October 25, 2021
When fleets lease their vehicles instead of owning them, they need to be aware of excessive mileage charges. Because a vehicle depreciates overtime, leasing companies charge this fee to protect themselves from financial loss. Learn more about excessive mileage charges and how to avoid them.
Excessive mileage charges occur when the mileage limit of a leased vehicle is reached.
Typically, the contract for the leased vehicle includes a total mileage limit upfront. If the vehicle's mileage exceeds the limit specified at the end of the lease or hire period, the leasing company will charge a mileage fee. Usually, the lender will charge based on a specified rate per mile over the limit.
There are limits due to vehicle depreciation. While all vehicles depreciate as they accumulate miles, it’s owners who inherit the risk of a lower vehicle resale value down the road. With the average fleet vehicle racking up anywhere between 11,000 and 70,000 miles per year, most fleets will see their total fleet value depreciate substantially over time. This makes it challenging to sell a used vehicle in the future.
Many leasing companies will sell a vehicle after a lease ends, so they are incentivized to keep mileage as low as possible. Thus, they include annual mileage or even lease-long mileage limits with steep excess mileage charges for depreciating their car more than expected. This is how the leasing company protects itself from financial loss.
Penalties for excess miles can add up quickly. Here are some ways to avoid accumulating these fees.
Some leasing companies opt to write their lease contracts without agreed mileage limits. Instead, they use an actual usage model. This is where the lessee only pays for the number of miles incurred during a lease term.
A high mileage lease is a lease agreement that has a higher mileage allowance than a standard lease. Typically, the lease payment is much higher for these vehicles to accommodate for the depreciation.
While fleet managers don’t need to keep an eye on the odometer as much, they could also be overpaying if the vehicle never comes close to the mileage limit. The closer drivers get to the mileage limit with high-mileage vehicles, the more their business will save. Fleet managers should estimate how much they may go over a standard lease’s mileage limits. If it’s only by a few hundred miles, it may make more financial sense to pay for the extra miles instead of the more expensive high mileage payments.
Most of the time, a buyout of the leased vehicle won’t result in having to pay the excess mileage fee. This is because the lessee is purchasing the vehicle at its residual value, or the amount the car is expected to be worth at the end of the contract. The lessee gets to keep the vehicle and avoids the mileage fee.
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