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Glossary of Lease Terms
A B C
D E F G
H I J K
L M N O
P Q R S
T U V W
X Y Z
A
Acquisition fee
A charge included in most lease transactions that is either paid up
front or is included in the gross capitalized cost. It may be called a bank fee,
an administrative fee, or an assignment fee. This fee usually covers a variety
of administrative costs, such as the costs of obtaining a credit report,
verifying insurance coverage, checking the accuracy and completeness of the
lease documentation, and entering the lease in data processing and accounting
systems.
Additional insured
A party that is covered by another party's insurance policy. The lessor
typically requires you to name the lessor or assignee as an additional insured
under your auto insurance policy.
Adjusted capitalized cost / Adjusted cap cost
The amount capitalized at the beginning of the lease. It is the
negotiated sales price of the vehicle, plus fees or other included charges,
minus capitalized cost reductions such as rebates, trade-in allowances or cash
reductions, so it is equal to the gross capitalized cost minus the capitalized
cost reduction. This amount is sometimes referred to as the net cap cost.
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B
Base monthly payment
The portion of the monthly payment that covers depreciation, any
amortized amounts, and rent charges. It is calculated by adding the amount of
depreciation, any other amortized amounts, and rent charges and dividing the
total by the number of months in the lease. Monthly sales/use taxes and other
monthly fees are added to this base monthly payment to determine the total
monthly payment.
Balloon Loan
Also known as payment saver loan. It combines features of a lease and a
conventional auto loan. Payments can be as much as 30 percent less than a
conventional amortized loan, because a lease-like loan has a big balloon payment
at the end. Frequently requires no down payment or security deposit but all
taxes are to be paid up front. At the end of the term, the borrower may be
able to make a final payment (balloon payment) and keep the car or
refinance the amount owed, or return the car to the lender as payment for the
balance.
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C
Cap cost / Capitalized Cost /
Total capitalized cost
Short term for gross capitalized cost or adjusted / net capitalized
cost. Both are required disclosures under federal law.
Cap cost reduction / Capitalized cost reduction / Down payment
A deposit on the lease, which reduces the monthly lease payment. This is
like a down payment on a car that you finance with a loan. When you
subtract the cap cost reductions from the cap cost, you get the net cap
cost, also called the adjusted cap cost. In addition to cash reductions,
rebates by the manufacturer or the dealer and the net trade-in allowance
are also cap cost reductions.
Captive Finance Company
A leasing or finance company that is owned by or otherwise associated
with a particular vehicle manufacturer or distributor, for example GMAC,
Chrysler Financial or Ford Credit.
Closed-end Lease
A lease that allows the lessee to return the vehicle at the end of the
lease term with no further financial obligation, assuming that the lessee has
complied with all of the terms of the lease. The lessee may be responsible for a
disposition fee, if it is part of the lease agreement. There may be additional
charges according to the terms of the lease for any excess mileage or excess
wear. The lessee is not responsible for any difference between the residual
value, as stated in the lease, and the actual value of the vehicle at the end of
the lease as is the case with an Open-end Lease.
Consumer lease
A lease of personal property to an individual to be used primarily for
personal, family, or household purposes for a period of more than 4
months to as high as 72 months. A lease is covered by the Consumer
Leasing Act and the Federal Reserve Board's Regulation M.
Consumer Leasing Act
A 1976 amendment to the Truth in Lending Act that requires disclosure of
the cost and terms of consumer leases and also places substantive restrictions
on consumer leases.
Constant Yield Method (actuarial method)
The method of earning rent charges in which the rent charge earned each
month is proportional to the remaining lease balance. Under this method,
the lessor or assignee earns rent charges at an equal rate over the
term, similar to most home first mortgages.
Consummation
Generally, the time at which you and the lessor sign the lease
agreement.
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D
Dealer preparation fee
A fee charged by some dealers to cover the expenses of preparing a
vehicle for lease. The dealer may be reimbursed by the manufacturer for
this expense.
Default
Your failure to meet one or more conditions of your lease agreement.
Default may result in early termination of the lease.
Deposit
An initial cash payment in a lease that reduces the capitalized cost or
is applied to other amounts due at lease signing. See Capitalized cost
reduction.
Depreciation
The amount the vehicle declines in value over the term of the lease. The
depreciation may be calculated by subtracting the residual value from
the adjusted capitalized cost. Using this method, the depreciation
amount will also include any amounts that were added by agreement to the
price of the vehicle to arrive at the gross capitalized cost.
Disclosures
Information on the financial and other terms and conditions of a lease,
including information required by federal regulation (Regulation M) and
by state laws. Required disclosures must be made in writing before the
lease is consummated. Advertisements that include key lease terms (the
amount of any payment or a statement of payments due before consummation
or delivery) must also include certain disclosures. Under Regulation M,
certain disclosures must be grouped together and segregated from other
information. Other required disclosures appear elsewhere in the lease
documents.
Disposition Fee
The fee charged by the lessor if the lessee does not purchase the auto
at lease-end, for costs associated with preparing the auto or truck for
resale and selling the vehicle. The disposition fee must be disclosed in
the lease agreement.
Documentation fee
A fee to cover the cost of preparing lease documents charged by some
dealerships (sometimes called a dealer documentation fee) or other
lessors.
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E
Early Termination
Ending a lease before the scheduled termination date. The lessee will
typically be required to pay an early termination charge as described in
the lease agreement.
Early termination charge
If you end your lease before the end of term, you will be charged with
this fee, even if the vehicle is stolen or wrecked.
Equity
In an installment sale or loan, the positive difference between the
trade-in or market value of your auto and the loan payoff amount. When
the loan is paid off, the equity is the market value of the car.
Excess mileage charge
The fee charged for each mile in excess of the predetermined mileage
limit. This is part of the lease agreement. Charges vary and are based
on the vehicle. They can range from $0.10 to $0.25 per mile.
Excessive Wear and Tear Charge
Amount charged by a lessor or assignee to cover wear and tear on a
leased car beyond what is considered normal. The charge may cover both
interior and exterior damage, such as upholstery stains, body dents and
scrapes, and tire wear beyond the limits stated in the lease agreement.
Open-end leases typically do not include an excessive wear and use
charge.
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F
Fair market value purchase
option
Your right to purchase the auto at scheduled termination, according to
terms specified in your lease agreement for a price determined by
referring to a readily available guide to used car values or to another
independent source.
Federal Reserve Board
The federal agency with rule-writing authority for the Truth in Lending
Act, of which the Consumer Leasing Act is part; officially known as the
Board of Governors of the Federal Reserve System. The Board also
performs other functions related to U.S. monetary policy, financial
system stability, bank supervision and regulation, and the nation's
payments system.
Federal Trade Commission
The federal agency responsible for enforcing the Truth in Lending Act,
of which the Consumer Leasing Act is part, among leasing companies,
finance companies, lessors, and assignees not regulated by other federal
agencies. The Federal Trade Commission also performs other functions
related to its role of ensuring that the nation's markets function
competitively; enforcing other statutes affecting consumer financial
services; and enforcing the Federal Trade Commission Act, which
prohibits unfair or deceptive acts or practices.
Fees and taxes (or official fees and taxes)
The total amount you will pay for taxes, licenses, registration, title,
and official (governmental) fees over the term of your lease. Because
fees and taxes may change during the term of your lease, they may be
stated as estimates.
Fixed price purchase option
Your right to purchase the auto at scheduled termination for a fixed
price specified in your lease agreement.
Full maintenance lease
A lease in which the lessor or assignee assumes responsibility for all
manufacturer-recommended maintenance and service on the auto. The lease
may also cover additional mechanical repairs and servicing during the
term of the lease. The cost of this service usually is included in the
gross capitalized cost or is added to the base monthly payment.
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G
Gap insurance / Gap coverage
A plan that provides you financial protection in case your leased auto
is stolen or totaled in an accident. Some plans deny gap coverage if you
are in default at the time of the loss. There are two types of gap
coverage. One is a waiver by the lessor or assignee of the gap amount if
the vehicle is stolen or totaled. The other is a contract by a third
party to cover the gap amount. Under either type, you may remain
responsible for the insurance deductible, for other amounts deducted
from the insured amount of the vehicle by your insurance company, and
for any past-due or other amounts you owe under the lease. You may also
be responsible for your monthly payments until the lessor receives your
insurance proceeds.
Gross Capitalized Cost
The negotiated price of the vehicle, plus any other amounts you agree to
include in the capitalized cost, such as fees, insurance premiums,
service contract premiums or prior auto loan or lease payoff.
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H
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I
Incentives
Amounts rebated or credited, or special programs offered to encourage
the lease of certain cars.
Independent leasing company
A leasing company that offers leases directly to consumers and
businesses and is generally not affiliated with a particular automobile
manufacturer.
Insurance
A contract in which one party agrees to pay for another party's
financial loss resulting from a specified event (for example, a
collision, theft, or storm damage). Lease agreements generally require
that you maintain auto collision and comprehensive insurance as well as
liability insurance for bodily injury and property damage.
Insurance verification
The process of obtaining verbal or written confirmation of required
coverage from your insurance agent or company.
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J
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K
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L
Late charge
A fee charged for a past-due payment. This charge is usually either a
percentage of the lease payment or a fixed dollar amount.
Late payment
A payment received after the specified due date. In most cases, after
any grace period, a late payment triggers a late charge.
Lease
A contract between a lessor and a lessee for the use of an auto or other
property, subject to stated terms and limitations, for a specified
period and at a specified payment.
Lease balance (adjusted lease balance)
The unpaid portion of the adjusted capitalized cost of the lease. The
lease balance is reduced as you make your monthly payments, usually by
use of a standard methodology such as the constant yield (actuarial)
method. The lease balance is often a primary component of the early
termination payoff amount.
Lease charge
See Rent or rent charge.
Lease extension
Continuation of a lease agreement beyond the original term, often one
month at a time. There may be a charge for extending the lease. If the
extension continues beyond six months, new lease disclosures must be
provided.
Lease factor
See Money factor.
Lease payments
The number of payments in the lease agreement. Generally, the number of
payments and the number of months in the lease term are the same.
However, there are some leases in which the numbers may be different,
such as a single-payment lease that would disclose "1" as the number of
payments and may disclose "24 months" as the lease term.
Lease rate
A percentage used by some lessors or assignees to describe the rent
charge portion of your monthly payment. However, no federal standard
exists for calculating the lease rate. Any rates or factors used in
lease calculations do not have to be disclosed under federal law. If a
lease rate is given as a percentage in an advertisement or on any lease
form, the ad or form must also state, "This percentage may not measure
the overall cost of financing this lease." Some states may require lease
rate disclosure using the state's definition.
Lease term
The period of time covered by the lease agreement.
Lease-purchase contract
A purchase option at the end of a lease. You can buy the car at the
residual value.
Lemon laws
State laws that provide remedies to consumers for vehicles that
repeatedly fail to meet certain standards of quality and performance.
Lemon laws vary by state and may not cover leased vehicles.
Lessee
The party to whom the auto is leased. In a consumer lease, the lessee is
you, the consumer. The lessee is required to make payments and to meet
other obligations specified in the lease agreement.
Lessor / Leasing company
The legal owner of the property that is leased. Leasing companies can be
owned by manufacturers (also known as “captive finance companies” like
GMAC, Ford Motor Credit and Chrysler Financial), but they can also be
banks or other financial / lending institutions.
Luxury car tax
A federal excise tax assessed on vehicles with a gross vehicle weight of
less than 6,000 pounds and a value exceeding a threshold amount, which
is adjusted periodically for inflation.
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M
Maintenance
Care for the auto required by the lease agreement. Maintenance may
include manufacturer-recommended servicing and any repairs needed to
keep the vehicle in good operating condition.
Maintenance contract
A contract that you may purchase to cover some or all of the auto
maintenance and servicing. Distinguish from Service contract.
Maintenance lease
A lease agreement in which some or all of the auto maintenance and
servicing is the responsibility of the lessor or assignee.
Mechanical breakdown coverage
See Service contract.
Mileage allowance or mileage limitation
The fixed mileage limit for the lease term. If you exceed this limit,
you may have to pay an excess mileage charge.
Model lease forms
Sample disclosure forms developed by the Federal Reserve Board. You
should receive a similar form before becoming obligated on the lease.
View the sample model lease forms with explanations of the disclosures.
Money factor
The “interest rate” used by a leasing company. To convert it to an
annual percentage rate, multiply it by 2400. This conversion factor is
the same regardless of term or leasing company. For example a money
factor of .0042 corresponds to an annual interest rate of 10.08%. The
money factor should be comparable to the annual percentage rate of an
auto loan.
Monthly payment
This term may refer to one of two required federal disclosures. See Base
monthly payment and Total monthly payment.
Monthly sales/use tax
The state and local taxes that you must pay monthly when you lease an
auto. These payments, if any, are added to your base monthly payment and
paid as part of your total monthly payment.
MSRP / Sticker price
This is the full price for the automobile suggested by the manufacturer
and displayed on the window sticker, including options and most
accessories. Destination charges and dealer fees are not included in the
MSRP. You can usually negotiate the price if you ask and if you are
willing to haggle.
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N
Negative equity / negative
trade-in balance
The portion of the gross capitalized cost representing the amount due
under a previous credit contract after crediting the value of the auto
traded-in on the lease.
Net capitalized cost / Net cap cost
See adjusted capitalized cost.
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O
Open-end lease
A lease agreement in which the amount you owe at the end of the lease
term is based on the difference between the residual value of the leased
property and its realized value. Your lease agreement may provide for a
refund of any excess if the realized value is greater than the residual
value. In an open-end consumer lease, assuming you have met the mileage
and wear standards, the residual value is considered unreasonable if it
exceeds the realized value by more than 3 times the base monthly payment
(sometimes called the "three-payment rule"). If you believe the amount
owed at the end of the lease term is unreasonable and refuse to pay, the
lessor or assignee may attempt to prove that the residual value was
reasonable when it was set at the beginning of the lease. However, if
you cannot reach a settlement with the lessor or assignee, you cannot be
forced to pay the excess amount unless the lessor or assignee brings a
successful court action and pays your reasonable attorney's fees.
Distinguish from Closed-end lease.
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P
Personal property tax (or Ad valorem tax)
A tax on personal property. State laws govern whether personal property
taxes apply to a leased car; your lease agreement governs whether you or the
lessor or assignee will pay these taxes.
Purchase Option
The lessee's right to purchase the leased auto, either at the end of the
lease or during the lease term, as specified in the lease agreement. The lease
agreement may or may not include a purchase option.
Purchase Option Fee
A fee in addition to the purchase price that is required to exercise a
purchase option, according to the terms of the lease.
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Q
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R
Realized Value
The price received by the lessor or assignee for the leased auto at
disposition, (2) the highest offer for the leased auto at disposition, or (3)
the fair market value of the leased auto at termination. The realized value may
be either the wholesale or the retail value specified in the lease agreement.
Reasonableness standard
The requirement of the Consumer Leasing Act that charges for
delinquency, default, or early termination be reasonable in light of the
lessor's or assignee's (1) anticipated or actual harm caused by such
delinquency, default, or early termination; (2) difficulties in proving loss;
and (3) inconvenience in obtaining a remedy.
Rebate
An amount that may be offered by a manufacturer, dealer, lessor, or
assignee that may be paid to you separately or credited to your lease agreement.
Reconditioning
The process of preparing an auto for resale or re-lease if you return
it.
Reconditioning reserve
An amount that you may pay at the beginning of the lease that may be
used by the lessor or assignee to offset any amounts you may owe at the end of
the lease term for excessive wear and use and excess mileage. Any remaining
amount may be refunded to you.
Registration fee
A fee charged by a state motor vehicle department to register an auto
and authorize its use on the public roadways.
Regulation M
The regulation issued by the Federal Reserve Board that implements the
Consumer Leasing Act.
Rent or Rent Charge
The portion of the monthly lease payment that is in addition to the
depreciation and amortized amounts.
Residual value
Predicted value of the auto at the end of the lease term including a
certain mileage and normal wear and tear, established at the beginning of the
lease term. The residual value is deducted from the adjusted capitalized cost to
determine the depreciation and any amortized amounts. It is an estimate that may
be determined, in part, by using residual value guidebooks. The residual value
may be higher or lower than the realized value at the scheduled end of the
lease. The higher the residual value compared to the cap cost, the lower your
lease payments will be. Residuals fall most rapidly in the first 12 months, for
some cars 50% or more, and they fall less rapidly after 24 months. Therefore
short-term leases are more expensive than longer-term leases.
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S
Sales/use taxes
Sales/use taxes, which vary from state to state, are assessed on both
leased and purchased autos. There are often differences in what amounts are
taxed and when the taxes are assessed. In a lease, sales/use taxes may be
assessed on (1) the base monthly payment; (2) any capitalized cost reduction;
and (3) in a few states, the adjusted capitalized cost. In most states, the
sales/use tax on the base monthly payment is paid monthly; in some states,
however, the tax is due at lease inception. Sales/use taxes on the capitalized
cost reduction and the adjusted capitalized cost are usually due at lease
inception. If you exercise any purchase option, separate taxes may apply.
Security Deposit
A refundable deposit you may be required to pay at the beginning of the
lease, usually equal to one monthly payment, collected by the lessor at the
beginning of the lease to offset any amounts due under the term of the lease.
Any remaining amount may be refunded to you.
Service contract
Also known as mechanical breakdown protection or extended warranty. It
is a contract that you may purchase to cover expenses such as the repair or
replacement of vehicle components and that may pay for related services such as
towing or replacement rental cars. In most cases, service contracts do not cover
routine maintenance. Distinguish from Maintenance contract.
Single-payment lease
A lease that requires a single payment made in advance rather than
periodic payments made over the term of the lease. This lump-sum payment should
be less than the total amount you would pay were you to make periodic payments
over the term of the lease.
Standards for wear and use
Statements in the lease agreement defining what the lessor or assignee
means by normal wear and use and setting the requirements for the auto's
condition at the end of the lease. Standards may address such items as the
minimum amount of tread on the tires at the end of the lease or the type of
dents or scratches that are acceptable. These standards must be reasonable.
Sublease
Oral or written contractual transfer of your right to use the leased
auto to another person. Such a transfer is usually prohibited without the
lessor's or assignee's approval.
Subvented Lease
A lease subsidized by the manufacturer or other lessor. Many subvented
leases offer lower monthly payments by utilizing a higher residual value than
other lessors, or by offering a lower rent portion of the monthly payment.
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T
Termination fee
See Disposition fee or disposal fee.
Time value of money
The value derived from the use of money over time as a result of
investment and reinvestment. This term may refer to either present value or
future value calculations. The present value is the value today of an amount
that would exist in the future with a stated investment rate called the discount
rate. For example, with a 10% annual discount rate, the present value today of
$110 one year from now is $100. Future value is the value in the future of a
known amount today with a stated investment rate. For example, with a 10% annual
investment rate, the future value in one year of $100 today is $110. In either
case, the interest rate used reflects the lost opportunities for return from
alternative investments.
Title
Legal document that identifies the owner of the automobile. The lessor
or assignee, not you, holds title to the leased auto.
Total contractual obligation
The sum of the capitalized cost reduction, the total of base monthly
payments, and other charges due under the lease agreement. The total contractual
obligation excludes any security deposit as well as sales taxes and any other
fees and taxes paid to a third party. If the total contractual obligation
exceeds $25,000, the Consumer Leasing Act does not apply.
Total monthly payment
The base monthly payment plus monthly sales or use taxes and any other
monthly charges.
Total of payments
The sum of the periodic payments, the end-of-term disposition fee, any
other charges, and all amounts due at lease signing or delivery, minus
refundable amounts such as a security deposit, and any monthly payments included
in the amount due at lease signing or delivery.
Trade-in
The net value of your auto credited toward the purchase or lease of
another auto. If you own the auto being traded-in, you sell it to the dealer or
lessor. If you are leasing the auto being traded-in, you are turning in the auto
(either at the scheduled end of the lease or upon early termination) to the
dealer or lessor who has agreed to pay any remaining balance on your agreement.
The amount credited may be positive or negative, depending on the agreed-upon
value of the trade-in vehicle and any remaining balance on your agreement.
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U
Use tax
See Monthly sales/use tax.
Used car guidebooks
Publications that report current wholesale and/or retail prices of
vehicles. Wholesale values generally are determined from factors including auto
auction prices, other wholesale transactions, and regional demand. Prices are
listed according to year, make, model, options, mileage, and condition of the
vehicle. Retail prices are generally determined by factors including dealership
retail sales prices, other retail transactions, and regional demand.
Used-vehicle leasing
Leasing of previously owned or driven cars.
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V
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W
Walk-away lease
See Closed-end lease.
Warranty
A guarantee that the auto will function and perform as specified. A
warranty usually covers specified mechanical problems during a specified period
of time or number of miles.
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