payment is referred to
as the capitalized cost reduction. Typically, the larger the down
payment, the smaller the lease payment.
Early Termination Fee: A penalty paid by the lessee
for terminating a lease contract early. A lessee pays for the
depreciation of a semi truck in equal monthly payments. Since a semi
truck’s depreciation is highest in the first months of a lease,
terminating a lease early results in the lessee using more of the
semi truck’s value than what they’ve paid for subjecting the
lessee to penalty.
End-of-Lease Purchase Price: Also known as the
residual value. This is the price at which the lessee may purchase
the semi truck at the end of the lease term.
Excess Wear & Tear: Wear and tear beyond what is
deemed acceptable by the leasing company. It is the responsibility of
the lessee to take reasonable trucke of the truck and to ensure it is
returned at the end of the lease term in good condition. Bald tires,
body dents, and engine trouble due to neglect could subject the
lessee to repair and replacement charges.
Gap Insurance: The name given to a type of insurance
coverage that covers the difference between the actual cash value of
the leased semi truck and what is still owed on the lease contract.
If a leased semi truck is destroyed in an accident or stolen, gap
insurance coverage protects the lessee against additional losses due
to “gaps “ between the insurance settlement and the lessee’s
financial obligations set out in the lease contract.
Independent Lessor: These are non-traditional lessors,
usually an individual business, that can structure and write a lease
for most makes and models of semi trucks. The terms and conditions of
the lease agreement can be customized to accommodate different lease
and mileage conditions.
Lease Extension: This is the continuation of a lease,
beyond the original lease contract. Payments are continued on a
month-by-month basis at the same sum negotiated at the beginning of
the lease term.
Lease Term: This is the length of the lease contract.
Most semi trucks can be leased for 12, 24, 36, 48, and 60 month lease
terms. The monthly payment of a lease will vary depending on the
length of the lease term.
Lessee: Name assigned to a person or party who signs
a lease and agrees to assume responsibility for a semi truck and the
lease payments.
Lessor: Name assigned to a person or party that owns
the semi truck and agrees to lease it to the lessee.
Mileage Allowance: Lease agreements establish a
maximum mileage allowance that the truck may be driven over the life
of the lease. The agreement will also specify the cost per mile or
kilometer the truck is driven over and above the allowance that is
due and payable at the end of the lease term.
Money Factor: This is a number used to calculate the
base interest rate of a lease. To arrive at a base interest rate,
leasing companies will multiply a money factor by 2400. The money
factor of a lease is known by the leasing and sales consultant at the
dealership and is used to calculate the cost of money in the same
fashion as an interest rate does. The lower the money factor, the
lower the monthly lease payments.
Monthly Payment: A payment made on a specified date
each and every month as specified in the lease contract. Monthly
lease payments calculated on a lease contract typically include all
applicable taxes.
Net Interest Rate: This is the total interest rate
for a lease and represents the true cost of the lease. The lower the
net interest rate, the lower the cost of the lease.
Open-End Lease: Leases in which the lessee’s
financial obligation may exceed the negotiated monthly lease payment.
In an open-end lease the residual value is set at the beginning of
the lease term. The lessee is financially responsible if the actual
value of the semi truck is less than the stated residual value.
Purchase Option: Option extended to the lessee, at
the end of a lease contract, to purchase the semi truck at the
pre-determined purchase price. The pre-determined purchase price is
normally the stated residual value in the lease contract.
Residual Penalty: This is the penalty a lessee pays
if the end-of-lease purchase price is greater than the expected value
of the semi truck at the end of the lease term.
Residual Value: This is the expected or
pre-determined value of a leased semi truck at the end of the lease
contract. The stated residual value on a lease contract is normally
the buyout price at the end of a lease term. The residual value also
determines whether the lessee should purchase the semi truck at the
end of the lease term. If the residual value is less than the actual
market value it would be advantageous for the lessee to buy the semi
truck and sell it to a third party.
Security Deposit: This is a sum of money, paid up
front, as security for excess wear and tear on the leased semi truck.
The amount is refunded if the semi truck is returned in good
condition. In some cases, the deposit may be applied against the
final monthly payment.
Good luck and happy negotiating!
William Bolton is founder, owner, and operator of
Leasedwheels.com, a website specializing in auto lease transfers and
assumptions. If you're stuck in a lease you need out of or wish to
take over an existing lease on a short-term basis with no money down,
visit:
http://www.leasedwheels.com
