The Consumer Leasing Act requires that lessees of personal property receive meaningful disclosures to enable them to compare lease terms with other credit transactions. The Board of Governors of the Federal Reserve System further states that lease products and loan products must have their own distinct terminology. The purpose of this requirement is to allow consumers to differentiate between what is a loan and what is a lease.
Terms like Amount Financed, Interest Rate and Down Payment are distinctly terms used to describe a loan. By regulation requirements, however, these terms cannot be used to describe a lease. The following are lease terms and similar loan descriptions that every consumer interested in leasing should become familiar with.
Capitalized cost. The Amount Borrowed or the Amount Financed. Just like a loan these amounts can include the agreed upon selling price of the car, the cost of tax and tags, extended warranty etc…
Capitalized cost reduction. The total cash down payment, trade-in allowance and rebate used to reduce the capitalized cost. The loan term is called Down Payment
Rent charge.The portion of your base monthly payment that is similar to interest on a loan.
Residual value.The end-of-term value of the vehicle established at the beginning of the lease. When the residual value is subtracted from the capitalized cost the result is the total amount of depreciation. The residual value is similar to the balloon note on a loan
Depreciation.The total amount charged to cover the vehicle’s decline in value. It is the difference between the capitalized cost and the vehicles residual value. Similar to the monthly principle reduction on a loan
To summarize, the Capitalized Cost on a lease is the Amount Financed on a loan; the Capitalized Cost Reduction on a lease is like the Down Payment on a loan; the Rent Charge on a lease is like the Interest Charge on a loan and Depreciation on a lease is like the Principle Reduction on a loan.
Therefore, the base Lease Payment is made up of the monthly depreciation and rent charge added together. Similarly, the Loan Payment consists of the monthly principle reduction added to the monthly interest charge.
About
the Author:
Mike has a thirty year career in automotive management and
vehicle leasing. A former automobile dealer, Mike was also the National Supervisor
for Navy Federal Credit Union’s Vehicle Leasing & Auto Buying Service.
Mike is currently the Manager for Consumer Leasing for Allstate Leasing
To
contact Mike call 800-223-4885 or email at
mblumenthal@allstateleasing.com
