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Indiana Department of Financial Institutions

DFI > Education > Education Information > Credit Information > Auto Credit / Leasing > A Consumer Guide To Vehicle Leasing A Consumer Guide To Vehicle Leasing

Keys to Vehicle Leasing

Under the federal Consumer Leasing Act, you, the consumer, have a right to information about the costs and terms of a vehicle lease. This information will help you compare lease offers and negotiate a lease that best fits your needs, budget, and driving patterns.

This consumer guide is for a closed-end lease, the most common type of vehicle lease. With a closed-end lease, you may return the vehicle at the end of the lease term, pay any end-of-lease costs, and walk away. The sample leasing form shows the types of information the dealer or leasing company must give you before you sign a lease. "Leasing language" gives definitions of terms associated with vehicle leasing.

Leasing is different from buying.

Here's how . . .

OWNING

Leasing Buying
You do not own the vehicle. You get to use it but must return it at the end of the lease unless you choose to buy it. You own the vehicle and get to keep it at the end of the financing term.

UP-FRONT COSTS

Leasing Buying
Up-front costs may include the first month's payment, a refundable security deposit, a capitalized cost reduction (like a down payment), taxes, registration and other fees, and other charges. Up-front costs include the cash price or a down payment, taxes, registration and other fees, and other charges. Monthly payments.

BUYING

Leasing Buying
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 other finance charges, taxes, and fees.

EARLY TERMINATION

Leasing Buying
You are responsible for any early termination charges if you end the lease early. You are responsible for any pay-off amount if you end the loan early

VEHICLE RETURN

Leasing Buying
You may return the vehicle at lease end, pay any end-of-lease costs, and "walk away. You may have to sell or trade the vehicle when you decide you want a different vehicle.

FUTURE VALUE

Leasing Buying
The lessor has the risk of the future market value of the vehicle. You have the risk of the vehicle's market value when you trade or sell it.

MILEAGE

Leasing Buying
Most leases limit the number of miles you may drive (often 12,000-15,000 per year). You can negotiate a higher mileage limit and pay a higher monthly payment. You will likely have to pay charges for exceeding those limits if you return the vehicle. You may drive as many miles as you want, but higher mileage will lower the vehicle's trade-in or resale value.

EXCESS WEAR

Leasing Buying
Most leases limit wear to the vehicle during the lease term. You will likely have to pay extra charges for exceeding those limits if you return the vehicle. There are no limits or charges for excessive wear to the vehicle, but excessive wear will lower the vehicle's trade-in or resale value.

END OF TERM

Leasing Buying
At the end of the lease (typically 2-4 years), you may have a new payment either to finance the purchase of the existing vehicle or to lease another vehicle. At the end of the loan term (typically 4-6 years), you have no further loan payments.

See Interactive Auto Calculator: Should I lease or purchase?

Consider Beginning, Middle, and End-of-lease Costs

At the beginning of the lease, you may have to pay your first monthly payment; a refundable security deposit or your last monthly payment; other fees for licenses, registration, and title; a capitalized cost reduction (like a down payment); an acquisition fee (also called a processing or assignment fee); freight or destination charges; and state or local taxes.

During the lease, you will have to pay your monthly payment; any additional taxes not included in the payment such as sales, use, and personal property taxes; insurance premiums; ongoing maintenance costs; and any fees for late payment. You'll also have to pay for safety and emissions inspections and any traffic tickets. If you end your lease early, you may have to pay substantial early termination charges.

At the end of the lease, if you don't buy the vehicle, you may have to pay a disposition fee and charges for excess miles and excess wear.

You can Compare Different Lease Offers and Negotiate Some Terms.

Consider . . .

  • the agreed-upon value of the vehicle—a lower value can reduce your monthly payment
  • up-front payments, including the capitalized cost reduction
  • the length of the lease
  • the monthly lease payment
  • any end-of-lease fees and charges
  • the mileage allowed and per-mile charges for excess miles
  • the option to purchase either at lease end or earlier
  • whether your lease includes "gap" coverage, which protects you if the vehicle is stolen or totaled in an accident.

Ask for alternatives to advertised specials and other lease offerings.

Know Your Rights and Responsibilities

When you lease a vehicle, you have the right to:

  • use it for an agreed-upon number of months and miles
  • turn it in at lease end, pay any end-of-lease fees and charges, and "walk away"
  • buy the vehicle if you have a purchase option
  • take advantage of any warranties, recalls, or other services that apply to the vehicle.

You may be responsible for:

  • excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be.
  • excess wear charges when you return the vehicle. The standards for excess wear, such as for body damage or worn tires, are in your lease agreement.
  • substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be.

Lease Squeeze

If you're among the one in three new-car shoppers who favors leasing, you may be surprised the next time you trade in for a new lease. The lease that cost you $300 a month, may now cost you $400 for the same model. Financial institutions are setting lower, more realistic residual values on new leases and charging higher payments. Lower payments are usually limited to models the dealers want to promote. Lease deals o remain, just don't expect them to be as widespread as they once were. Here's how to get one:

  • Unearth promotions. When car makers, lenders and dealers want to push a model, they can cut lease payments one of three ways: inflate the residual value, cut the capitalized cost, or charge a low interest rate (or "money factor").

Residual Value

To see how the residual value compares with the industry norm, go to http://www.carwizard.com. There you will find the Automotive Lease Guide (ALG) estimate of what your car will be worth at the end of the lease term, expressed as a percentage of the price. If the residual value is two percentage points o more above the ALG value - a less common occurrence nowadays - you're being offered a promotional lease.

Capitalized Cost

To figure out if the capitalized cost has been cut, look up the dealer's invoice cost at the same site. You're getting a favorable deal if the capitalized cost is no more than $500 over the dealer's invoice (including options).

Money Factor

You should try to get the money factor below 5%. It appears in dense-looking decimals such as 0.001430. Don't be daunted, multiply that figure by 2400 for an approximate annual interest rate (3.4% in this case).

Buying the Leased Car

If you want to buy the car that you're leasing now, the industry woes could work in your favor. An inflated residual value may mean that your lease's buy-out price is higher than your car's current value (which you can look up at http://www.edmunds.com.) If so, call the financial institution and offer the market value, which many lenders will accept - or bargain from - to avoid having to take a loss.

For more information . . .

Contact your dealer, manufacturer, leasing company, or financial institution for more information.

The federal Consumer Leasing Act and some state laws may provide you with additional consumer rights not covered in your lease agreement. For information on these laws, contact your state's consumer protection agency or Attorney General's office. You also can contact:

Division of Consumer & Community Affairs
Mail Stop 800
Federal Reserve Board
Washington, DC 20551 or Consumer Response Center

Federal Web site on Leasing
Keys to Vehicle Leasing: A Consumer Resource.

Federal Trade Commission
6th and Pennsylvania Ave., N.W.
Washington, DC 20580

Regulates the disclosure statutes on consumer leasing, Regulation M.

Links to Other World Wide Web Sites 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?

Guide to Vehicle Leasing Brochure in Adobe

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.