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Acquisition fee
A charge included in most lease transactions that is either paid up front or is
included in the gross capitalized cost. It may be called a bank fee, an
administrative 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. Some leasing companies do not charge this fee at all.
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 auto insurance policy.
Adjusted capitalized cost / Adjusted cap cost
The amount capitalized at the beginning of the lease. It is the negotiated
sales price of the vehicle, plus fees or other included charges, minus
capitalized cost reductions such as rebates, trade-in allowances or cash
reductions, so it is equal to the gross capitalized cost minus the capitalized
cost reduction. This amount is sometimes referred to as the net cap cost.
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 auto.
APR (annual percentage rate)
The annualized cost of credit expressed as a percentage in a finance agreement.
In a lease, there is no annual percentage rate or equivalent rate.
Arranger
See Broker.
Assignee
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. An assignee may
be a lessor for purposes of Regulation M when the assignee has substantial
involvement in the lease.
Assignment
The sale of a lease agreement and transfer of the ownership rights for the
leased car from the lessor to an assignee. Many leases are assigned at the time
the lease is signed.
Assignor
A lessor that sells the lease agreement and transfers the ownership rights for
the leased auto to an assignee.
Base monthly payment
The portion of the monthly payment that covers depreciation, any amortized
amounts, and rent charges. It is 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.
Balloon Loan
Also known as payment saver loan. It combines features of a lease and a
conventional auto loan. Payments can be as much as 30 percent less than a
conventional amortized loan, because a lease-like loan has a big balloon
payment at the end. Frequently requires no down payment or security deposit.
Mileage allowance is usually higher at 18,000 miles per year. At the end of the
loan, the borrower may be able to sell or trade in the car and pay off the loan
balance, keep the car and refinance the amount owed, or return the car to the
lender as payment for the balance.
Broker
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.
Cap cost / Capitalized Cost / Total
capitalized cost
Short term for gross capitalized cost or adjusted / net capitalized cost. Both
are required disclosures under federal law.
Cap cost reduction / Capitalized cost reduction / Down payment
A deposit on the lease, which reduces the monthly lease payment. This is like a
down payment on a car that you finance with a loan. When you subtract the cap
cost reductions from the cap cost, you get the net cap cost, also called the
adjusted cap cost. In addition to cash reductions, rebates by the manufacturer
or the dealer and the net trade-in allowance are also cap cost reductions.
Captive Finance Company
A leasing or finance company that is owned by or otherwise associated with a
particular vehicle manufacturer or distributor, for example GMAC, Chrysler
Financial or Ford Credit.
Closed-end Lease
A lease that allows the lessee to return the vehicle at the end of the lease
term with no further financial obligation, assuming that the lessee has
complied with all of the terms of the lease. The lessee may be responsible for
a disposition fee, if it is part of the lease agreement. There may be
additional charges according to the terms of the lease for any excess mileage
or excess wear. The lessee is not responsible for any difference between the
residual value, as stated in the lease, and the actual value of the vehicle at
the end of the lease. 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 of these criteria is covered by the Consumer Leasing Act and Federal
Reserve Board's 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 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 (actuarial method)
The method of earning rent charges in which the rent charge earned 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 term, similar to most
home first mortgages.
Consummation
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.
Default
Your failure to meet one or more conditions of your lease agreement. Default
may result in early termination of the lease.
Depreciation
The amount the vehicle declines in value over the term of the lease. The
depreciation may be calculated by subtracting the residual value from the
adjusted capitalized cost. Using this method, the depreciation amount will also
include any amounts that were added by agreement to the price of the vehicle to
arrive at the gross capitalized cost.
Disclosures
Information on the financial 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. Other required
disclosures appear elsewhere in the lease documents.
Disposition Fee
The fee charged by the lessor if the lessee does not purchase the auto at
lease-end, for costs associated with preparing the auto or truck for resale and
selling the vehicle. The disposition fee must be disclosed in the lease
agreement.
Documentation fee
A fee to cover the cost of preparing lease documents charged by some
dealerships (sometimes called a dealer documentation fee) or other lessors.
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 a lease before the scheduled termination date. The lessee will typically
be required to pay an early termination charge as described in the lease
agreement.
Early termination charge
If you end your lease before the end of term, you will be charged with this
fee, even if the vehicle is stolen or wrecked.
Equity
In an installment sale or loan, the positive difference between the trade-in or
market value of your auto and the loan payoff amount. When the loan is paid
off, the equity is the market value of the car.
Excess mileage charge
The fee charged for each mile in excess of the predetermined mileage limit.
This is part of the lease agreement. Charges vary and are based on the vehicle.
They can range from $0.10 to $0.25 per mile.
Excessive Wear and Tear Charge
Amount charged by a lessor or assignee to cover wear and tear on a leased car
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.
Fair market value purchase option
Your right to purchase the auto at scheduled termination, according to terms
specified in your lease agreement for a price determined by referring to a
readily available guide to used car values or to 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, title, 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 the auto 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 auto. 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 insurance / Gap coverage
A plan that provides you financial protection in case your leased auto 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 your monthly payments until the lessor receives your
insurance proceeds.
Gross Capitalized Cost
The negotiated price of the vehicle, plus any other amounts you agree to
include in the capitalized cost, such as fees, insurance premiums, service
contract premiums or prior auto loan or lease payoff.
Incentives
Amounts rebated or credited, or special programs offered to encourage the lease
of certain cars.
Independent leasing company
A leasing company that offers leases directly to consumers and businesses and
is generally not affiliated with a particular automobile manufacturer.
Insurance
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 auto 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, after any grace
period, a late payment triggers a late charge.
Lease
A contract between a lessor and a lessee for the use of an auto 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 by use of a
standard methodology 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 one month at
a time. There may be a charge for extending the lease. If the extension
continues beyond six 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 that 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 lease rate disclosure using the state's
definition.
Lease term
The period of time covered by the lease agreement.
Lease-purchase contract
A purchase option at the end of a lease. You can buy the car at the residual
value.
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.
Lessee
The party to whom the auto 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.
Lessor / Leasing company
The legal owner of the property that is leased. Leasing companies can be owned
by manufacturers (also known as ìcaptive finance companiesî like GMAC, Ford
Motor Credit and Chrysler Financial), but they can also be banks or other
financial / lending institutions.
Luxury car tax
A federal excise tax assessed on vehicles with a gross vehicle weight of less
than 6,000 pounds and a value exceeding a threshold amount, which is adjusted
periodically for inflation.
Maintenance
Care for the auto 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 auto maintenance
and servicing. Distinguish from Service contract.
Maintenance lease
A lease agreement in which some or all of the auto 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
model lease forms with explanations of the disclosures.
Money factor
The ìinterest rateî used by a leasing company. To convert it to an annual
percentage rate, multiply it by 2400. This conversion factor is the same
regardless of term or leasing company. For example a money factor of .0042
corresponds to an annual interest rate of 10.08%. The money factor should be
comparable to the annual percentage rate of an auto loan.
Monthly payment
This term may refer to one of two required federal disclosures. See Base
monthly payment and Total monthly payment.
Monthly sales/use tax
The state and local taxes that you must pay monthly when you lease an auto.
These payments, if any, are added to your base monthly payment and paid as part
of your total monthly payment.
MSRP / Sticker price
This is the full price for the automobile suggested by the manufacturer and
displayed on the window sticker, including options and most accessories.
Destination charges and dealer fees are not included in the MSRP. You can
usually negotiate the price if you ask and if you are willing to haggle.
Negative equity / negative trade-in balance
The portion of the gross capitalized cost representing the amount due under a
previous credit contract after crediting the value of the auto traded-in on the
lease.
Net capitalized cost / Net cap cost
See adjusted capitalized cost.
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 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.
Personal property tax (or Ad valorem tax)
A tax on personal property. State laws govern whether personal property taxes
apply to a leased car; your lease agreement governs whether you or the lessor
or assignee will pay these taxes.
Purchase Option
The lessee's right to purchase the leased auto, either at the end of the lease
or during the lease term, as specified in the lease agreement. The lease
agreement may or may not include a purchase option.
Purchase Option Fee
A fee in addition to the purchase price that is required to exercise a purchase
option, according to the terms of the lease.
Realized Value
The price received by the lessor or assignee for the leased auto at
disposition, (2) the highest offer for the leased auto at disposition, or (3)
the fair market value of the leased auto 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.
Rebate
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.
Reconditioning
The process of preparing an auto for resale or re-lease if you return it.
Reconditioning reserve
An amount that 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 an auto and
authorize its use on the public roadways.
Regulation M
The regulation issued by the Federal Reserve Board that implements the Consumer
Leasing Act.
Rent or Rent Charge
The portion of the monthly lease payment that is in addition to the
depreciation and amortized amounts.
Residual value
Predicted value of the auto at the end of the lease term including a certain
mileage and normal wear and tear, established at the beginning of the lease
term. 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. The higher the residual value compared to the cap cost, the lower
your lease payments will be. Residuals fall most rapidly in the first 12
months, for some cars 50% or more, and they fall less rapidly after 24 months.
Therefore short-term leases are more expensive than longer-term leases.
Sales/use taxes
Sales/use taxes, which vary from state to state, are assessed on both leased
and purchased autos. There are often differences in what 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
A refundable deposit you may be required to pay at the beginning of the lease,
usually equal to one monthly payment, collected by the lessor at the beginning
of the lease to offset any amounts due under the term of the lease. Any
remaining amount may be refunded to you.
Service contract
Also known as mechanical breakdown protection or extended warranty. It is a
contract that you may purchase to cover expenses such as the repair or
replacement of vehicle components and that may pay for 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. This 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 auto'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.
Sublease
Oral or written contractual transfer of your right to use the leased auto to
another person. Such a transfer is usually prohibited without the lessor's or
assignee's approval.
Subvented Lease
A lease subsidized by the manufacturer or other lessor. Many subvented leases
offer lower monthly payments by utilizing a higher residual value than other
lessors, or by offering a lower rent portion of the monthly payment.
Termination fee
See Disposition fee or disposal fee.
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 with 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 with 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.
Title
Legal document that identifies the owner of the automobile. The lessor or
assignee, not you, holds title to the leased auto.
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.
Trade-in
The net value of your auto credited toward the purchase or lease of another
auto. If you own the auto being traded-in, you sell it to the dealer or lessor.
If you are leasing the auto being traded-in, you are turning in the auto
(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 trade-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 factors including 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 factors including dealership retail
sales prices, other retail transactions, and regional demand.
Used-vehicle leasing
Leasing of previously owned or driven cars.
Walk-away lease
See Closed-end lease.
Warranty
A guarantee that the auto will function and perform as specified. A warranty
usually covers specified mechanical problems during a specified period of time
or number of miles.
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