Disposition fee

Disposition fee
See also
Full service leasing Back Charge Ijarah True lease Prepaid rent Service lease Long term lease Indemnity principle Insurable value

A disposition fee is a fee which is charged by dealers and lessors payed in the end of a car lease period. Fee has to be placed on lessors account if lessee decides not to buy back the car after the lease period and the lessor has to prepare for reselling the car. Disposition fee and other similar charges are foreseen by the contractors as an circumstance to the normal operation of the lease arrangement. The lessor is obliged to state the highest possible amount to be charged. Lessor may also introduce a concise description of the fee structure. It covers cleaning up and repairing any damage that has happened to the car during the time of rent. As the car is brought into a suitable condition, it can be sold. Any disposition fee must be itemized in the lease agreement.

Inspection

By the time the car is sold, it has to be inspected by a specialist for any damages. Afterwards it is repaired, serviced and cleaned. Lessor covers these (and other, like administrative costs and selling costs) costs via fixed disposition fee. To lower the disposition fee, lessee may cover some of the damages by its own, for example replace worn tires, get repairs done by itself, but it has to be calculated whether it is profitable. Disposition fee can also be avoided. If lessee decides to buy back the car disposition fee may be dodged since no reselling cost will be applied. Another way to sidestep the disposition fee is to take another car lease from the same lessor/dealership, however it is not assured in every case. It should be dealers interest to keep lessee for another lease term, as it is its way of earning the money.

Other end-of-lease fees

Disposition fee isn't the only fee that lessee has to cover at the end of a lease period. Potential end lease charges and fees are:

• Mileage overage - most leases have limited mileage. It should be stated in the lease agreement, how many kilometers the car is allowed to cover on a monthly or yearly basis. If the car travels more kilometers that are allowed in the agreement, lessee is obliged to pay certain amount of money.
• Excess wear - a vehicle which is leased, has to be returned in a good condition. Vehicle should have no scratches or dents.
• Late charges - are charges imposed on lessee, who is being late with returnig the vehicle back to lessor. If the car is brought later than period stated in the lease agreement, charges may be applied.

Examples of Disposition fee

• The classic example of a disposition fee is the one charged by car leasing companies at the end of a lease period. The fee is paid by the lessee to the lessor, and it covers the costs of preparing the car for re-sale, such as cleaning and repairs.
• Another example of a disposition fee is the one charged by landlords for property rentals. This fee can be charged if the tenant chooses to leave the property before the end of the lease period, or if the landlord needs to sell the property quickly due to a change in circumstances. This fee covers the cost of marketing and preparing the property for re-letting.
• A third example of a disposition fee is the one charged by retailers for the return of goods. This fee is usually charged in addition to the cost of returning the goods, and covers the cost of preparing them for re-sale. This is usually a set fee, regardless of how much the goods were originally purchased for.

Advantages of Disposition fee

• Disposition fee provides a way for the lessor to recoup some of the costs associated with reselling the vehicle.
• It also helps to ensure that the car is returned in a suitable condition for sale.
• Disposition fee can reduce the cost of the lease for the lessee, as it's a fixed amount rather than a percentage of the final sale price.
• It can also save the lessee time and hassle of selling the car themselves.
• The fee can also be used to cover administrative costs associated with the lease agreement.

Limitations of Disposition fee

• Disposition fee cannot be charged to the lessee if the car is returned in its original condition.
• The fee should be reasonable and must not exceed the actual cost of cleaning, repairing and reselling the car.
• The fee must be stated in the lease agreement and any changes made must be agreed to by both parties.
• The fee cannot be used as a penalty for any breach of the lease agreement by the lessee.
• If the lessee decides to buy the car at the end of the lease period, the disposition fee should not be charged.
• The lessor should not charge the lessee for any other costs associated with the disposition of the car.

Other approaches related to Disposition fee

• Early termination of lease: This approach allows for the lessee to terminate the lease earlier than the scheduled end date. If this occurs, the disposition fee will still apply and the lessee will have to pay a certain percentage of the remaining lease amount.
• Buyout option: This option allows the lessee to purchase the vehicle from the lessor at the end of the lease period. This option is usually more expensive than the disposition fee, but it does allow the lessee to keep their vehicle.
• Lease extension: This approach allows the lessee to extend their lease at the end of the term. This is usually more cost effective than the disposition fee, and the lessee can keep their vehicle.

In summary, there are three approaches related to Disposition fees. These include early termination of lease, buyout option, and lease extension. Each of these approaches has its own benefits and drawbacks, and the lessee should consider all of them before making a decision.

References

• Agrawal V., Ferguson M., Toktay B., (2012)., Is Leasing Greener than Selling?. Management science, Vol. 58, No. 3.
• Billingsley R., Gitman L. J., Joehnk M. (2017)., Personal Financial Planning. South-Western Cengage Learning, Mason, 167
• Chan S. (2004)., Fundamentals of Engineering Economics. Pearson, New Jersey, 5, 100.
• Gao S. (2018)., International Leasing. Routledge, Abingdon.
• Hallenborg M. A. (2002)., New York Tenants' Rights . Nolo, USA.
• McConell J., Schallheim J. (1983)., Valuation of asset leasing contracts. "Journal of Financial Economics" 12, 237-261.
• Schroter W. (2004)., LeaseAdvisor.
• Smith C., Macdonald L. (1985)., Determinants of Corporate Leasing Policy. "The Journal of Economics", VOL. XL, NO.3

Author: Michał Sznurkowski