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Board of Governors of the Federal Reserve System
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Keys to Vehicle Leasing


The definitions in this glossary are meant to give you, the consumer, a general understanding of terms used in vehicle leasing. They are not legal definitions, but they generally assume compliance with applicable legal requirements. 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 Federal Reserve Board Regulation M and the Consumer Leasing Act for more information about federal requirements for lease disclosures and terms. This glossary does not cover credit transactions, even those that have similarities to leasing.

Some of the definitions refer to monthly payments. If your lease has a different payment period (for example, biweekly or yearly), you may substitute that period in the definitions. Also, the definitions generally are applicable to both single-payment and multiple-payment leases.


Acquisition fee

A charge included in most lease transactions that either is paid up front or is included in the gross capitalized cost; may be called a bank fee, an administrative fee, or an assignment fee. This fee usually covers a variety of administrative or insurance costs. These may include the costs of obtaining a credit report, verifying insurance coverage, checking the accuracy and completeness of the lease documentation, entering the lease in data processing and accounting systems, and purchasing insurance for or reserving funds for residual-value losses, gap-coverage losses, and other lease losses. Without an acquisition fee, lessors have to charge higher rental charges.
Actuarial method
See Constant Yield method.
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.
Adjusted capitalized cost (adjusted cap cost)
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.
Ad valorem tax
See Personal property tax.
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.
APR (annual percentage rate)
The annualized cost of credit expressed as a percentage; used in finance agreements. An annual percentage rate, or an equivalent rate, is not used in leasing agreements.
See Broker.
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. For purposes of Regulation M, an assignee may be a lessor when the assignee has substantial involvement in the lease.
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.
A lessor that sells the lease agreement and transfers the ownership rights for the leased vehicle to an assignee.
Base monthly payment
The portion of the monthly payment that covers depreciation, any amortized amounts, and rent charges; 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.
Broker (or Arranger)
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.
Capitalized cost
Shortened term for either gross capitalized cost or adjusted capitalized cost. Disclosure of both types of costs is required under federal law. Some states require that the term "capitalized cost" be used in state lease disclosures. See Gross capitalized cost and 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.
Captive finance company
A finance company related to a particular automobile manufacturer or distributor.
Closed-end lease (or 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 (though you may be responsible for excessive 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 these criteria is covered by the Consumer Leasing Act and Federal Reserve Board 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.
Consumer Leasing Act
A 1976 amendment to the federal 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.
Constant Yield method (or Actuarial method)
The method of earning rent charges whereby the rent charge 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 lease term (this method is the way the lender earns interest in most first mortgages).
Generally, the time at which you and the lessor sign the lease agreement.
Dealer documentation fee
See Documentation fee.
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.
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 of (1) amount charged to cover the vehicle's projected decline in value through normal use during the lease term and (2) other items that are paid for over the lease term; 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.
Information on the financial terms 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 must appear elsewhere in the lease documents (see Nonsegregated disclosures).
Disposition fee (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 you do not purchase the vehicle but instead return it to the lessor or assignee.
Documentation fee
A fee charged by some dealerships (who may call it a dealer documentation fee) or other lessors to cover the cost of preparing lease documents.
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.
Early termination
Ending of the lease before the scheduled termination date for any reason, voluntary or involuntary (for example, you return the vehicle early or default on the lease, or the vehicle is stolen or totaled). 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 $16,000 and the amount credited for the vehicle is $14,000. The early termination charge would be $16,000 minus $14,000, or $2,000.
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 the value credited to you for the vehicle is subtracted. The early termination payoff is calculated as described in your lease agreement. It 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.
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.
Excess mileage charge
A charge by the lessor or assignee for miles driven in excess of the maximum specified in the lease agreement. The excess mileage charge 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 you may purchase that covers some or all of the charges for excessive wear and tear defined in the lease agreement. The coverage of these plans varies in the amounts and types of charges covered. Most plans deny coverage if the lease is terminated early or if you are in default. Generally, these plans do not cover excess mileage.
Excessive wear-and-use charge
Sum of the excess mileage charge and the excessive wear-and-tear charge.
Extended warranty
See Service contract.
Fair market value
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 a leased vehicle at scheduled termination in accordance with the terms specified in your lease agreement for a price determined by referring to a readily available guide to used-car values or 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 fees, title fees, 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 a leased vehicle 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 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.
Gap amount
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 the monthly payments until the lessor receives the insurance proceeds.
Gross capitalized cost (gross cap cost)
The agreed-upon value of the vehicle at the time you lease it, 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.
Amounts rebated or credited, or special programs offered to encourage the leasing of certain vehicles.
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.
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, a payment made after any grace period triggers a late charge.
A contract between a lessor and a lessee for the use of a vehicle 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 calculated according to a standard method 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 1 month at a time. There may be a charge for extending the lease. If the extension continues beyond 6 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, which 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 disclosure of the lease rate calculated according to the state's definition of the lease rate.
Lease term
The period of time for which a lease agreement is written.
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.
The party to whom the vehicle 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.
A person or organization that regularly leases, offers to lease, or arranges for the lease of a vehicle. See Assignee and Broker.
Care for the vehicle 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 vehicle maintenance and servicing. Distinguish from Service contract.
Maintenance lease
A lease agreement in which some or all of the vehicle 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 leasing forms with explanations of the disclosures.
Money factor (or Lease factor)
A number, often given as a decimal, used by some lessors or assignees to determine the rent charge portion of your monthly payment. This number is not a lease rate and cannot be converted to a lease rate by moving the decimal point.
Monthly payment
This term may refer to one of two required federal disclosures. See Base monthly payment and Total monthly payment.
Monthly sales/use taxes
The state and local taxes that you must pay monthly when you lease a vehicle. These payments, if any, are added to your base monthly payment and paid as part of your total monthly payment.
Manufacturer's suggested retail price, sometimes called the sticker price.
Net capitalized cost
See Adjusted capitalized cost.
Nonsegregated disclosures
Disclosures required by Federal Reserve Board Regulation M that may be presented in any order and may appear anywhere in the lease documents except with the segregated disclosures. Page 2 of the sample leasing form shows these disclosures. See also Segregated disclosures.
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 that 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.
Option to purchase
See Purchase option.
See Early termination payoff.
Personal property tax (or Ad valorem tax)
A tax on personal property. State laws govern whether personal property taxes apply to a leased vehicle; your lease agreement governs whether you or the lessor or assignee will pay these taxes.
Prior credit balance (negative equity or negative trade-in balance)
The portion of the gross capitalized cost representing the amount due under a previous credit contract after the value of the vehicle traded in on the lease has been credited.
Prior lease balance
The portion of the gross capitalized cost representing the balance due under a previous lease agreement after the value of the previously leased vehicle has been credited.
Purchase option
Your right to buy the vehicle you have leased, before or at the end of the lease term, according to terms specified in the lease agreement. Your lease agreement may or may not include a purchase option.
Purchase-option fee
An amount, in addition to the purchase price, you may have to pay to exercise any purchase option in your lease agreement.
Realized value
(1) The amount received by the lessor or assignee for the leased vehicle at disposition, (2) the highest offer for the leased vehicle at disposition, or (3) the fair market value of the leased vehicle 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.
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.
The process of preparing a vehicle for resale or re-lease if you return it.
Reconditioning reserve
An amount 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 a vehicle and authorize its use on the public roadways.
Regulation M
The regulation issued by the Federal Reserve that implements the Consumer Leasing Act.
Rent or rent charge
The portion of your base monthly payment that is not depreciation or any amortized amounts. This charge is similar to interest on a loan.
Residual value
The end-of-term value of the vehicle established at the beginning of the lease and used in calculating your base monthly payment. 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.
Residual value guidebooks
Publications used, in part, by some lessors and assignees to establish vehicle residual values. Different guidebooks are more popular in different regions of the United States and with different lessors and assignees.
Sales/use taxes
Taxes assessed on leased and purchased vehicles. States differ in which 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
An amount you may be required to pay, usually at the beginning of the lease, that may be used by the lessor or assignee in the event of default or at the end of the lease to offset any amounts you owe under the lease agreement. Any remaining amount may be refunded to you.
Security interest
If stated in your lease agreement, a lessor's or assignee's legal right to your property (such as stocks or bonds) that secures payment of your obligation under the lease agreement.
Segregated disclosures
Disclosures required by Federal Reserve Board Regulation M that must be grouped together and separated from other information in the lease documents. The first page of the sample leasing form shows the disclosures that must be segregated. See also Nonsegregated disclosures.
Service contract (or Mechanical breakdown coverage or Extended warranty)
A contract you may purchase to cover such expenses as the repair or replacement of vehicle components and, in some cases, 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. The single, 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 vehicle'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.
Oral or written contractual transfer of your leased vehicle to another person. Such a transfer is usually prohibited without the lessor's or assignee's approval.
A program or plan in which certain items are subsidized by the manufacturer, the finance company, the lessor, or the assignee.
Termination fee
See Disposition fee (disposal fee).
Three-payment rule
See Open-end lease.
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, given 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, given 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.
Legal document that identifies the owner of the vehicle. The lessor or assignee, not you, holds title to the leased vehicle.
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.
The net value of your vehicle credited toward the purchase or lease of another vehicle. If you own the vehicle being traded in, you sell it to the dealer or lessor. If you are leasing the vehicle being traded in, you are turning in the vehicle (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 traded-in vehicle and any remaining balance on your agreement.
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 such factors as 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 such factors as dealership retail sales prices, other retail transactions, and regional demand.
Used-vehicle leasing
Leasing of previously driven (owned or leased) vehicles.
Walk-away lease
See Closed-end lease.
A guarantee that the vehicle will function and perform as specified. A warranty usually covers specified mechanical problems during a specified period of time or number of miles.
Last update: March 13, 2013

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