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Introduction

This file provides information about consumer leases and the protections established by the Consumer Leasing Act (CLA). Passed by Congress in 1976, the CLA requires the leasing company (the lessor) to disclose in writing specific information about a consumer lease before you (the lessee) sign the lease agreement. In a few situations, it also limits certain terms of the lease that lessors may require. The CLA covers vehicles leased: * for personal, family, or household use; * for periods exceeding four months; and * for total contractual obligations under $25,000.

This booklet also explains different types of vehicle lease plans and what to look for when considering a leasing contract. It provides information about costs and obligations that you and the leasing company may negotiate. At the end of this booklet, there are questions you might ask yourself or the company about leasing, as well as two checklists to help you compare the costs of leasing versus buying and the costs of different leasing contracts. [Due to formatting problems, we cannot provide the checklists on-line. However, you may request a free hard copy of the Guide, which includes the checklists, by contacting: Public Reference, Federal Trade Commission, Washington, DC 20580; (202) 326-2222; TDD: (202) 326-2502.]

If you decide to lease a vehicle, remember, the lease is an important legal document. Your rights and liabilities in connection with using and paying for the vehicle depend on the lease, so be sure you understand its terms before you sign. Whether you decide to lease or purchase the vehicle, be sure the contract you sign reflects that decision. Read it carefully before signing and be sure to obtain a copy of all contract papers you signed. Because many of the lease terms discussed in this booklet are negotiable, understanding what the terms are and how they relate to your own needs may help you negotiate a lease that is right for you.

Whether you decide to lease or buy, shop around first.

The various programs and financial arrangements offered by either option can vary as much as car models themselves.

What are the Differences Between Leasing and Buying

After selecting the vehicle you want, you have to decide whether you want to buy it with cash, buy it with credit, or lease it. You may wish to compare the advantages and disadvantages of leasing against those of buying a vehicle. Some of the many factors to consider are a comparison of initial costs and continuing costs, the costs that can be imposed at the end of the transaction and for early termination of the contract, the value you place on equity and ownership, and tax considerations.

Initial Costs

Usually your initial cash outlay when leasing a car is less that the initial amount (the down-payment) you might need to buy a car on credit. When leasing a car, the lessor may require you to put down a security deposit, the first and last periodic payment, and a "capitalized cost reduction." These costs are often negotiable.

Be sure to include in your consideration such additional initial expenses as insurance, sales tax, license fees, and other standard new-car charges, which apply whether you buy or lease. When leasing, such costs may be negotiated, with the lessor in some cases paying for some items.

Continuing Costs

To help you compare the continuing costs of leasing a car with the continuing costs of buying a car on credit, talk to your dealer, bank, or leasing company representative. Based on the car you select, the agent can show you how to calculate and compare continuing cost payments for each -- leasing and buying on credit. When you compare the two options, consider the total cost of buying on credit against the total cost of leasing. Also keep in mind an important difference: at the end of the lease you do not own the car.

You also will want to compare any difference in the monthly payments between leasing and buying on credit, and any special benefits the lessor might offer to make the deal more attractive, such as manufacturer rebates, free or low-cost insurance, repairs, or maintenance. You also can try to negotiate the costs of the lease with the lessor, asking that any agreements reached be included as special clauses in your lease.

End of Transaction Costs and Early Termination of the Contract

When you purchase a vehicle on credit, at the end of the loan term (and assuming you have made all payments as agreed) you own the vehicle and other charges are not generally required. In leasing, however, you may have to pay additional charges at the end of the lease, such as, fees for excess wear and tear, excess mileage, and disposition.

If you terminate the transaction early on a loan, you are liable for the outstanding balance on your contract, and you may have to pay a prepayment charge. Your contract will tell you whether a prepayment charge is required and also the method used to determine any remainder of your contract obligation.

In leases, however, you may be liable for a substantial early termination fee, as well as the outstanding contract balance. Your contract balance in a lease may be considerably higher than in a loan due to a smaller downpayment and the fact that at least part of the vehicle's value is included in the contract obligation even though you are not purchasing the car. The Consumer Leasing Act (CLA) limits early termination charges to "reasonable" amounts but lessors are permitted to consider several issues -- such as the actual harm caused by the termination -- in setting the amount. Review your contract carefully for information regarding early termination charges before you decide whether to lease or purchase.

Equity

Equity may be a persuasive factor for purchasing a car rather than leasing it. If you buy a car on credit, you are building equity as you pay off the loan principal. When you complete your car-loan payments, you own the car, although the value of the car will depreciate over time. If you sell the car before all the loan payments are completed (and assuming you meet the lender's requirements for such a sale), you will usually receive the amounts in excess of the loan balance, if you have paid the obligation as agreed. As indicated above, some lenders may, however, impose an additional charge for early payoff of the loan. However, when you lease a vehicle, you are, in effect, merely paying rent for the car's use, and the payments do not build up equity.

Tax Considerations

The amount of interest paid during the year for the purchase of a car is no longer deductible for individuals in most cases. For this reason, interest deductibility is no longer an issue when considering whether to purchase or lease a vehicle for personal use. However, if you use the vehicle for business purposes, you may have certain tax benefits regardless of whether you lease or buy. If taxes are a factor in your consideration, you may want to discuss leasing with your tax advisor.

What Kinds of Leases are Available

There are two types of lease contracts: the closed-end lease (sometimes called a "net" or "walk-away" lease) and the open-end lease (sometimes called a "finance" lease).

Closed-End Lease

Under a closed-end lease, you return your vehicle to the leasing company at the end of the lease term and "walk away." This means that you are not responsible for the value of the vehicle at the end of the lease term (but you may have to pay fees for damage to the vehicle or if you have driven more miles than the lease permits.) Because the lessor is taking the risk as to what the value of the car will be when you return it, your lease payments generally will be higher than they would be under an open-end lease.

Open-End Lease

In contrast to a closed-end lease, an open-end lease has comparatively lower periodic payments. But, in return for lower payments, you take the risk that, at the end of the lease, the vehicle will be worth an amount specified in the lease documents. This specified amount is sometimes called the "estimated residual value."

When you return the vehicle, the lessor will either sell or appraise it and compare the sale proceeds or the appraised value with the residual value stated in the lease. Under the Consumer Leasing Act (CLA), you have the right, at your expense, to obtain an independent appraisal by someone agreed to by both you and the lessor. If you get an independent appraisal, you and the lessor are bound to it.

If the appraised value of the car is the same as, or greater than, the residual value specified in the lease disclosure, you owe nothing. (Your contract will determine whether you get a refund for any excess value. You can ask the lessor to include the right to a refund in your contract.) On the other hand, if the appraisal indicates the vehicle is worth less than the specified amount, you may have to pay all or a portion of the difference. This cost is often called an "end-of-lease" payment.

You may be able to bargain for lower periodic payments if you agree to have a higher residual value put on the vehicle than what would otherwise be specified. However, setting a higher residual value increases your risk of having to make a large payment at the end of the lease. This is because, at the end of the lease, the car may be worth less than the residual value noted in the lease.

Under the CLA, the lessor, in most cases, cannot collect an end-of-lease payment that is more than three times the average monthly payment. However, the lessor can collect a higher amount after the lessor determines the car's end-of-lease value if:

* You agree to pay a greater amount;

* The vehicle has suffered unreasonable wear or excessive use; or

* The lessor wins a lawsuit seeking a higher amount. The payment limit does not cover other customary end-of-lease costs, and does not apply if the lease is terminated early. See pages 8 and 9 for an explanation.

What are the Initial Leasing Costs?

Federal law requires the lessor to disclose any up-front costs you have to pay before you sign the lease. At the time the lease is signed, the lessor may require you to pay a security deposit, the first and last periodic payment, and a "capitalized cost reduction."

Security Deposit

A security deposit for a vehicle is similar to a security deposit for an apartment. Its purpose is to make money available to the lessor in the event that you owe money at the end of the lease, or if you fail to pay during the term of the lease. Your security deposit could be used by the lessor to cover past-due payments, damage to the vehicle, excess mileage, or an end- of-lease payment. If you do not owe the lessor any money at the end of the lease, the lessor should return the entire security deposit to you. However, if your contract defines the security deposit as "nonrefundable," it will not be refunded unless you negotiate that provision with the lessor.

First and Last Lease Payments

The first payment is usually due at the beginning of the lease and sometimes the last payment also is required at that time. If your credit rating is good, lessors do not always require you to make the last payment at the beginning of the lease.

Capitalized Cost Reduction

Instead of making a "downpayment" as if you were buying car, you may wish to make an initial payment, often called a "capitalized cost reduction." The capitalized cost of the vehicle is basically the sales price plus taxes and additional lease charges. A "capitalized cost reduction" is a payment you make, similar to a downpayment, that reduces the value of the leased vehicle to be amortized (or spread) over the term of the lease. The advantage of making a capitalized cost reduction payment is that it lowers your periodic payments, over the lease term. However, if you make a high initial payment in order to reduce your periodic payments, you lose one important advantage of leasing -- lower initial cost. As an alternative to paying a capitalized cost reduction outright, the lessor may allow you to trade in a vehicle you own. If you choose to trade-in a vehicle, be sure that the full value of the trade-in is included in your contract. The CLA requires lessors to disclose the total dollar amount of any initial payment that you make, and to itemize the types of charges imposed in that total figure. If your contract does not also list the actual dollar amount of your trade-in, ask the dealer to show you the calculations that document that your trade-in has been fully included in your initial payment.

Sales Tax, Title, and License Fees

When you buy a car, you must pay sales tax, title, and license fees. When you lease a car, you also may have to pay these costs, or the lessor might agree to cover them. If you pay these costs, you can include them with your initial payment, or, if state law permits, you may be able to include them in your periodic payments. If you include sales tax, title, and license fees in your periodic payments, you will lower your initial cost, but increase your periodic payments. The CLA requires that the lessor give you a written disclosure of the specific amounts to be paid for sales tax, title, and licensing fees.

Insurance

The CLA requires that the lessor provide you with insurance information. If the lessor provides insurance, you must be told the type, amount of coverage, and its cost to you, if any. If the lessor does not provide insurance, you must be told the type and amount of insurance you must obtain to comply with the requirements of the lease.

What are the Continuing Lease Obligations?

In addition to the initial costs of leasing a car, the amount of the periodic payments and expenses associated with operating the vehicle are important considerations. You may be able to negotiate with the lessor the amount of your lease payments and in some cases, the responsibility for some ongoing expenses, such as repairs and maintenance.

Periodic Payments

The Consumer Leasing Act (CLA) requires the lessor to disclose the following information about your lease payments:

* The number of payments;

* The amount of each payment;

* The total amount of the payments; and

* The due dates or schedule of payments (for example, whether monthly or quarterly).

Most leases impose a penalty for late payments. The CLA requires the lessor to disclose to you, before you sign the contract, the amount of the late- payment charge or how it will be calculated.

Repairs and Maintenance

You may be required to pay for repairs and maintenance on your leased vehicle. Under the CLA, the lessor must disclose in writing who is responsible for repairs and maintenance on the vehicle. The lessor also must disclose the standards used to determine "wear and tear." Because "reasonable maintenance" and "reasonable wear and tear" are vague and because the definitions of these terms vary among lessors, be sure your contract is specific about these matters.

* Warranties. The CLA requires the lessor to disclose in writing whether the standard warranties are available from the manufacturer or whether additional warranties are provided by the leasing company. The vehicle manufacturer usually provides a warranty for new cars, so the coverage, requirements, and length of time will vary from manufacturer to manufacturer. You will be required to follow certain maintenance schedules established by the manufacturer to keep the warranty coverage. If the leasing company also offers a warranty on the car, you must follow the terms of that warranty as well.

Because the duration of the warranty may differ from the duration of the lease, many lessors offer service contracts, which are often called extended service plans.

* Extended Service Plans. Lessors often sell extended service plans (ESPs) that provide repair and maintenance coverage. They offer many kinds of ESPs, which vary in amount and length of coverage. Some ESPs cover repairs only for specific major systems of a car, such as the cooling system; others offer comprehensive protection covering the entire workings of the car, maintenance, and items such as towing or emergency service.

Read the warranty and the ESP to compare their coverage with your maintenance responsibilities under the lease and warranty. Be sure that you know whether the ESP will fulfill those responsibilities. Otherwise, you might have unexpected expenses when meeting your maintenance obligations.

What are the End-of-Lease Considerations?

In addition to knowing your initial and continuing leasing costs, you should understand the factors that affect your final costs. These may include an excess mileage charge, default penalties, an end-of-lease payment on an open-end lease, an excessive wear charge, and a disposition charge. Such costs are addressed in this section.

Final Costs

* Excessive Mileage Charge. Closed-end lease contracts usually will have mileage allowances or limitations. If you exceed the mileage limit in the lease contract, you may have to pay an additional charge when your lease expires. For example, some lessors currently charge $.10-.15 per mile, if you exceed a limit of 15,000 miles annually. Therefore, you may want to negotiate a mileage allowance that covers the number of miles you think you will drive the car.

In open-end lease contracts, any excess mileage normally will be reflected in the final appraised value of the car. A separate excess mileage charge generally will be imposed only if the estimated value of the lease exceeds the end-of-lease value ("realized" value) by more than three times the average monthly payment.

Here is some other information you might want to know about mileage charges:

-- If you are considering a lease where you have either early termination or purchase options, ask how the mileage allowance will be handled if you exercise either option. Generally, you should not have to pay an excess mileage charge in either case.

-- If you do not use the car for all the miles allowed in the lease, you probably will not get a refund.

-- If you buy the vehicle at the end of a closed-end lease, you should not have to pay for excess wear.

-- If your end-of-lease payment is solely an excess mileage charge or an excess wear charge, the CLA's payment limit does not apply.

* Default Charges. The lease also must specify the costs and charges you will have to pay if you do not make your payments as required or otherwise default on your lease obligations. Default charges that lessors commonly impose include the immediate payment of all your remaining obligations and your payment of the lessor's fees and costs to reclaim the vehicle. You also may lose your security deposit if you fail to pay what you owe.

* End-of-Lease Payment. Under an open-end lease, the lessor will sell or appraise the vehicle when you return it and compare the sale proceeds or appraised value with the vehicle's estimated residual value stated in your lease. If the appraised value or sale amount indicates the vehicle is worth less than the amount stated in your lease, you may have to pay all or a portion of the difference. With a closed-end lease, there is no end-of-lease payment based on an appraisal or sale. However, in the event of early termination or default, a closed-end lease usually has liability provisions similar to these for an open-end lease, discussed above.

* Excessive Wear Charge. Your lease probably will contain a clause making you responsible for any damage greater than reasonable wear on the vehicle. You may be liable for this charge even if you terminate the lease early. While you may think your vehicle has incurred only average wear and tear, your lessor may seek to impose a charge for bald tires, nicks in the windshield, dents or scratches in the paint, and interior damage to the vehicle. Disputes over this charge may be minimized if your contract contains specific language regarding vehicle repair and maintenance requirements. You also may want to retain copies of your receipts for repairs and maintenance to demonstrate your good care of the vehicle.

* Disposition Charge. Some lessors also require you to pay the costs of preparing the vehicle for sale. These costs may include cleaning, tune-up, final maintenance on the vehicle, and storage fees.

Option Rights

* Purchase Option. Sometimes a lease will give you the right to buy the vehicle you have leased. If the lease gives you the option to purchase at the end of the lease term, the CLA requires the lessor to disclose the purchase price before a lease is signed.

If you want a purchase option, be sure to negotiate it with the leasing company before you sign the lease. The lessor has no obligation to sell you the vehicle if your lease does not have a purchase option clause. If the lessor is willing to sell you the vehicle even though your lease did not contain a purchase option, the sale will be a totally new transaction that you must negotiate at the end of the lease.

* Right to Extend or Renew. In some instances you may want to extend the term of the lease. Your lease may contain an option to extend, or you may be able to negotiate an extension at the end of the original lease term.

If you think you might want to extend (continue the lease on a month-to- month basis), you should consider negotiating that term into the original lease. Some lessors may be willing to reduce your costs if your contract contains an extension option. If the lease is extended for more than six months, the lessor must give you all the required CLA disclosures again. Also, if you enter into a new lease for more than four months, the lessor must give you the CLA disclosures before you sign the new lease contract.

* Right to Early Termination. When you sign a lease, you have the right to use the vehicle and the obligation to make lease payments for the entire term of the lease. If the lease is for 48 months and you decide you want a different vehicle at the end of 36 months, your contract will determine whether you can terminate the lease early.

In many instances a lease will require you to keep a car for at least 12 months before you can exercise any right to terminate. In any event, early termination may require you to pay an extra charge or penalty, and this charge could be a substantial amount. Be aware that early termination of the lease may occur for certain "involuntary" events, such as theft or accidental damage to the vehicle. Before you sign the lease, the CLA requires the lessor to tell you under what circumstances you or the lessor can terminate the lease and to disclose the amount and method of determining the amount of early termination charges. Under the CLA, lessors may only impose early termination charges that are reasonable in light of the harm, difficulties or proof of loss, and inconvenience or infeasibility of obtaining an adequate remedy. However, because lessors may impose different charges based on this standard, be sure you understand all of the costs that may be imposed if you pay off the lease early.

Questions You Might Ask About Car Leasing

Here are some questions you might ask yourself or the leasing company:

What kinds of leases are available?

* Does the lessor offer both closed-end and open-end leases?

* If I have a choice, does a closed-end lease (higher payments/lower potential end-of-lease costs) or an open-end lease (lower payments/higher potential end-of-lease costs) fit my needs?

What are the initial leasing costs?

* How much will my total initial payment be? What does it cover?

* Is a capitalized cost reduction payment part of the initial cost? If so, how much will this payment lower my periodic payments?

* Is a security deposit required? Is it refundable, and, if so, under what conditions?

* Does the lease disclosure explain the insurance coverage, sales tax, title, and license fees?

What are the continuing lease obligations?

* Payments

-- How often must I make payments and how much will they be?

-- What is the total amount of all lease payments, including initial costs?

* Repair and Maintenance

-- Who is responsible for repairs and maintenance on the vehicle?

* Warranty and Extended Service Plans

-- If there is a warranty that covers the vehicle, what does it cover? How does the length of the warranty compare with the length of the lease? Is an extended service plan available? If so, what does it cost and what does it cover?

What are the end-of-lease considerations?

* Final Costs

-- What is the maximum amount I could be charged in an open-end lease if the vehicle is worth less than the residual value specified in the lease?

-- What is the charge if I exceed the mileage allowance? What is the mileage allowance?

-- What is the basis for an excessive wear charge?

What constitutes excessive wear?

-- What are the default charges?

-- What is the disposition charge?

* Early Termination Costs

-- Under what circumstances can I terminate the lease early ("voluntary termination")? Are there other circumstances under which I can be required to terminate the lease early ("involuntary termination")?

-- What are the total additional costs I may have to pay if I terminate the lease early?

* Option Rights

-- Does the lease contain an option to purchase the car at the end of the lease?

-- If I want to purchase the car at the end of my lease, what will it cost?

-- Can my lease be extended? What are the conditions and the costs of extending my lease? Will I gain any advantages by extending my lease?

For Further Information

For further information about vehicle leasing, talk to a dealer, bank, or a company involved with leasing. You also might contact your local Better Business Bureau or a trade association, such as the National Vehicle Leasing Assn, P.O. Box 34579, Los Angeles, CA 90034.

While the FTC cannot help resolve individual disputes, the agency can take action if there is evidence of a pattern of federal law violations, including deceptive or unfair practices. Write to: Correspondence Branch, Federal Trade Commission, Washington, DC 20580, or contact the FTC Regional Office nearest you.
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from material by the Federal Trade Commission in consultation with the Nat'l Vehicle Leasing Assn. Nov, 1994

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