Mileage Allowance

Meaning and Definition

Mileage allowance, also known as mileage limit or mileage cap, refers to the maximum number of miles a lessee (individual or business) is allowed to drive a leased vehicle without incurring additional charges. It is a predetermined limit agreed upon in the lease agreement between the lessor (leasing company) and the lessee. The mileage allowance helps protect the vehicle's residual value and accounts for the wear and tear associated with excessive mileage.

Why it is important to know

Understanding the concept of mileage allowance is crucial for individuals considering leasing as a car finance option. The mileage allowance determines the number of miles the lessee can drive within the lease term without facing excess mileage charges. It is important for lessees to estimate their expected annual mileage accurately and select a mileage allowance that aligns with their driving habits. Exceeding the mileage allowance can result in additional fees at the end of the lease term.

Example in car finance

Suppose a lessee enters into a lease agreement for a car with a mileage allowance of 10,000 miles per year and a lease term of three years. This means that over the three-year lease term, the lessee can drive up to a total of 30,000 miles without incurring excess mileage charges. If the lessee drives 35,000 miles by the end of the lease term, they will have exceeded the mileage allowance by 5,000 miles. In this case, the lessor may impose additional charges for the excess mileage, typically calculated on a per-mile basis.