Consumer Sourcebook

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Auto Leasing

Leasing has become a popular alternative to buying a vehicle, and can have some advantages over buying. You are not committed to a particular model of vehicle for more than a couple of years, and you don't have to worry about being stuck with a "lemon." Leasing a vehicle is not the same as renting a car for a short period of time, such as for two weeks while you are on vacation. Auto leases typically extend for two or three years.

Leases differ from traditional methods of financing a vehicle in significant ways. Motor vehicle leases may contain provisions imposing greater costs over the term of the lease than would be expected from owning the vehicle. For example, motor vehicle leases frequently contain early termination penalties, under which a consumer may be liable for large cash payments if she or he breaks (or defaults on) the lease prior to the full term. Most motor vehicle leases also contain mileage limitations, and may impose high charges for every mile the vehicle travels in excess of those limits. Financial considerations at the end of the lease may include a charge for excess wear and tear or a charge for the difference between a vehicle's fair market value at lease end and the value predicted for the vehicle when the lease started. Consumers must understand all potential costs associated with a lease to accurately evaluate whether a lease is really a better deal than conventional financing.

The type of information that must be given in a lease for many kinds of consumer products, including vehicles, is regulated by federal law through the Consumer Leasing Act. Regulation M issued by the Federal Reserve Board under the Consumer Leasing Act details the precise language to be used in consumer leases and in advertisements about consumer leases. New Hampshire's Motor Vehicle Leasing Act, RSA 361-D requires several additional disclosures in common motor vehicle leases.

The Law

The Consumer Leasing Act applies to personal property leased by a consumer for personal, household or family (not business) use for a period of more than four months.

Items such as cars and trucks would be covered. A business which offers vehicles for lease must give a written statement to the consumer, before the lease is signed, containing the following information:

• A description of the vehicle being leased
• Whether a security deposit is required
• The amount due at lease signing or delivery (such as a security deposit), if any
• The payment schedule and dollar amount of the periodic payments
• Any other charges that are not part of the monthly payment
• The total of all the payments (in other words, the amount that will have been paid by the end of the lease)
• The payment calculation including the gross capitalized cost (you can ask to have this itemized), capitalized cost reduction, adjusted capitalized cost, residual value, depreciation and any amortized amounts, rent charge, total of base periodic payments, number of lease payments, base periodic payments, itemization of other charges, and total periodic payment
• An early termination notice, and disclosure of any early termination or default charges
• The residual value of the vehicle
• A statement of who is responsible for routine maintenance, and the wear and use standards of the lease
• Whether or not you may buy the vehicle, and if so, when and under what conditions, including price
• Amount or method to determine end-of-lease liability
• Any other fees and taxes that have to be paid, and who pays them
• Any insurance that is needed and paid for by the consumer, and that which is paid for by leasing company
• Any express warranties on the item to be leased
• The standards used to determine "wear and tear" and mileage limits
• Whether the leasing company will hold a "security interest" in your vehicle
• Information about charges for late payments

Motor vehicle leases typically contain early termination and default penalty clauses. These provisions exist because most leases call for uniform payments over the term of the lease, at the end of which, the item will presumably have depreciated to its "residual value." Motor vehicles, unlike other types of consumer goods, depreciate faster in value earlier in their useful lives than later. Accordingly, in the early months or years of a long term lease, your total lease payments may not be equal to the rapidly diminishing value of the motor vehicle. In theory, this difference gets made up toward the end of the lease term, when the vehicle's value has stabilized. If you terminate the lease early in the term, whether at your option or through default, the leasing company may not be fully compensated for the actual value of the vehicle at the time it is returned.

Motor vehicle leases used to permit the leasing company to resell the car at auction in the event of early termination or default, and charge the consumer for the difference. This method was too uncertain to result in "reasonable" charges to the consumer in all cases. Nowadays, leases contain complex calculations to measure the difference between the value of the car upon early termination and the total of payments made under the lease. A good "rule" to use in evaluating the reasonableness of any motor vehicle lease's early termination provision is to compare the "blue book" value of the car at the time of surrendered to the total of payments made under the lease up to the surrender date.

Note: Early termination charges can be as high as several thousand dollars! The actual charge will depend, however, on when the lease is terminated. The earlier that you terminate the lease, the higher the charge is likely to be.

Generally, auto leases are "open-end" leases which have the potential for end-of-lease payments. With an open-end lease you take the risk that at the end of the lease, the vehicle will be worth less than the residual value specified in the lease documents. An open-end lease will probably have lower periodic payments than a comparable "closed-end" lease. In a "closed-end" lease, sometimes referred to as a "walk-away lease," 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. You may, however, be responsible for excess war and excess mileage charges, and for other lease requirements.

At the end of an "open-end" lease, when you return the vehicle, the dealer will either sell it or appraise it.

Note: Under the Consumer Leasing Act, you have the right to get an independent appraisal by someone agreed to by you and the leasing company.

Depending on the sale proceeds or the appraised value in comparison to the vehicle's residual value, you may or may not have to make an "end-of-lease" payment and, depending on whether a right to a refund was in your contract, you could be entitled to a refund. If the residual value is greater than the vehicle's sale proceeds or appraisal value, you will have to make up the difference through an end-of-lease payment to the leasing company. This payment may be limited to three-times the base monthly payment.

Example: Herb Hobby had leased a sport utility vehicle from Clarence's Fine Autos. At the end of the lease, the appraised residual value of the vehicle was found to be $1000 more than had been estimated in the lease. Not only did Herb not have to make an end-of-lease payment, but he got a $1000 reimbursement check from Clarence's since the lease contained a clause giving Herb the right to a refund.

Mileage limitations are common with closed-end lease contracts. Any excess mileage will probably require an end-of-lease payment. You should negotiate mileage allowances with the leasing company before signing the contract.

• If you are considering a lease where you have early termination or purchase options, ask how the mileage allowance will be handled in case you exercise either option.
• 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 generally will not have to pay for excess mileage.

Compare the cost of traditional financing with the cost of the lease before making a decision. To estimate the total cost related to traditional financing, add the total of the down payment, amount financed, finance charges, cost of insurance and estimated repairs and maintenance. For the total cost of the lease include all lease charges plus any other required costs such as insurance and repairs and maintenance. Consumer finance magazines such as Money and Kiplinger's Personal Finance have occasional articles on motor vehicle leasing which often include worksheets to compare the costs of leasing to traditional financing. You can also find extensive information on leasing through the Federal Reserve Board's Web site.

Advertising Rules

Both the federal Consumer Leasing Act and New Hampshire's Motor Vehicle Leasing Act require important disclosures in advertisements for consumer leases. The most important disclosure is a requirement that the financing structure specifically be described as a lease. An advertisement that includes a statement about the amount of any payment, or capitalized cost reduction (or that no payment is required), must also disclose the following several points of information. For television and radio commercials, the advertiser can provide a toll-free number to provide the disclosures to you rather than put them in the ad itself. The ad must reveal:

• That the transaction is a lease
• The total amount of any payment required prior to, or at the beginning, of the lease
• The number, amounts, and due dates of the scheduled periodic payments
• Whether a security deposit is required
• Whether extra charges may be due at the end of the lease term
• Whether your liability, if any, at the end of the lease is based on the difference between the residual value of the vehicle and the realized value
• The option to purchase

Points To Remember

• Shop around for the best leasing deal. All leases are not created equally.
• Read the lease carefully. An attractive low monthly payment might be available only if you make a large down payment or have a balloon payment at the end of the lease. For information about balloon loans, see Watch Out For: Balloon Loans.
• Remember that a lease is a complicated legal arrangement which is very different from traditional financing and which should be carefully examined before you enter into an agreement.
• Be sure the document you are signing reflects the kind of financing you want. Some unscrupulous auto dealers will attempt to promote a lease by emphasizing the low weekly or monthly payments available under an "alternative" financing plan.
• Be sure you understand what the capitalized cost of any leased vehicle is. The capitalized cost is the total cost of the leased vehicle plus any other item you may agree to capitalize (such as the remaining payments on a prior lease or financing agreement), which serves as the base price from which all other lease charges are determined. Because of the complex structure of leases, the capitalized cost may reflect a price for the vehicle which is equal to or greater than the manufacturer's suggested retail price (MSRP). Under New Hampshire's Motor Vehicle Leasing Act and under federal law, you have the right to ask the auto dealer for an itemization of all components of the capitalized cost.
• If you have traded in a vehicle, make sure you are getting credit for its value; sometimes, leasing companies may inflate the capitalized cost under a lease to negate a vehicle's trade-in value.
• Beware of open-end leases. This type of lease requires you to pay the difference if the leased vehicle is worth less at the end of the lease than was originally estimated.
• Be sure you know:
  • What the up-front costs are (security deposit, down payment, advanced payment, taxes);
  • What your payments will be;
  • What the penalties are for early termination of the lease; and
  • What the termination costs are, for example, excess mileage penalties for a vehicle, excessive wear and tear, and disposition charges.

For your information … Leasing Consumer Products

Other kinds of property can also be leased, such as musical instruments, exercise equipment, tools, etc. Leasing can be advantageous since it allows you to try something out for a period of time to see how you like it. The Consumer Leasing Act also applies to consumer product leases, in addition to vehicles. Most of the information contain in Auto Leasing applies equally to other types of consumer product leases.

Note: Neither the federal nor New Hampshire laws cover the leasing of real estate or housing, or rent-to-own agreements. For information about rental housing, refer to Renting, Security Deposits & Evictions. For information on rent-to-own contracts, refer to Rent-To-Own.

Remember, when you have paid off the lease, you do not own the vehicle; you may be able to purchase it at an additional cost.

• New Hampshire's Motor Vehicle Leasing Act requires that auto leases be in at least 8 point type (this size), that a copy of the lease be given to you at the time the lease is signed, and that a completed lease have no blank spaces.

Where To Go If You Have A Problem

Contact the NH Consumer Protection & Antitrust Bureau:

NH Consumer Protection and Antitrust Bureau
33 Capitol Street
Concord, NH 03301-6397

The Federal Reserve Board has a publication specifically on car leasing. A free copy of "Keys to Vehicle Leasing – A Consumer Guide" can be obtained by writing to the Federal Reserve, or downloaded from the Federal Reserve Web site:

Public Services
Federal Reserve Board
Mail Stop 127
Washington, DC 20551
212-452-3244