# Presentation: 495548

## Slide 1

## Consumer Leasing Act

**Regulation M**
-  consumer leases
-  more than 4 months
- $25,000 contract or less

## Keys to Vehicle Leasing

**Leasing is different from buying**
**Consider beginning, middle, ****and end-of-lease costs**
**You can compare lease offers ****and negotiate some terms**

** ****Know your rights and responsibilities**

**Notes:**
3. 	Core messages consumers need to remember

	Leasing also requires that consumers learn a whole new vocabulary. Use the glossary to 	define terms as you go through this presentation.  

	Terms you may need to define here are:
		Lessor
		Lessee

## Leasing is Different from Buying

** ****Ownership****	**
** ****Up-front costs  ****	**
** ****Monthly payments**
** ****Early termination**
** ****Vehicle return**

** ****Future value**
** ****Mileage**
** ****Excess wear**
** ****End of term**

**Notes:**
4. 	Refer consumers to the “Leasing Is Different from Buying.  Here’s How....” section of 			the Keys to Vehicle Leasing brochure

	Note that early termination may be voluntary or involuntary (for example, the vehicle 			may be returned early, stolen, or totaled, or you may default on the lease). In most cases 		of early termination, you must pay an early termination charge. Defaulting on your 					lease--that is, failing to make payments--also is considered an early termination, and 				early termination charges will apply.

## Lease or Buy Considerations

**Typically, how often do I get ****a new vehicle?**

**Lease or Buy ****Considerations**

**How many miles per year do I drive?**

**Do I maintain my car in good condition?**

**Notes:**
5.  	In general

	Leases typically run 2 to 4 years; loans typically have 4- to 6-year terms. In general, 		the longer you keep your vehicle, the more likely you are to be a candidate for owning 	rather than leasing.

	In addition to keeping the car in good mechanical condition, consider how likely you 	are to get permanent stains or holes in the seats, and whether you park where the car 		might get excessive dings and chips in the paint. In a lease, you may find excessive 		wear charges assessed for not keeping the car in good condition. If you own, the trade-	in or resale value of your car may be affected if you don’t keep it in good condition.

	Match the miles you drive to the lease terms. Most leases limit the number of miles 		you may drive (often to 12,000–15,000 per year). You can negotiate a higher mileage 	limit and pay a higher monthly payment.  If you own the vehicle, higher mileage will 	lower the vehicle’s trade-in or resale value. 

## Consider Beginning, Middle, and End-of-Lease Costs

- Consider **Beginning**, Middle, and End-of-Lease Costs

**Acquisition fee**
**First monthly payment**
**Capitalized cost reduction**
**Refundable security deposit**
**Title, registration, & license fees**
**Freight charges**
**State and local taxes**

**Notes:**
6. 	Refer to the glossary for the definitions of terms in this section. Terms you may need 	to 	define are:
		Acquisition fee
		Capitalized cost reduction

	Although the security deposit is refundable, if you have any excess mileage charges or 	excessive wear charges, these amounts may be deducted from your security deposit.  

	Different states treat some of these items differently. For example, some states require 	that you pay all state taxes up front, while others require that you pay the taxes monthly 	during the term of the lease. If you move from one state to another, you may have to 		change the way you pay the taxes on the leased vehicle.

## Consider Beginning, Middle, and End-of-Lease Costs

**Monthly payment**
**Maintenance costs**
**Insurance premiums**
**If applicable:**
- Early termination charges
- Sales and use tax
- Inspections
- Personal property tax
- Late-payment fees

**Notes:**
7. 	Refer to the glossary for the definitions of terms in this section. Terms you may need to 		define are:
		Early termination
		Early termination charge

	“Middle costs” do not occur only in the “middle” of the lease (for example, in month 18 	of 	a 36-month lease), but rather during the lease. Some of these costs may be once-in-a-		while costs, such as registration and inspection fees, while others are recurring costs, for 	example,  the monthly payment.  

	Most lessors require that you carry “100,000/300,000” insurance coverage. If you have 		not carried this much insurance before, you will see your premiums go up. Insurance 		companies do not usually charge different rates for leased and owned vehicles.

## Consider Beginning, Middle, and End-of-Lease Costs

**Return**
**Disposition fee**
**Excessive wear charges**
**Excess mileage charges**
**Buy**
**Purchase-option price**
**Purchase-option fee (if any)**

**Notes:**
8.  	Refer to the glossary for the definitions of terms in this section. Terms you may need to	 define are:
		Disposition fee
		Excessive wear
		Excess mileage

	At the end of the lease, you may have several options:
		•	turn in the car and pay any end-of-lease charges due
		•	purchase the car (if you have a purchase option)
		•	extend the lease for a short term (typically month to month for up to  6 				months)-- usually under the same terms as 	the original lease
		•	re-lease the same vehicle; new terms and payments usually apply

## Compare Offers and Negotiate Terms

**Monthly lease payments **
**End-of-lease payments**
**Purchase option**
**Gap coverage**

**Notes:**
9. 	Refer to the glossary for the definitions of terms in this section. Terms you may need to 	define are:
		Gap coverage (see slide 11)

	Some items in a lease are generally not negotiable (for example, a purchase option and	 late charges), but you should compare the terms of different leases to make sure you’re 	getting the best terms.

	The monthly payment may be negotiable, but it is really a function of other items in the 	lease. If you have negotiated the agreed-upon value of the vehicle, the capitalized cost 	reduction, the length of the lease, the mileage allowance, and the residual value, you 		will have, in effect, negotiated your monthly payment.

## Compare Offers and Negotiate Terms

**Agreed-upon value of vehicle (price)**
**Up-front payments, including capitalized cost reduction ****(down payment)**
**Length of lease**
**Mileage allowance & per-mile charges**

**Notes:**
10.  	Some items are truly negotiable.  

	The capitalized cost reduction is negotiable and will affect the monthly payment amount. 	The more you put down, the lower your monthly payments will be--but the higher your 	up-front costs will be.

	Most leases are for 2 to 4 years, with an average of 35 months (almost 3 years). 	Depreciation rates for cars are highest during the first 2 years; rates drop some in 	years 3–5, and then rise as the car gets older (and may have more things go wrong with it).

	In general, it’s less expensive to “buy” extra miles up front, by getting a lease with a 	higher mileage allowance, than to pay an excess mileage charge at lease-end. You 	“buy” these  extra miles by having a lower residual value (that is, more depreciation 	on the car)--a car with 45,000  miles on it at the end of 3 years is worth less than a car 	with 36,000 miles on it. However, most lessors won’t give you a rebate if you drive 	fewer miles than allowed, so it’s best to get a lease with the mileage that most closely 	approximates what you’ll actually drive.

	Don’t forget to negotiate the value (price) of the vehicle! Ask about rebates and 	incentives, and go prepared with information on dealer invoice costs (you can get this 	from 	various books and web sites). If there are manufacturer’s incentives for a particular 	vehicle, the dealer may already be passing these on to you and there may not be much 	room for negotiation on the price of the car.

## The Gap

**Gap**

**The Gap**

**Number of months**** **

**$**

- The difference between
- the insured value of the vehicle
- and the amount due for early termination

**Early Termination Payoff**

**Insured**
**Value**

**Notes:**
11. 	The gap is the difference between the early termination payoff amount--the top line in 		the graph--and the insured value of the vehicle--the bottom line in the graph--at any 		point in time during the lease.

	An example:
	Your car is totaled in an accident halfway through your lease. The adjusted lease 		balance is $16,000. Your insurance company says the book value of the car is only 		$15,000, and you have a $500 deductible; the insurance company pays $14,500. The 		difference between the $16,000 you still owe on the lease and the $15,000  insured 		value is “the gap.” If you don’t have gap coverage, you are responsible for the $1,000 		gap and the $500 deductible.  If you do have gap coverage, it will cover the gap--but 		you are still responsible for the $500 deductible.

	Many lessors will “waive” gap liability so that you won’t have to pay anything extra 	to 	have gap coverage. In reality, this type of gap coverage is “paid for” in the fees the 		lessor is charging you and other lessees whose vehicles are not totaled. Other lessors 		will not waive the gap liability but may offer gap coverage at an additional charge 		(usually in the $400–$500 range). You can also shop around for gap coverage offered 		by insurers and other third parties.  

	In general, gap coverage, or a waiver of gap liability, is important.

## Know Your Rights and Responsibilities

**Use for agreed-upon number ****of months and miles**
**Service under warranty or recalls**
**Turn it in, pay any end-of-lease charges, ****and “walk away”**
**Buy the car if you have a purchase option**

**Notes:**
12.  	Read your contract thoroughly to understand what you’re agreeing to.  

	There is no federal  “cooling off” law that covers purchases or leases at vehicle 		retailers! If the dealer/lessor says you have 3 days to change your mind and turn the 	car back in, make sure to get that promise in writing!

	Note to Instructor:  
	Show a sample lease contract so that consumers understand the difference between 		the required disclosures and the full contract.

## Know Your Rights and Responsibilities

**Returning the vehicle**
**Early**
-  early termination charges
**At end of lease**
- 	excess mileage charges, if any
- 	excessive wear charges, if any

**Notes:**
13. 	You are responsible for abiding by all the terms and conditions of the contract.  Know 	what you’re agreeing to before you sign. If you’re feeling pressured, it’s OK to say 		you need time to think about this and “sleep on it.” Manufacturer incentives and 		rebates will have time limits. However, there are a lot of cars and a lot of lessors, and 	it’s likely that other promotions and incentives will be offered in the future.

## A Lease’s Monthly Payment

**-****	****Reductions **
**=****	****Adjusted cap cost**
**- ****	****Residual value**
**=****	****Depreciation**
**+ ****	****Rent **

**A Lease’s ****Monthly Payment**

**=****	****Total for calculating **
**	****	****base monthly payments**

**÷****	****Lease term in months**

**=****	****Base monthly payment**

**Notes:**
14. 	This slide gives an overview of all the parts of the lease disclosure for a lease having 	monthly payments.  The following slides go through these parts step-by-step.

## Gross Capitalized Cost

**	****(Price plus freight and options)  **
**+ ****	****Insurance that is capitalized **
**+ ****	****Prior loan or lease balances**
**+****	****Acquisition or documentation fee**
**+****	****???**

**Gross Capitalized Cost**

**Notes:**
15. 	Refer to the glossary for the definitions of terms in this section. Terms you may need 		to define are:
		Gross capitalized cost
		Prior loan/lease balance
		Acquisition/documentation fee

	Other add-ons include 
	• 	license and registration fees 
	•  	optional service contracts (commonly called extended warranties) and 				contracts for mechanical breakdown coverage
	•  	any up-front sales taxes

	Consumers can, and probably should, ask for an itemization of the gross capitalized			cost.

## Capitalized Cost Reduction

**	****Cash  **
**+****	****Trade-in allowance **
**+****	****Rebates/dealer incentives**
**Think of capitalized cost reduction **
**as pre-paid depreciation.**

**Notes:**
16. 	Refer to the glossary for the definitions of terms in this section. Terms you may need 	to define are:
		Rebates
		Incentives

	It’s important to think of the capitalized cost reduction (similar to a down payment) as 	pre-paid depreciation. To understand that, look at the example in the sample leasing 	form and work through the numbers without the $3,500 capitalized cost reduction.  

	Also, because you are “financing” less when you make a cap cost reduction, the rent 	charge will be less. If you were to have a lower cap cost reduction, the adjusted cap 		cost would be higher--so the rent charge would go up.

## Residual ValueAssumes that Residual Value = Purchase Option Price

**Higher Residual**
**	****Monthly payment is lower****	**
**	****Purchase-option price is higher****	**
**Lower Residual**
**	****Monthly payment is higher****	**
**	****Purchase-option price is lower ****	****	**

**Negotiating a higher mileage allowance ****will lower residual value.**

**Notes:**
17.	Refer to the glossary for the definitions of terms in this section. Terms you may need	 	to define are:
		Residual value
		Depreciation
		MSRP
	The residual value is usually set according to guidelines from the third-party assignee/ 		lessor that purchases the lease from the originating dealer. It is usually based on 		guidebooks or historical data.
	It is usually set as a percentage of the MSRP--not the agreed-upon value the 			consumer has negotiated.
	There is a direct relationship between the residual value and the monthly payment, 		and between the residual value and the purchase-option price, assuming the fixed-		purchase- option price equals the residual value.
	If you are pretty sure you will be turning the car in at the end of the lease, you may 		want to look for a higher residual value, which will lower your monthly payments. 		However, if you decide to buy the car at the end of the lease, the purchase price may 		be higher.
	If you think beforehand that you may want to buy the car at the end of the lease, you 		may want to look for a low residual value.  Keep in mind that a lower residual value 		will mean higher monthly payments, but lower total rent charges.
	If you've negotiated more miles in your lease (for example, 18,000 instead of 15,000), 		you will have a lower residual value (a car with 54,000 miles on it is worth less than a 		car with 45,000 miles), which means you will face higher monthly payments, but 		either a lower purchase price or less chance of excess mileage charges.

## Depreciation—You Pay For What You Use

**	**

**Lease**
**Pay the stated depreciation during the lease term**
** ****	****$22,300 gross cap cost**
**-****	****  12,350****	****residual value**
**=****	****    9,950****	****depreciation**
******	****        ****48****	****months**
**= ****	****    ****$207**** ****	****avg. depreciation**
**	****	****per month**

**Finance**
**Pay the full cost **
**during the loan term**
**	****$22,300 ****	****cost of vehicle**
******	****        ****48****	****months**
**=****	****    ****$465****	****avg. cost**
**	****	****per month**

**Notes:**
18. 	This example is greatly simplified, but it helps show why leasing usually has lower 		monthly payments than financing when purchasing a vehicle. 

	Monthly lease payments are usually lower than monthly loan payments because you 	are paying only for the vehicle’s depreciation during the lease term, plus rent charges 	(like interest), taxes, and fees. Monthly loan payments are usually higher than 		monthly lease payments because you are paying for the entire purchase price of the 		vehicle, plus interest and any other finance charges, taxes, and fees.

	Keep in mind that if you buy the car and finance it, even though you pay the full cost 	over the term of the loan, you may  keep the car longer than the loan (for example, the 	loan in the example is for 4 years, but you may keep the car for 8 years).

## Rent Charge

**	****(Similar to interest on a loan)**
*** ******Not***** an APR**

**Rent Charge**

**Notes:**
19.	Refer to the glossary for the definitions of terms in this section. Terms you may need 	to define are:
		Rent charge
		APR
	The rent charge may be referred to as the lease charge. The number used to calculate 	the rent charge may be referred to as the lease rate, money factor, or lease factor.
	There is no annual percentage lease (APL) rate. Lessors are not allowed to use this 		term.

	Note to Instructor:
	The difficulties in calculating an annual percentage lease rate stem from the need to 	assume a value for all but one of the unknowns in the lease equation in order to arrive 	at a unique solution to the mathematical formula for a lease rate. Because it’s 		impossible to know at lease inception what the consumer will do at lease-end 		(purchase the car, lease a different car, re-lease the same car) and because the value of 	the purchase option and the residual value are part of the formula, there is no unique 	solution to the lease rate calculation. Different assumptions about depreciation and 		residuals can change the annual percentage lease rate for the same payment stream, 		even apart from any issue of manipulation by dealers, lessors, or assignees.

## Slide 20

**Notes:**
20. 	Refer consumers to the  “centerfold” in the Keys to Vehicle Leasing brochure--	the numbers there are the same as the numbers in the slide.

	This slide provides an overview and shows how all the pieces fit together.  We are 		about to go through the 4 major sections of this disclosure form.

## Top of Lease Form Disclosures

**Top of Lease Form ****Disclosures**

**Notes:**
21.	These top boxes provide a “snapshot” of the beginning (up-front), middle, and end-of-	lease costs along with an estimate of the total of payments in this lease.  

## Top of Lease Form Disclosures

**Top of Lease Form ****Disclosures**

**Beginning**

**Notes:**
22.	These top boxes provide a “snapshot” of the beginning (up-front), middle, and end-of-	lease costs along with an estimate of the total of payments in this lease.  

## Top of Lease Form Disclosures

**Top of Lease Form ****Disclosures**

**Beginning**

**Middle**

**Notes:**
23.	These top boxes provide a “snapshot” of the beginning (up-front), middle, and end-of-	lease costs along with an estimate of the total of payments in this lease.  

## Top of Lease Form Disclosures

**Top of Lease Form ****Disclosures**

**Beginning**

**Middle**

**End**

**Notes:**
24.  	These top boxes provide a “snapshot” of the beginning (up-front), middle, and end-of-	lease costs along with an estimate of the total of payments in this lease.  

## Top of Lease Form Disclosures

**Top of Lease Form ****Disclosures**

**Beginning**

**Middle**

**End**

**Overall**

## Amounts Due at Lease Signing Are Itemized

**Amounts Due at Lease Signing Are Itemized**

**Column totals should be equal**

**Notes:**
26. 	Box #2 is expanded in the second section of the lease. The itemization of the 		amount due at lease signing was designed to address concerns about “disappearing 		down payments” and “disappearing trade-ins.”

	Note that the out-of-pocket amount “due” at lease signing in this case is not the full 		$4,241.94 but only $1,741.94 (amount to be paid in cash) because there is a $2,500 	trade-in.

## Monthly Payment Calculation

**Monthly Payment ****Calculation**

**Notes:**
27. 	This shows how all the pieces (gross cap cost, cap cost reduction, adjusted cap cost, 	residual value, depreciation, rent charge) fit together to determine the base monthly 		payment. Add monthly sales/use taxes (if any in your state) to get the total monthly 		payment.

	Note that there is a separate check box for consumers to request an itemization of the 	gross capitalized cost.

## Additional Disclosures

**Early termination**
**Excess wear and mileage**
**Purchase option**
**Other terms in the lease**

**Notes:**
28. 	These disclosures include a
		•  	conspicuous notice about early termination costs
		•  	notice about excessive wear
		•  	disclosure of the mileage limit and cost of excess mileage
		•  	disclosure of the purchase-ption price, if any
		•  	disclosure of any purchase-option fee, if any
		•  	reminder to read the rest of the contract

## Slide 29

**Notes:**
29.	These disclosures are only part of the lease contract. 

	Note to Instructor:  
	Show a sample lease contract so that consumers understand the difference between 		the required disclosures and the full contract.

## Early Termination Notice

**Early Termination ****Notice**

***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.***

**Notes:**
30.	Note that early termination may be voluntary (for example, you no longer like the car 	and want to turn it in early) or involuntary (the car is stolen or totaled); if you default 	on making your lease payments, that is also considered an early termination, and early 	termination charges will apply.

## Advertising

**Advertising**

**SPARK EX**** **
**Lease for $245/month for 48 mo.**
**$4,095 due at lease signing, includes security deposit**
**excludes taxes, title, and registration fees **
**15,000 miles per year. **
**Subject to credit approval**

**Notes:**
31.	Federal Reserve Board Regulation M requires that except for the monthly payment, no other 	component of the total amount due at lease signing (for example, the cap cost reduction/down 	payment) may be more prominently advertised than the total amount due at lease signing 		($4.095 in the example). 
	If a printed lease ad includes any of the triggering terms (the amount of any payment or a 		statement of a specific or zero capitalized cost reduction or other payment required prior to or 	at delivery), it must also state
		•  	that the transaction is a lease
		•  	the total amount due before or at delivery
		•  	the number, amounts, and due dates of the payments 
		• 	whether or not a security deposit is required
	If third-party fees (taxes, license, registration) that vary by state or locality are due up front, 		the lessor may disclose that these fees have been excluded or may include the fees along with 	a statement that the fees may vary by state or locality.  
	For an open-end lease only, the ad must also state that extra charges may be imposed at the 		end of the lease term (if the lessee’s liability is based on the difference between the residual 		value and the realized value at the end of the lease).
	The disclosures must be made in a clear and conspicuous manner so that consumers can read 	and understand them. Unfamiliar abbreviations or terms are not allowed.
	This is an ad for the EX model of the Spark. It tells the monthly payment ($245) and the term 	of the lease (48 months). It  tells you that to get this monthly payment, you need to pay 		$4,095 at lease signing. This amount includes a security deposit but excludes taxes, title, and 	registration fees. It tells you that this lease allows you 15,000 miles per year. It also tells you 	that if you apply for a lease, the lessor may run a credit check on you.

## Beyond the Ad

**You’re responsible for ongoing license plate, inspection, and emission test fees**
**Required insurance coverage may be ****at higher limits than you now carry**
**You must follow the maintenance schedule**

**You’re responsible for “excessive wear”**

**Notes:**
32.	Beyond the text in the ad, there’s a lot for consumers to know.

	The ad doesn’t specify if there’s a purchase option and, if so, what  the purchase- 		option price is if there’s gap coverage
	 	• 	how the amount due at lease signing is itemized
		• 	other amounts and conditions that will be stated in the lease but are not 				included in the ad
	 	• 	other terms for this particular offer

## Lease Rate — Advertising

**May not be **
**advertised as an “annual percentage rate” ****or “annual lease rate” or any equivalent term**
**more prominent than required written disclosures**

**Don’t use the Lease Rate as you would use ****an APR to shop for the best rate on a loan.**

**Must state**** **
**“*****This percentage rate may not measure ******the overall cost of financing this lease*****” **

**Notes:**
33.	In general, Regulation M discourages lessors from advertising a lease rate. 

	There must be a disclaimer, and the rate figures must not be more prominent than 		other information.

	Lessors may not use the terms APR or APL.

	Note to Instructor:
	The difficulties in calculating an annual percentage lease rate stem from the need to 	assume a value of one or more of the unknowns in the lease equation in order to arrive 	at a unique solution to the mathematical formula for a lease rate. Because it’s 		impossible to know at lease inception what the consumer will do at lease-end 		(purchase the car, lease a different car, re-lease the same car) and because the value of 	the purchase option and residual value are part of the formula, there is no unique 		solution to the lease rate calculation. Different assumptions about depreciation and 		residuals can change the annual percentage lease rate for the same payment stream, 		even apart from any issue of manipulation by dealers, lessors, or assignees.

## Special Issues

**Personal property taxes**
**Relocation/Transfers**
- 	Within U.S.
- 	Outside U.S.
**Flexibility in payments**

**Notes:**
34. 	These special issues may be important if you tend to move a lot in your job or if you 	are in the military.

	In states with personal property taxes, you will still owe those taxes, even though the 	lessor holds title to the car. This is especially important for military personnel, who 		are exempt from personal property tax when they hold title to their own car. If a 		member of the military leases a car, the exemption does not apply to the lessor (who 	holds the title), and the military personnel will have to pay the tax.

	Not all lessors will let you move the car out of state.  The major national leasing 		companies generally allow this, but smaller regional companies generally do not.

	Virtually none of the leasing companies let you move your car outside the United 		States, with the exception of letting you drive to Canada (not Mexico) for a vacation.

	Most lessors do not allow any flexibility in payments. Unlike car loans, on which you 	may be able to make “interest only” payments if needed, leases generally require full 	payment every month. Consumers who need a lot of flexibility in their budgets (for 		example, seasonal workers) may find that leasing doesn’t work for them.

## If You Have a Problem, Talk to . . .

**1.****	****The dealer, manufacturer, or lessor **
**2.****	****Local consumer protection office ****or state attorney general’s office**
**3.****	****Federal ****	****or****	**
**	****Trade **
**	****Commission**** ****	**

**Federal regulators**
**(if the lessor is a bank)**
** ****Federal Reserve Board**
** ****Federal Deposit Insurance Corporation**
** ****Office of the Comptroller of the Currency **
** ****Office of Thrift Supervision**
** **

**Notes:**
35.	Try to resolve your problems locally with your dealer or lessor. As a next step, work with 	your local office of consumer protection (if available) or with your state’s attorney 			general’s office.

	If your lease is with a “captive finance company” (affiliated with Ford, GM, Chrysler, 		Honda, Toyota, Mazda, or Mitsubishi, for example) or other leasing finance company, 		you can contact the Federal Trade Commission.  

	If your leasing company is a financial institution (such as a bank or credit union), contact 	the federal regulator for that institution.

## Questions?