Leasing a Car

Most car buyers don't have the means to buy a car upfront and in full. Instead, these consumers often choose to finance a vehicle purchase or lease the vehicle.

Taking out a car loan works similarly to mortgages and other kinds of secure loans. Leasing, on the other hand, is a little more complex. This article talks about how vehicle leasing works and the consumer protection laws that apply to the car leasing process.

See FindLaw's Buying a Car section for resources and information on purchasing a vehicle.

How Does Vehicle Leasing Work?

A car lease is a long-term car loan agreement. Consumers with auto lease agreements do not own the vehicle, and in most cases, return the vehicle at the end of the lease term.

How lessors calculate monthly lease payments can be complex. This often makes it difficult for consumers to decide whether leasing or buying is a better financial decision.

The best way to understand lease pricing is to view it from the car dealer's perspective. In that sense, the dealer isn't lending you a vehicle but rather an asset worth a certain amount of money. By the end of the lease term, you must return the car dealership or leasing company, plus interest and other administrative costs (like a rent charge) and taxes.

However, a car's value isn't a constant. It reduces with time and use, which is called depreciation. Lease payments are the total amount the car depreciates divided by the number of months in the lease term, plus interest.

For example, suppose you lease a car worth $30,000 for two years. From the car dealership's perspective, they just gave you a $30,000 loan. The dealership calculates that after two years of normal use, the car will be worth $15,000. Since the lease term is 24 months, your monthly payments will be $625 plus interest, taxes, and fees.

At the end of the lease term, you will have paid the dealership $15,000 plus interest. You will return the car worth $15,000 to complete the rest of the loan. Some dealerships offer a purchase option for consumers to buy the car at its current value.

Since lease payments are tied to the car's market value, they are often lower than car loan payments. Lessees should be careful before agreeing to deals with lower monthly payments. Keep in mind you still must pay back an amount equal to the car's depreciation over the lease term.

Dealerships often calculate interest as a percentage of the depreciation that is not yet paid back. The lower the monthly payment, the more depreciation value is left over for you to pay off. This means you'll pay a higher interest rate.

Federal Consumer Protection Laws and Leased Vehicles

The Consumer Leasing Act (CLA) is a federal law that protects personal property consumer leases, including motor vehicles.

This Act is an amendment to The Truth in Lending Act (TILA), added in 1976 to extend TILA's protections to personal property leases exceeding four months. It sets parameters for balloon payments and residual liabilities, meaning the costs the lessee must pay at the end of the lease term. These include charges for excess wear and tear or mileage and disposition fees.

The CLA requires lessors to provide specific disclosures about a vehicle lease agreement, including:

• The number, amount, and due dates of payments
• Total amount of initial fees
• A clear description of penalty fees, including late payments and early termination charges
• Security deposit information
• Any express warranties or guarantees provided by the manufacturer or lessor

The CLA also regulates what dealerships and leasing companies can say when advertising leased vehicles.

The Dodd-Frank Act of 2010 established the Consumer Financial Protection Bureau (CFPB) to oversee various consumer financial protection laws, including enforcement of the CLA.

Advantages and Disadvantages of Leasing a Car

The primary advantage of financing a vehicle instead of leasing is that you own the car. You can drive it as much as you like, modify it while avoiding illegal modifications, and sell it when you're ready.

A leased vehicle is not yours. As a result, you have less freedom. You can't change the car in any significant way and most lease terms limit how many miles you can put on the car.

Leasing a vehicle allows you the flexibility to drive a new vehicle for lower payments than purchasing. You must factor in various fees or potential penalties, including:

• Early termination fees
• Excess mileage fees (if you surpass your mileage limit)
• Excessive wear and tear fees
• Late payment penalties
• Disposition fee

Some auto leases include the option to buy the vehicle at the end of the lease. These contracts include both the vehicle's buyout price and residual value. These are the vehicle's estimated worth after depreciation over the course of the lease. In general, the buyout price in your contract is the residual value plus taxes and fees needed to transfer ownership.

Issue With an Auto Lease Agreement? Get Legal Help

Most vehicle leases are straightforward contracts consumers can navigate without legal help. However, not all leasing companies and dealerships follow the law. If you suspect you've signed an auto lease with unlawful terms or are involved in a scam, an attorney in your area can help.

Contact a local consumer protection attorney to learn more. An expert attorney with knowledge of state and federal laws can review your situation, protect your rights, and help determine the next steps.