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How is leasing different from buying? Is leasing different from buying? What are the upfront, and end-of-lease costs? How do you compare lease offers and negotiate lease terms? What is a residual? The answer to these questions and more can be found by reading on.
Under the Consumer Leasing Act, as implemented by Federal Reserve Regulation M, a vehicle lessor must provide you, the consumer, with certain information. Some of the information (called “segregated disclosures“) must appear on the lease form. Other information that you must be given (the “nonsegregated disclosures“) will not necessarily appear on a form or in one place in your lease.
Under the Federal Consumer Leasing Act, you have a right to information about the costs and terms of a vehicle lease. This information will help you compare lease offers and negotiate a lease that best fits your needs and budget.
This consumer guide is for a closed-end lease, the most common type of vehicle lease. With a closed-end lease, you may return the vehicle at the end of the lease term, pay any end-of-lease costs, and walk away (also termed a “walk away lease”). “Leasing language” gives definitions of terms associated with vehicle leasing.
Leasing is very different from buying.
IF YOU LEASE . . .
IF YOU BUY . . .
OWNERSHIP
You do not own the vehicle. You get to use it but must return it at the end of the lease unless you choose to buy it.
OWNERSHIP
You own the vehicle and get to keep it at the end of the financing term.
UP FRONT COSTS
Up-front costs include the first month’s payment, a refundable security deposit, a capitalized cost reduction (like a down payment), taxes, registration and other fees depending upon where you live.
UP FRONT COSTS
Up-front costs include the cash price or a down payment, taxes, registration and other fees depending upon where you live.
MONTHLY PAYMENTS
Monthly lease payments are usually lower than monthly loan payments because you are paying only for the vehicle’s depreciation during the lease term, plus rent charges (like interest), taxes, and fees.
MONTHLY PAYMENTS
Monthly loan payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and other finance charges, taxes, and fees.
EARLY TERMINATION
You are responsible for any early termination charges if you end the lease prematurely.
EARLY TERMINATION
You are responsible for any pay-off amount if you end the loan prematurely.
VEHICLE RETURN
You may return the vehicle at lease end, pay any end-of-lease costs, and “walk away.”
VEHICLE RETURN
You may have to sell or trade the vehicle when you decide you want a different vehicle.
FUTURE VALUE
The lessor has the risk of the future market value of the vehicle.
FUTURE VALUE
You have the risk of the vehicle’s market value when you trade or sell it.
MILEAGE
Most leases limit the number of miles you may drive (often 12,000-15,000 per year). You can negotiate a higher mileage limit and pay a higher monthly payment. In almost every case, you will have to pay additional charges for exceeding those limits if you return the vehicle.
MILEAGE
You may drive as many miles as you want, but higher mileage will lower the vehicle’s trade-in or resale value.
EXCESSIVE WEAR
Most leases limit wear to the vehicle during the lease term. You will have to pay extra charges for exceeding those limits if you return the vehicle.
EXCESSIVE WEAR
There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle’s trade-in or resale value.
END OF TERM
At the end of the lease (most are 2-4 years), you may have a new payment either to finance the purchase of the existing vehicle or to lease another vehicle.
END OF TERM
At the end of the loan term (most are 4-6 years some lasting as long as 8 years), you have no further loan payments. However, recent studies have confirmed that 74% of car buyers trade or otherwise sell the vehicle before paying off the loan.
The beginning and end-of-lease costs
At the beginning of the lease, you may have to pay your first monthly payment; a refundable security deposit or your last monthly payment depending upon the lessor; other fees for licenses, registration, and title; a capitalized cost reduction (like a down payment, see our checklist); an acquisition fee (also called a processing or assignment fee); freight or destination charges; and state or local taxes.
During the lease, you will have to pay your monthly payment; additional taxes not included in the payment such as sales, use, and personal property taxes; insurance premiums; ongoing maintenance costs; and any fees for late payment(s). You’ll also have to pay for safety and emissions inspections and any traffic tickets. If you end your lease early, you may have to pay substantial early termination charges.
At the end of the lease, if you don’t buy the vehicle, you may have to pay a disposition fee and charges for excess miles and excess wear.
You can compare different lease offers and negotiate some terms. Consider these. .
the agreed-upon value of the vehicle–a lower value can reduce your monthly payment (negotiate)
up-front payments, including the capitalized cost reduction, the length of the lease, the monthly lease payment, any end-of-lease fees and charges, the mileage allowed and per-mile charges for excess miles, the option to purchase either at lease end or earlier.
whether your lease includes “gap” coverage, which protects you if the vehicle is stolen or totaled in an accident.
Know your rights and responsibilities . . .
When you lease a vehicle, you have the right to use it for an agreed-upon number of months and miles, turn it in at lease end, pay any end-of-lease fees and charges, and “walk away”. Buy the vehicle if you have a purchase option take advantage of any warranties, recalls, or other services that apply to the vehicle.
You may be responsible for . . .
excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be.
excess wear charges when you return the vehicle. The standards for excess wear, such as for body damage or worn tires, are in your lease agreement.
substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be.
For more information . . .
Contact your dealer, manufacturer, leasing company, or financial institution for more information.
The Federal Consumer Leasing Act and some state laws may provide you with additional consumer rights not covered in your lease agreement. For information on these laws, contact your state’s consumer protection agency or Attorney General’s office. You also can contact:
Division of Consumer & Community Affairs Mail Stop 800 Federal Reserve BoardWashington, DC 20551
or Consumer Response Center Federal Trade Commission 6th and Pennsylvania Ave. N.W.Washington, DC 20580
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