Mileage Charge

Definition

The term mileage charge is usually associated with automobile leases or car rentals.  These are the per mile fees imposed when a vehicle is driven beyond the miles allowed in the lease or rental agreement.

Calculation

Mileage Charge = (Miles Driven - Miles Allowed) x Per Mile Charge

Explanation

The monthly payment on an automobile lease is determined by the capitalized cost of the car, its residual value at the end of the lease, and prevailing interest rates.  When a car is driven miles in excess of the mileage estimate used for the residual value calculation, the car is very likely to be worth less at the end of the lease term.

The mileage charge, also known as the excess mileage charge, compensates the leasing company for the excess wear and tear on the car beyond the estimate used in the calculation of residual value.  Typically, a lease allows the driver 10,000 to 15,000 miles each year.  The number of excess miles is determined by subtracting the total allowed mileage over the term of the lease from the actual mileage on the car's odometer.  Mileage charges will vary with the value of the car leased.  Cars with a higher retail price will have higher excess mileage charges.

The term mileage charge is sometimes mistakenly associated with mileage reimbursement rates, which are published by the IRS.

Example

Sally's 24 month car lease allowed her to drive 12,000 miles annually before an excess mileage charge of $0.20 per mile applied.  At the end of the lease, Sally had driven the car 30,000 miles.  The excess mileage charge would be:

= (30,000 - 24,000) x $0.20
= 6,000 x $0.20, or $1,200

Related Terms

residual value, closed end lease, capitalized cost