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.
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.
- 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