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Indiana Department of Financial Institutions

DFI > Education > Education Information > Credit Information > Auto Credit / Leasing > Auto Leasing Auto Leasing

The Leasing Question

Leasing became popular when businesses wanted to operate automobile fleets while avoiding the high cost of ownership and maintenance. When individual leasing developed, consumers were faced with a new market question: to lease or not to lease.

Automobile leasing is not a simple matter. Cars lose value or depreciate over time. When you lease a car for two years, you are paying for two years of depreciation in monthly payments plus interest. At the end of the lease, the automobile can be either sold to you or someone else for its value at that point. When you lease, you pay to drive someone else's vehicle. There is no ownership or equity, you simply pay for the use of the automobile. The manufacturer's warranty covers most repairs but all maintenance costs and insurance are your responsibility.

See Web Site: Is Leasing Right for You?

See Interactive Calculator: Should I lease or purchase?

Regulation M from the Federal Reserve Board, effective January 1, 1998, requires disclosure by leasing companies of specific information and provides consumers with a description in writing of the lease's financial details. A model disclosure form is available. The stated purpose of the new Regulation M is to allow consumers to compare one lease with another for the same vehicle and to compare leasing a vehicle with buying it on credit. However, the disclosure requirements do not apply to lease transactions over $25,000.

Leasing Terms

  • Balloon Payment. A large final payment due at the end of a lease. (Allows a lower monthly payment.
  • Capitalized Cost (Cap Cost). The base price on which a dealer will agree to lease a vehicle.
  • Capitalized Cost Reduction. A cash (or trade) down payment the leasing customer makes to reduce the base leasing price (Cap Cost).
  • Dealer Cost (Invoice Price). The cost of the vehicle to the dealer as invoiced by the manufacturer.
  • Lease Term. The length of a lease, usually specified in months.
  • Leasing Fees. Title, lease application, license, security, documentation fees, etc.
  • Lessee. The consumer.
  • Lessor. The company that owns the automobile.
  • Gross Capitalized Cost. The price of the car for leasing purposes.
  • Guaranteed Auto Protection (GAP). Coverage protecting the amount between what you owe on the lease and the amount covered by insurance in the event your leased vehicle is stolen or destroyed.
  • Manufacturer's Suggested Retail Price (MSRP). A price set by the car manufacturers which, by law, must be posted on a window sticker.
  • Mileage Allowance. The amount of maximum mileage you can put on the car during the lease term. There will be charge per mile for miles driven over the allowance.
  • Money Factor. T his figure, also known as the lease factor, lease rate, or monthly lease fee, is the interest rate built into all leases. It is leasing's version of the annual percentage rate of interest (APR) that is charged to people who buy on credit. Leasing companies do not usually disclose the money factor except when competing with other lessors.
  • Monthly Lease Payment. An amount which amortizes the difference in a car's value when it's new and when it's turned back to the dealer. This is calculated as Cap Cost minus Residual Value. A finance charge (money factor) and possibly state sales taxes will be included in the monthly lease payment.
  • Open-end Lease. You make scheduled monthly payments but a balloon payment is due at the end of the lease term.
  • Payment Amount. An amount paid by the lessee that may include interest, overhead and profit.
  • Residual Value. The automobile's value at the end of the lease. Also known as guaranteed future value or lease-end value. It is often expressed as a percentage of the Manufacturers Suggested Retail Price (MSRP). The higher the residual value, the less depreciation you pay. The residual value may be a negotiable figure. To determine it, many dealers consult a publication called Automotive Leasing Guide, a useful tool for predicting future value.

Advantages To Leasing

  • The monthly payment is lower than when buying a car. In some cases there is no down payment at all.
  • Leasing puts the driver in a new car every two or three years. For some consumers, this is an important lifestyle consideration. Leasing also allows consumers to drive a more expensive vehicle than they can afford to buy.
  • Leasing is easier since negotiating over the price is downplayed. But remember, you can still negotiate the terms of a lease.
  • Vehicles are subject to wear as they age. A lease allows consumers to side-step the issue. By the time the car usually needs expensive repairs, the lease will have ended.
  • There is no hassle with a trade-in at the end of the lease.
  • Current tax law considers many of the expenses of a lease car used for business to be tax deductible.

Disadvantages Of Leasing

  • When the lease ends, you have built up no equity in a vehicle. You have nothing to trade in on a new car, so you will probably lease again.
  • If a lease runs longer than the vehicle's warranty, the lessee may have to pay for repairs that would have been covered.
  • In most cases, leasing is more expensive than buying on credit.
  • Maintenance requirements for leased vehicles are strict if the lessee hopes to avoid end-of-lease charges. A lessee should honor the manufacturer's recommended maintenance schedules and should have written receipts to prove that service was performed as required.
  • Early termination of a lease may result in substantial charges to the lessee.

Steps In Automobile Leasing

Know the important questions to ask before you lease a car. There are major differences between buying and leasing. However, the first steps in leasing are the same as those in buying a car.

Collect Information

  • select the model you are interested in and record the identifying data
  • at the dealership, negotiate a fair price for the car and get a price commitment on your trade-in
  • ask the salesperson to have the agreement written up as a lease

Negotiate the Gross Capitalized Cost

Try to negotiate a gross capitalized cost somewhere between the MSRP and the dealer invoice price. The lower the cap cost, the better deal for the consumer. If the gross capitalized cost is too high, tell the salesperson to cut items that increase the total cost. If the salesperson claims that capitalized cost is a fixed figure and can't be lowered, find another salesperson. Use the required disclosure form as a worksheet. On the form, compare the agreed upon value of the vehicle with the gross capitalized cost to see what charges have been added.

The law of supply and demand affects leasing as well as buying. If car sales are breaking records and the model you want to lease is a hot seller, expect to pay more. If the opposite is true and car sales are sluggish, bargain for a capitalized cost that represents a discount from the MSRP.

Filled in Disclosure Form

Ask the salesperson to fill in the disclosure form-front and back and give you the figures. Be sure that you check the box near the middle of the front page in order to get a step-by-step calculation of the monthly payment. At this time, lessors are not required to provide data on the money factor used to calculate the equivalent of the annual percentage rate of interest (APR) charged on vehicle loans.

Review the Disclosure Form

Review the disclosure form and ask for explanations of any items you do not understand. Make sure that the trade-in allowance reduces the gross capitalized cost. In the past, a common leasing complaint was that consumers were not given credit for the trade-in. To prevent this, scrutinize the line on the disclosure form titled capitalized cost reduction. The total amount should include rebates, cash down payment, and trade-in allowance. If you have paid a deposit, make sure you get credit for it.

Take the Lease Home and Study it

Once the lease is written, instead of signing on the spot, ask for an exact photocopy to take home and study. Given the importance of the document, the obscurity of its terms, and its legally binding status, a quick decision is not smart. If possible, avoid giving a deposit at this stage since there is no deal until you sign the lease.

Compare the Figures

At home, compare the figures on the lease with those on your disclosure form. Look for unexplained changes. Use your calculator to check the math. Verify the accuracy of the most important figures: lease term, gross capitalized cost, capitalized cost reduction, residual value, and rent charge.

A short-term lease, up to 24 months, means larger payments and more money spent for depreciation. A longer lease, up to 48 months, should have smaller payments, but may be less flexible. Experts recommend a lease length that coincides with the length of the vehicle's warranty.

End-Of-Lease Costs And Other Considerations

When you buy an automobile, the hard bargaining and stressful confrontations often come at the beginning of the deal. In contrast, leasing is quite simple at the onset but potentially complicated at the end. When you turn the car in, problems may develop. They can be avoided by reading the fine print, sentence by sentence, before you sign. Some of the important items to look for are:

  • Gap Insurance. If the lease car is totaled or stolen, your auto insurance may cover replacement but not the payments still required. Gap insurance covers the difference between the replacement value of the car and what is still owed on the lease. It is expensive to purchase separately. Ask if it is included without charge to the lessee.
  • Excess Wear and Tear. At the end of the lease, if the car has visible damage, the consumer will probably be charged to repair it. To protect yourself, get a copy of the written guidelines or checklist issued by leasing companies. Of course, the longer the lease, the more likelihood of an excess wear charge. Some leasing companies have made the marketing decision to downplay minor dings, scratches, and upholstery stains. If no damages are assessed, the security deposit will be mailed to you shortly after the automobile is returned.
  • Excess Mileage. The yearly mileage limit should exceed your normal driving needs. If it does not, find out the charge for additional miles. Try to negotiate a more favorable rate for added miles at the outset.
  • Lower Mileage. Driving too little can also saddle you with unnecessary costs. Since you do not get a credit for the value of the unused miles, you would be giving the lending company what amounts to a windfall when it resold the vehicle.
  • Disposition Fees. This end-of-lease charge covers costs associated with picking up and processing the returned car are for sale. Some leasing companies do not charge a disposition fee or an acquisition fee, but instead include the costs in the monthly payment. Also, some dealers will absorb the fee if the customer is planning to sign another lease.
  • Purchase Option. Many leases include the chance to buy the automobile at the end of the lease. The disclosure sheet should tell you if the purchase price is pre-determined or negotiated at the end of the contract. In cases where the residual value has been boosted to a very high level, do not pay more than market price for a car. When examining the contract, see if there is a purchase option fee.
  • Early Termination and Default. You may incur significant penalties if you break the lease. For example, you may be required to pay 100% of all the remaining payments. A detailed explanation of early termination fees is required by the disclosure form. Although some leases can be broken with less penalty than others, early terminations are a big cause of disputes.

REMEMBER —LEASING A CAR IS DIFFERENT FROM BUYING A CAR — WHEN YOU BUY, YOU'RE THE OWNER. YOU PAY FOR THE CAR, YOU KEEP THE CAR. WHEN YOU LEASE, YOU PAY TO DRIVE A CAR OWNED BY SOMEONE ELSE. AT THE END OF THE LEASE, YOU GIVE IT BACK OR IN SOME AGREEMENTS, YOU CAN BUY THE CAR.

Model Closed-End Or Net Vehicle Lease Disclosure Forms

Federal Consumer Leasing Act Disclosures Date ______

Amount Due at Lease Signing or Delivery

(Itemized below)*

$____

Monthly Payments

Your first monthly payment of $____ is due on ______, followed by ______ payments of $____due on the ______ of each month.

The total of your monthly payments is $____

Other Charges (not part of your monthly payment)

Disposition fee (If you do not purchase the vehicle) $____
Total $____

Total of Payments

(The amount you will have paid by the end of the lease) $____

Lessor(s) ________ Lessee(s) ________

*Itemization of Amount Due at Lease Signing or Delivery

Amount Due at Lease Signing or Delivery How the Amount Due at Lease Signing or Delivery will be paid:

Capitalized cost reduction $____ Net trade-in allowance $____

First monthly payment ______ Rebates and non-cash credits ______

Refundable security deposit ______ Amount to be paid in cash ______

Title fees ______ ______ ______

Registration fees ______ ______ ______

Total $_____ Total $____

Your monthly payment is determined as shown below:

Gross capitalized cost. The agreed upon value of the vehicle ($______ )
and any items you pay over the lease term (such as service contracts, insurance, and any outstanding prior creditor lease balance)

$____

If you want an itemization of this amount, please check this box.. [ ]
Capitalized cost reduction. The amount of any net trade-in allowance, rebate, non-cash credit, or cash you pay that reduces the gross capitalized.cost -____
Adjusted capitalized cost. The amount used in calculating your base monthly payment =____
Residual value. The value of the vehicle at the end of the lease used in calculating your base monthly payment -____
Depreciation and any amortized amounts. The amount charged for the vehicle's decline in value through normal use and for other items paid over the lease term =____
Rent charge. The amount charged in addition to the depreciation and any amortized amounts +____
Total base monthly payments. The depreciation and any amortized amounts plus the rent charge =____
Lease term. The number of months in your lease /____
Base monthly payment =____
Monthly sales/use tax

+____

______

+____

Total monthly payment = $____
Early Termination. You may have to pay a substantial charge if you end this 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.
Excessive Wear and Use. You may be charged for excessive wear based on our standards for normal use [and for mileage in excess of ____ miles per year at the rate of ____ per mile].

Purchase Option at End of Lease Term. [You have an option to purchase the vehicle at the end of the lease term for $____ and for a purchase option fee of $____.] [You do not have an option to purchase the vehicle at the end of the lease term.]

Other Important Terms. See your lease documents for additional information on early termination, purchase options and maintenance responsibilities, warranties, late and default charges, insurance, and any security interest, if applicable.

Model Closed-end or Net Vehicle Lease Disclosures. Page 2 of 2

[The following provisions are the non-segregated disclosures required under Regulation M.]

Description of Leased Property

Year Make Model Body Style Vehicle ID #

Official Fees and Taxes. The total amount you will pay for official and license fees, registration, title, and taxes over the term of your lease, whether included with your monthly payments or assessed otherwise: $____. The total amount you will pay for official and license fees, registration, title, and taxes over the term of your lease, whether included with your monthly payments or assessed otherwise: $____.

Insurance. The following types and amounts of insurance will be acquired in connection with this lease: The following types and amounts of insurance will be acquired in connection with this lease:______ We (lessor) will provide the insurance coverage quoted above for a total premium cost of $____.

______ You (lessee) agree to provide insurance coverage in the amount and types indicated above.

Standard Wear and Use. The following standards are applicable for determining unreasonable or excessive wear and use of the leased vehicle: The following standards are applicable for determining unreasonable or excessive wear and use of the leased vehicle: ______.

Maintenance..

(You are responsible for the following maintenance and servicing of the leased vehicle: ______].

[We are responsible for the following maintenance and servicing of the leased vehicle: ______].

Warranties.

The leased vehicle is subject to the following express warranties: ______.

Early Termination and Default. (a) You may terminate this lease before the end of the lease term under the following conditions: (a) You may terminate this lease before the end of the lease term under the following conditions: ______.

The charge for such early termination is: ______.

(b) We may terminate this lease before the end of the lease term under the following conditions: ______.

Upon such termination we shall be entitled to the following charge(s) for: ______

(c) To the extend these charges take into account the value of the vehicle at termination, if you disagree with the value we assign to the vehicle, you may obtain at your own expense, from an independent third party agreeable to both of us, a professional appraisal of the ________ value of the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value.

Security interest. We reserve a security interest of the following type in the property listed below to secure performance of your obligation under this lease: We reserve a security interest of the following type in the property listed below to secure performance of your obligation under this lease: ______.

Late Payments. The charge for late payments is: ______.

Option to Purchase Leased Property Prior to the End of the Lease. [You have an option to purchase the leased vehicle prior to the end of the term. The price will be [$____ /[the method of determining the price]. [You do not have an option to purchase the leased vehicle.] [You have an option to purchase the leased vehicle prior to the end of the term. The price will be [$____/[the method of determining the price]. [You do not have an option to purchase the leased vehicle.]

View Consumer Lease Statutes.

Auto Leasing Brochure

Links to Other World Wide Web Sites on Leasing

See Web Sites:

See Federal Reserve Board's Web Site on Leasing

Interactive Auto Calculator: Should I lease or purchase?

Other Lease Web Sites:

Leasing has become the choice of millions of drivers. Is it for you?

Note: The links on this page that go to web sites outside of this agency's control are provided as a convenience only. The Department takes no responsibility for their content.