What is a disposition fee?

When your car lease ends, you may think you’re even with the dealer.

But you’ll often find you still owe money because of what’s called a disposition fee. This fee, which typically runs $300 to $400, covers the dealer’s costs of putting the vehicle back onto the market to sell as a used car.

We’ll take a look at how the disposition fee works, what you can do to avoid it and how it fits into the overall cost of an auto lease.

• What is a lease disposition fee?
• Do I have to pay the disposition fee?
• Tips for leasing your next car

What is a lease disposition fee?

A car lease is a financial arrangement that lets you effectively “rent” a car from a dealership or auto manufacturer, usually for a few years. The disposition fee is a fee that may be charged when the lease ends.

So how exactly does the disposition fee factor into a lease? When you think about leasing a car, you’ll probably consider any potential “down payment” fee — called a capitalized cost reduction — that comes at the beginning of lease. And you’ll definitely consider your monthly lease payment. But what about the fees you may pay at the end of your lease?

Unlike other fees, the disposition fee isn’t typically paid before your lease starts or as part of the monthly payments. Instead, this fee, sometimes called a “turn-in fee,” gets charged at the end of the lease. The fee usually runs a few hundred dollars, and it offsets some of the costs associated with putting a used car back on the market, such as vehicle cleaning, inspection fees, storage fees and other administrative costs.

You’re not alone if the disposition fee feels like a “gotcha” fee to you. If you’re focused on upfront fees and monthly payments when you sign your lease contract, you may not realize that you’ll owe some money when your lease ends.

Do I have to pay the disposition fee?

The disposition fee should be noted in your lease contract. When you return your vehicle, the leasing company may deduct the disposition fee from any security deposit you may have paid at the beginning of your lease. If you didn’t pay a security deposit, you’ll have to come up with the cash to pay the fee out of pocket.

But there are ways you may be able to avoid paying this fee.

• You buy the car — In some cases, a leasing company may not charge the disposition fee if you buy the car at the end of the contract. After all, they’ll no longer have to recondition or otherwise ready the car for sale.
• You lease or buy another vehicle — Similarly, a dealer may be more willing to work with you if you plan to lease another vehicle from them or buy a new car from them. Keep that in mind as you decide what to do next.

Tips for leasing your next car

If you want to lease your next vehicle, here are some tips to help you navigate the process.

Understand your contract

A lease contract doesn’t just outline your monthly payments. It should note any fees, too. Some of the fees have confusing names like acquisition fees, money factor and capital cost reductions.

Take time to read and understand your contract before you sign it. If you don’t understand something in the contract, ask the salesperson, but do your own research as well.

Focus on the whole cost of the lease, not just the monthly payment

Leasing will usually give you a lower monthly payment than if you take out an auto loan to buy a similar car, but with a lease you won’t build any equity or ownership. And a low monthly payment may sound like a good idea, but the monthly cost of leasing doesn’t cover everything. Consider both your upfront costs and your lease-end costs when negotiating your lease.

You may be able to negotiate the following parts of your deal:

• Capitalized cost: This is the cost of your car, sometimes also known as the cap cost, and you’ll want it to be as low as possible.
• Rent charge/money factor: This translates to your interest rate, so you’ll want to know your credit scores and current interest rates to figure out if you’re getting a reasonable deal based on your situation.
• Mileage allowance: Most lease contracts include limits on the number of miles you can drive, often 12,000 to 15,000 miles. You’ll usually have to pay a small fee for every extra mile you drive. But these fees can add up for road warriors, so it may be wise to negotiate this on the front end if you think you’ll go over your mileage limit.

Keep the car in good repair

You may be assessed a fee if the car has excessive wear and tear when you turn it in at lease-end. To avoid this charge, change your oil on time and keep up with the required maintenance schedule. You may also want to have your car detailed before you turn it in.

Examples of excessive wear and tear include a dented car body, broken glass or missing car parts.

Bottom line

If you’re nearing the end of your lease, review your lease agreement to see if you’ll be on the hook for a disposition fee. If you are, talk to your dealer about any options for a fee waiver and see if any of them make sense for you.