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Lease Glossary A - K | L - Z
updated 11-23-01
The definitions found here are meant to give you a better understanding of terms used in vehicle leasing. The terms may be used differently in different situations, and their exact definition under federal law may differ from that under state law. Please refer to the Federal Reserve Board's Regulation M and the Consumer Leasing Act, for more information about federal requirements for lease disclosures and terms.
If your lease has a different payment period (for example, bi-weekly or annual), you may substitute that period in the definitions. Also, the definitions generally are applicable to both single-payment and multiple-payment leases.
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.
Actuarial method
See Constant yield method - below
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 vehicle insurance policy. (see insurance tips)
The amount capitalized at the beginning of the lease, equal to the gross capitalized cost minus the capitalized cost reduction. This amount is sometimes referred to as the net cap cost. (see simple lease checklist)
Ad valorem tax
See Personal property tax - next page
Amortized amounts
Amounts such as taxes, fees, charges for service contracts, payments for insurance, and any prior credit or lease balance that are included in the gross capitalized cost and are paid as part of the base monthly payment.
Amount due at lease signing or delivery
The total of any capitalized cost reduction, monthly payments paid at signing, security deposit, title and registration fees, and other amounts due before you take delivery of the vehicle.
The annualized cost of credit expressed as a percentage in a finance agreement. In a lease, there is no annual percentage rate or equivalent rate.
Arranger
See Broker - below
A third party that buys a lease agreement from a lessor. You become obligated to the assignee, and the assignee generally assumes the responsibilities of the lessor, although some obligations may remain with the lessor. An assignee may be a lessor for purposes of Regulation M when the assignee has substantial involvement in the lease.
Assignment
The sale of a lease agreement and transfer of the ownership rights for the leased vehicle from the lessor to an assignee. Many leases are assigned at the time the lease is signed.
Assignor
A lessor that sells the lease agreement and transfers the ownership rights for the leased vehicle to an assignee.
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.
An entity that arranges for the sale or lease of vehicles through another party.
Business lease
A lease of personal property to (1) an individual to be used primarily for business, commercial, or agricultural purposes or (2) an organization, such as a partnership, corporation, or government agency. The Consumer Leasing Act and Regulation M do not apply to business leases.
Shortened term for either gross capitalized cost or adjusted capitalized cost, both required disclosures under federal law. Some states require that the term "capitalized cost" be used in state lease disclosures. See Gross capitalized cost or Adjusted capitalized cost.
Capitalized cost reduction (cap cost reduction)
The sum of any down payment, net trade-in allowance, and rebate used to reduce the gross capitalized cost. The cap cost reduction is subtracted from the gross cap cost to get the adjusted cap cost. (see the simple lease checklist)
Captive finance company
A finance company related to a particular automobile manufacturer or distributor.
Closed-end lease ("walk-away" lease)
A lease in which you are not responsible for the difference if the actual value of the vehicle at the scheduled end of the lease is less than the residual value, but you may be responsible for excess wear and excess mileage charges and for other lease requirements. Distinguish from 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 and with a total contractual obligation of no more than $25,000. A lease meeting all of these criteria is covered by the Consumer Leasing Act (next) and Federal Reserve Board's Regulation M. If any one of these criteria is not met, for example, if the leased property is used primarily for business purposes or if the total contractual obligation exceeds $25,000, the Consumer Leasing Act and Regulation M do not apply. See Total contractual obligation.
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. See Consumer lease above.
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.
A business entity to whom you (lessee) owe a debt.
A type of life insurance that helps repay the loan if the consumer becomes disabled. It is optional coverage. When taken out, the cost of the policy is sometimes rolled into the loan principal amount.
See Documentation fee. - below
Dealer incentives
Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.
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.
Dealer invoice
The amount that a dealer is invoiced by the manufacturer for a vehicle and any options.
Default
Your failure to meet one or more conditions of your lease agreement. Default may result in early termination of the lease.
Depreciation and any amortized amounts
Total amount charged to cover the vehicle's projected decline in value through normal use during the lease term and other items that are paid for over the lease term. It is calculated as the difference between the adjusted capitalized cost and the vehicle's residual value. This amount is a major part of your base monthly payment.
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 (see Segregated disclosures). Other required disclosures appear elsewhere in the lease documents (see Nonsegregated disclosures).
Disposition fee or disposal fee
A fee often charged by a lessor or assignee to defray the cost of preparing and selling the vehicle at the end of the lease if the vehicle is not purchased and is returned to the lessor or assignee.
A fee to cover the cost of preparing lease documents charged by some dealerships (sometimes called a dealer doc fee) or other lessors. (complete nonsense, another way for the dealer to squeeze you))
Down payment
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.)
Ending of the lease before the scheduled termination date for any reason. The reason may be voluntary or involuntary (for example, the vehicle is returned early, stolen, or totaled, or you default on the lease). In most cases of early termination, you must pay an early termination charge.
Early termination charge
The amount you owe if your lease ends before its scheduled termination date, calculated as described in your lease agreement. The earlier your lease is terminated, the greater this charge is likely to be. The charge is generally the difference between the early termination payoff and the amount credited to you for the vehicle. Suppose, for example, that your early termination payoff amount is $18,000 and the amount credited for the vehicle is $14,000. The early termination charge would be $18,000 minus $14,000, or $4,000 in this case.
Early termination payoff (early termination balance or gross payoff)
The total amount you owe if your lease is terminated before the scheduled end of the term before subtracting the value credited to you for the vehicle. The payoff is calculated as described in your lease agreement. The early termination payoff may include the unpaid lease balance and other charges.
Equal Credit Opportunity Act
A federal law that prohibits discrimination in credit transactions on the basis of race, color, religion, national origin, sex, marital status, age, source of income, or the exercise of any right under the Consumer Credit Protection Act.
Equity
In an installment sale or loan, the positive difference between the trade-in or market value of your vehicle and the loan payoff amount. When the loan is paid off, the equity is the market value of the vehicle.
A charge by the lessor or assignee for miles driven in excess of the maximum specified in the lease agreement. The excess mileage charge is usually between $0.10 and $0.25 per mile. Suppose, for example, that your lease specifies a maximum of 36,000 miles and a charge of $0.15 per mile over the maximum. If you drive 37,000 miles, the excess mileage charge will be $0.15 x 1,000, or $150. Open-end leases typically do not include an excess mileage charge.
Excessive wear-and-tear charge
Amount charged by a lessor or assignee to cover wear and tear on a leased vehicle 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.
Excessive wear-and-tear coverage
A plan that you may purchase that covers some or all of the charges for excessive wear and tear defined under the lease agreement. The coverage of these plans varies in the amounts and types of charges covered. Most plans deny coverage at early termination or if you are in default. Generally, these plans do not cover excess mileage.
Excessive wear-and-use charge
Sum of excess mileage charge and excess wear and tear charge.
Extended warranty
See Service contract. - page 2
The amount that a willing buyer would pay to a willing seller to purchase certain property at a particular point in time.
Fair market value purchase option
Your right to purchase the vehicle 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 (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 vehicle at scheduled termination for a fixed price specified in your lease agreement.
Full maintenance lease
A lease in which the lessor or assignee (third party) assumes responsibility for all manufacturer-recommended maintenance and service on the vehicle. 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.
In the event a leased vehicle is stolen or totaled, the difference between the early termination payoff amount, not including any past-due amounts, and the amount for which the vehicle is insured before the insurance deductible and any other policy deductions are subtracted. The definition of gap amount may vary in different states or in different lease agreements.
Gap coverage (guaranteed auto protection, or GAP)
A plan that provides you financial protection in case your leased vehicle 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 (gross cap cost)
The agreed-upon value of the vehicle, which generally may be negotiated, plus any items you agree to pay for over the lease term (amortized amounts), such as taxes, fees, service contracts, insurance, and any prior credit or lease balance.
see Dealer Holdback (a must read if you are seriously considering buying)
Amounts rebated or credited, or special programs offered to encourage the lease of certain vehicles. (see rebates and incentives).
Independent leasing company
A leasing company that offers leases directly to consumers and businesses and is generally not affiliated with a particular automobile manufacturer.
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 vehicle 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.
