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Frequently Asked Questions
At the beginning of the lease

1. Am I paying interest as part of my lease payments?

Lease payments include rent charges, which are similar to interest or finance charges on a loan or credit agreement.

2. How are rent charges calculated?

Rent charges are calculated at the beginning of the lease based on the capitalized cost, the residual value, and the lease term. Most lessors use a money factor to calculate rent charges.

3. Why doesn't my lease show a lease rate or interest rate?

There is no federal requirement for lessors to disclose a lease rate or to show the rent charge as a percentage rate. There is also no mandatory federal formula for calculating a lease rate. Standardizing the lease rate calculation would be extremely complex. It would also involve use of certain estimates that can vary among lessors. Because of certain limitations, a lease rate is not a reliable measure of the total lease cost.

The lease agreement will disclose the dollar amount of the rent charge--an amount included in your base monthly payment in addition to the depreciation and any amortized amounts. This charge is similar to interest or the finance charge on a loan.

4. Why do leases have mileage limitations and purchases do not?

Leases include a mileage limit because the residual value is based on the expected mileage. Driving more miles often reduces the value of the vehicle. Generally, excess mileage charges are the way lessors recover the expected decrease in value from the additional use. When you purchase a vehicle, if you drive more miles than you expect, you will not owe an excess mileage charge, but the vehicle will probably be worth less when you trade or sell it.

5. What is the mileage I may drive?

Most leases limit the number of miles you may drive before you are charged for additional mileage (often an average of 12,000 or 15,000 miles per year). The mileage allowed in your lease are stated in the lease agreement.

6. Can I purchase additional mileage if I intend to drive more?

Yes. When negotiating your lease, you generally can negotiate a higher (or lower) mileage limit. In the case of a higher mileage limit, the residual value will be reduced to reflect the higher mileage, and your monthly payment will be higher. It often costs less for you to negotiate a higher mileage limit at the beginning of the lease (which increases your monthly payment) than to pay for excess miles at the end. Increasing your mileage limit and your monthly payment can reduce or eliminate large (and often unbudgeted) end-of-term expenses. Increasing your mileage limit also should reduce the total rent charge because the average lease balance is reduced. During the lease, if you find that you are driving more miles than the authorized mileage, you may want to contact the lessor to see if the lessor will allow you to revise the lease to permit higher mileage.

7. If I don't use all my allowed mileage, will I get a refund for the unused portion?

If you purchase more than 15,000 miles per year, some lessors will refund unused miles. However, you will not get a refund for unused miles unless your lease states that the lessor will refund unused miles.

8. How do I decide if I should pay a capitalized cost reduction (down payment)?

A capitalized cost reduction is the sum of any cash down payment, trade-in allowance, and rebate. It is subtracted from the gross capitalized cost, leaving the adjusted capitalized cost. The attraction of paying a capitalized cost reduction is that it reduces your monthly payment. A capitalized cost reduction reduces your monthly payment in two ways. First, it reduces the amount of depreciation and any amortized amounts that you pay as part of your monthly payment. Second, it reduces the total rent charge by lowering the beginning lease balance (the adjusted capitalized cost), thereby reducing the average lease balance over the term. However, once you have paid a capitalized cost reduction, the money is nonrefundable.

9. Do rebates and incentives apply to leases?

Some rebates and incentives may apply to leases. Rebates and incentives may be offered by a manufacturer, dealer, lessor, or assignee and may be paid to you separately or credited to your lease agreement.

10. Why do I have to pay a dealer preparation fee if I'm already paying an acquisition/administrative fee?

The two fees cover different items. Some dealerships charge a dealer preparation fee to cover the expenses of preparing a vehicle for lease. The dealer may be reimbursed by the manufacturer for this expense. The acquisition fee may also be called an administrative fee, a bank 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. It is a charge included in most lease transactions that is either paid up front or is included in the gross capitalized cost.

11. If I am paying a security deposit, why must I also pay an acquisition, or administrative, fee?

The security deposit is generally 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. The acquisition, or administrative, fee usually offsets 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.

12. Who is responsible for insuring the vehicle?

In most leases, you are responsible for purchasing and maintaining vehicle insurance throughout the term of the lease. Your lease agreement will list the insurance requirements. When you sign the lease agreement, you will be required to show proof of insurance coverage, including the names of the insurance company and agent, insurance amounts, coverage dates, and policy number.

13. Is insurance coverage different for a leased vehicle?

The type of insurance coverage and the insurance rates generally are not different for leased and purchased vehicles. But the lessor may require a higher amount of insurance than you normally carry. For example, the following types of insurance are typically required:

  • Collision insurance, usually with a maximum deductible of $500 or $1,000
  • Comprehensive fire and theft insurance, usually with a maximum deductible of $500 to $1,000
  • Liability insurance, with coverage requirements of $100,000/$300,000/$50,000 ($100,000 of bodily injury insurance for the injuries of one person, up to $300,000 for two or more persons per accident, and up to $50,000 for property damage).

Note: The maximum deductible amounts and the minimum coverage limits are designated in the lease agreement, but you may choose to have lower deductibles or buy more coverage if you wish.

14. If I lease a used car, does it come with a warranty?

It depends. Used cars may continue the manufacturer's warranty from when they were new cars. (For example, if you lease a 2-year-old vehicle that had a 3-year warranty when it was new, you may still have 1 year left on that warranty, assuming any mileage limit on the warranty was not exceeded.) Some used cars carry warranties from the lessor rather than from the manufacturer. Some states may have laws that provide warranty rights.

15. What should I do if the dealership notifies me that my lease was rejected and wants more money?

In general, a lease agreement is binding if it is signed by both you and the dealership without any contingencies. However, even then, if noted in the lease agreement, the lease may be contingent on the dealership's ability to assign the lease to a third party. If the dealership did not sign the lease, or if the lease is contingent on acceptance by a third party, and you are concerned that your lease will not be accepted, you may want to wait until the agreement has been approved before transferring the title for a trade-in and driving off with the newly leased vehicle (because the dealer may have the right to sell your vehicle once you have transferred the title).

First return to the dealership or leasing company and learn the details. The contract may be enforceable even if the dealership was unable to assign it. Ask to see the notice of denial and ask about the reasons you were turned down. Do you need to pay a larger capitalized cost reduction? Are there other leasing companies that might approve your lease? If you are not able to find another leasing company to approve the lease, and if you are not willing to pay additional money, then you will need to cancel the agreement, get a refund of any amounts paid at lease signing, and take back any vehicle you traded (if you have not unconditionally sold the trade-in to the dealer).

16. Is there a time period (such as 3 days) during which I may cancel my lease agreement?

No, generally not. However, if you signed the contract at home or at your place of work, you may have a 3-day right to cancel under federal law. You may also have rights to cancel (rescind) under your state law; check with your state's attorney general's office.

17. Do I get copies of all the many papers I sign at the dealership or leasing company?

Under federal law, you must receive a copy of your federal lease disclosures, like the Sample Leasing Form. State laws determine whether you get copies of all the other documents that you sign. However, you should ask for copies regardless of the state law.

18. Should the lease agreement match the buyer's order?

A buyer's order (used when the leased vehicle is being ordered rather than taken "off the lot") generally describes the vehicle and includes some of the costs and terms of the lease. However, the final costs and terms of the lease may be influenced by other information not available at the time the order is placed. The lease agreement may include some other costs and terms but should not directly conflict with the buyer's order.

During the lease

19. May I have my lease payments electronically sent from my bank account?

Most lessors will allow you to make payments in this manner.

20. If I am transferred to another state, may I take my vehicle with me?

Some lessors, particularly those operating regionally, prohibit lessees from permanently moving the leased vehicle to another state. In most lease agreements, if you have the right to move out of state, you must notify the lessor that you have moved and must be sure that the vehicle is properly titled and registered in the new state. If you move, you should be aware that the new state may tax your vehicle in a different manner. Some states collect certain taxes at the beginning of the lease; other states collect these taxes during the term of the lease.

21. May I take my vehicle to another country?

Most lessors limit the lessee's right to take the vehicle out of the country. However, there may be exceptions for vacation use to visit Canada for a maximum period, such as 30 days. Retirees, others who maintain residences in two different states, Canadians who spend their winters in the United States, and members of the military should be especially careful about terms in their lease agreements that pertain to taking the vehicle to another country.

22. Can I terminate my lease early?

Your right to terminate your lease early is defined in your lease agreement. You may have to pay a substantial charge if you end the lease early. The charge may be up to several thousand dollars. The actual charge will depend on when the lease is terminated. The earlier you end the lease, the greater this charge is likely to be. Lessors are permitted reasonable charges at early termination.

23. How is the early termination charge calculated?

The charge is generally the difference between the early termination payoff amount and the amount credited to you for the vehicle. The early termination payoff may include the unpaid lease balance and other charges.

24. What happens if my vehicle is stolen or totaled in an accident?

Generally, these events qualify as early termination of the lease (although some leases allow the lessor to substitute a similar vehicle to complete the original lease). Some leases include gap coverage at no additional charge, which covers some or all of the gap amount that you may owe at early termination after a casualty loss. The gap amount is the difference between the early termination payoff, not including any past-due amounts, and the amount of actual insurance coverage before the deductible and any other policy deductions are subtracted. If your lease does not include gap coverage (without an additional charge), you may be able to purchase gap coverage from the lessor or another third party at the beginning of the lease.

25. What happens to my lease if I become disabled and no longer want the vehicle?

Your lease remains in effect. Talk with your lessor to see what your options are.

26. What happens if I die during the lease term?

Generally, this event qualifies as a default. Your lease terminates early, and your estate is held responsible for any early termination charge. Some lessors may allow your spouse or another party to assume the lease.

27. Is it possible to transfer my lease to another party that is not on the lease?

Lessors have different policies on lease transfers. Lease transfers are usually done by leaving your lease in place and allowing someone else to use the car and make payments (called subleasing) or by having someone else take over your lease (called an assumption). Generally, if the lessor permits subleasing or an assumption, the sublessee or assuming lessee will have to meet the same credit standards that you met. You will remain responsible for fulfilling the lease terms, including all payments, so it is important to find a responsible person to take over your lease. In some states, it is illegal to sublease vehicles. If the lessor does not agree to a sublease or an assumption, then you may not transfer the lease.

Some subleasing businesses offer, for a fee, to find someone to assume the lease or sublease the vehicle. They may or may not do so. These companies may advise you not to inform the lessor "so they can't turn you down." However, the vehicle may be subleased to an unqualified party, or the vehicle and the subleasing company may disappear, leaving the lessee responsible for the missing vehicle. You may want to check with your local consumer protection agency about any subleasing company you are considering.

28. If I have temporary financial difficulties, what can be done? Can I extend my lease beyond the lease term for a month or two?

Lessors have different policies on lessee financial problems. Some lessors let you skip a payment or extend the lease. The lease depreciation and monthly payment may increase, or you may be charged a fee because the vehicle will be older and will have more mileage, which will increase the lease depreciation. If you arrange to skip a payment or extend the lease, ask to get the terms in writing.

29. Who is responsible for paying for maintenance?

Lease agreements generally require you to follow all manufacturer maintenance requirements. Typically, you pay separately for vehicle maintenance.

30. What do I do if I receive notification of a recall on my leased vehicle?

Most leases require you to respond to the recall notice and have the repair made by the manufacturer's representative. Not responding to the recall may affect your warranty coverage or the excessive wear-and-tear charges at the end of the lease.

31. Does the lemon law apply to my leased vehicle?

The lemon law may apply, depending on the state in which you leased the vehicle. You need to check with your state's attorney general's office or office of consumer protection about state laws that apply.

32. How do I renew the registration for the vehicle?

You usually must pay for all annual state and local government fees required to register the leased vehicle and operate it. Either the state or the lessor will mail you the registration renewal application, just as if you owned the vehicle. You then renew the registration for the vehicle in the usual way.

33. Am I developing equity in my leased vehicle?

In most cases you are not. However, if at the end of the lease, the market value of the vehicle is more than the residual value stated in your lease (that is, if the actual depreciation was less than the depreciation stated in your lease), there may be equity in the vehicle. You don't receive this equity if you return it at the end of the lease. However, you may be able to acquire this equity in two ways:

  • Exercise your purchase option
  • Negotiate the vehicle's value and the transfer of your purchase option to a dealer or other third party you choose.

34. What do I do if I have a problem with my lease? Who can I turn to?

Your first step should be to talk with the dealership or leasing company directly. If you still have a problem, your next step would be to talk with staff in your state's Division of Motor Vehicles or your state's attorney general's office. 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. If your lessor is a bank, you can contact the bank's regulator. If your lessor is not a bank (for example, if it is a captive finance company or an independent leasing firm), you can contact the Federal Trade Commission.

At the end of the lease

35. At the end of the lease term, can I turn in the vehicle at a dealership other than the one from which I took delivery?

Lessors have a range of different policies on the return of leased vehicles at the end of the term. If the lessor or assignee permits you to return the vehicle to the originating dealership or leasing company, then upon request, you may be able to return the vehicle to any dealership affiliated with that lessor. However, you may be required to return the vehicle to a specific location; check your lease agreement for details.

36. What is considered "normal wear and tear"?

Any wear to the vehicle that is not defined as excessive is considered normal. Your lessor's standard for excessive wear and tear is stated in the lease agreement. Examples of excess wear and tear include

  • Broken or missing parts
  • Dented or damaged body panels or trim
  • Cuts, tears, burns, or permanent stains in the fabric or carpet
  • Excessively worn tires
  • Cracked or broken glass
  • Poor-quality repairs.

In addition to being responsible for excessive wear and tear, you are generally responsible for all scheduled maintenance and servicing, including oil changes.

37. What should I do to find out whether I will be charged for excessive wear and tear on my vehicle?

Some lessors require you or permit you to have the vehicle inspected for excessive wear and tear before the scheduled termination date. This procedure gives you notice of any expected excessive wear charges.

38. How long will it take to get my security deposit back?

Lessors have a range of different policies on the return of security deposits. Generally, the lessor will wait until you have paid (1) all amounts due under the lease (including any end-of-term costs), (2) any taxes due, such as personal property taxes, and (3) any other government fees, such as parking tickets before returning your security deposit. Once these obligations are paid, any remainder of your refundable security deposit should be returned within a few weeks.

39. If the replacement vehicle I have ordered is not available when my lease ends, may I continue leasing my current vehicle?

Many lessors will allow you to extend the lease while waiting for a replacement vehicle. Generally, the lease extension is done on a month-to-month basis. Find out how the lease extension will affect your end-of-lease costs. If the extension is for more than 6 months, you should receive a new set of Consumer Leasing Act disclosures.

Next topic: Checking your knowledge: A quiz on vehicle leasing

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Last update: May 5, 2003