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Vehicle Lease Agreement

The purchase of a desirable car often leads the buyer to the question: what is the cheapest option? People do not always have the money to buy a new vehicle. It can be problematic to apply for a loan from financial institutions—the requirements for bank customers are very strict, and the interest rate is quite high. The way out of this situation can be to buy a car through financial leasing or, put simply, leasing.

Car leasing is a long-term lease under which the lessee pays a monthly fee that includes payment for the vehicle, rent, and interest. However, once the contract expires, the person can become the rightful owner of the leased vehicle. A distinctive feature of car leasing is tax optimization. That is why this financial instrument is so popular among legal entities.

What Is a Vehicle Lease Agreement?

A motor vehicle rental lease is an agreement whereby the lessor transfers the motor vehicle to the lessee for temporary possession and use for a fee. The agreement can also be used with any other vehicle with a chassis number and registration number. The vehicle lease agreement protects both parties from any misunderstandings or ambiguous communications that may arise during the rental period by confirming the rental terms in writing.

Vehicle leasing contracts provide the right to drive the vehicle for a certain period of time in exchange for regular payments. With a lease contract, you never own the vehicle; you are expected to return it to the lessor at the end of the lease period.

You must include a detailed description of the leased vehicle, the car's full retail value, and the number of lease payments. Keep track of the parties' responsibilities and the potential of inspections. Include provisions for late fees and penalties for early termination.

A well-prepared agreement will safeguard both parties' interests by preventing misunderstandings and miscommunications, especially if you opt to sign the lease without the assistance of a competent lawyer.

If you want to sign a contract to use the car for a specific period of time, you may sign a Vehicle Rental Agreement. On the other hand, a lease is signed for a long period of time—usually 12 months or more, with the opportunity to renew. There are no changes to the lease after signing it for a certain length of time. However, the owner of the car can modify the contract at any moment under a rental arrangement. The lessee has the option to purchase the vehicle at the end of the lease period, which is not available under the Vehicle Rental Agreement.

When to Use a Vehicle Lease Agreement?

Usually, you know and consciously plan how long you will lease the car. Most often, it is not your first car, and based on previous experience, you understand the optimal "ownership cycle" for you. Also, you take into account the growth of your income, the fact that you have children (with the need for a more spacious car), etc.

Car loans are good if you buy a car for an extended period of time. That is, you plan to use it for at least 4-5 years. Then, under the condition of the further successful resale, the car credit will be more profitable compared to leasing.

Leasing is optimal for individuals when the planned term of car ownership is between one to three years since it allows using the car with monthly payments, which will be 2-3 times less than a car loan for a similar term. And at the end of the lease, you can easily replace the car with a new one.

What Is Included in the Vehicle Lease Contract?

The first part of the vehicle lease agreement focuses on what the customer will have to pay as part of the deal, such as how the monthly payment is calculated. It then goes on to provide information on early termination, mileage restrictions, and options at the end of the lease.

Pay attention to these important points:

1. The execution date and expiration date

Strange as it may seem, the catch may be hidden at the very beginning: the date of the lease agreement. As a rule, the lessor draws it up, and the lessee then checks and makes adjustments. It should also be remembered that, since the lease relationship is finite, the contract should also specify the term for which it is concluded.

2. Buy out value

The contract must indicate the amount and procedure of payment, the redemption value of the vehicle, and the terms of its transfer to the ownership of the lessee. This often raises the question of whether the redemption value under the contract can be zero. The answer is no because, in this case, the lessee will have to put up with the receipt of income (valuation of the car will be made based on market realities) and, as a result, the payment of tax on the profits. Therefore, it is better to specify the real redemption value. But the complete absence of the redemption value of the car in the contract can be a problem since the tax inspectors recognize the entire amount of payments. That is, until the moment the vehicle passes into your ownership, the lease payments cannot participate in the calculation of income tax.

3. Lease insurance

To begin with, the leased car is subject to compulsory insurance. There are two options here: either the lessor or the lessee will search for and conclude the agreement with the insurer. In either case, the cost of insuring the vehicle will be borne by the lessee. If the lessor concludes the agreement with the insurer, it is convenient for the lessee: there is no extra contract, and the premium itself can be spread over the entire term of the agreement instead of paying in one tranche. However, in the pursuit of an attractive offer for the client, the lessee may not take into account all the nuances of payments in the event of an insured event. That is why it is advisable to study all conditions before signing the lease agreement. Special conditions arise when the leased asset is stolen. The point is that the lessee is likely to be obliged to make lease payments until the very reimbursement from the insurance company. Often this payment is made with a long delay; that is, the lessee will essentially be paying for the property that they do not use all this time.

4. Restrictions

A lease agreement often contains several restrictions that are imposed on the user of the leased car. You should be aware of them beforehand. For example, during the car's operation, you may be imposed restrictions on the maximum mileage and territory of operation (if you need to travel abroad, you will have to agree separately). In addition, as a rule, the leased car cannot be subleased or transferred to a third party. Maintenance and repair procedures are also assigned strictly to certain dealerships.

What Happens at the End of the Lease Period?

At the end of the lease, the lessee must return the vehicle to the lessor. The vehicle must be in good roadworthy condition, without excessive internal wear and tear, damage, or serious mechanical defects. Otherwise, the cost of repairs will be borne by the lessee.

The lessor may offer to buy the vehicle. If the lessee agrees, the rental payments will be deducted from the total purchase price. If the rental contract is terminated before the rental period agreed, an early termination penalty may apply, including payment of the remaining rental payments and any additional charges.

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