Are you wondering whether leasing your next car would be a good idea? OR Would you rather lease than buy furniture for an apartment you'll use for only a year?
When leasing looks like a good option, there's a federal law that will help you shop for the best deal. The Consumer Leasing Act requires leasing companies to tell you the facts about the cost and terms of their contracts. You can use the information to compare one lease with another or to compare the cost of leasing with the cost of buying the same property. The law also limits any extra payment you may have to make at the end of a lease and regulates lease advertising. This article describes the Consumer Leasing Act and the regulation issued by the Federal Reserve Board to carry it out.
What leases are covered?
The law applies to personal property leased by an individual for a period of more than four months for personal, family, or household use. It covers long-term rentals of cars, furniture, appliances, and other personal property.
The law does not cover:
- daily car rentals or month-to-month rentals that you can cancel without penalty at the end of the month;
- leases for apartments or houses -- or furniture that comes with a rented apartment;
- property leased to companies or to individuals for business use.
What about costs?
Before you agree to a lease, the law requires that you get a written statement of its costs, including:
- the amount of any advance payment, such as a security deposit;
- the number, the amount, and the dates your regular payments are due, as well as the total amount of those payments; and
- the amount you must pay for license, registration and taxes, and for any other fees, such as maintenance.
What about terms of the lease?
You must also be told certain terms of the lease, including:
- what kind of insurance you need;
- any express warranty on the property;
- who is responsible for maintaining and servicing the property, and any standards for wear and tear (which must be reasonable) set by the leasing company;
- any penalty for default or late payment;
- how you or the leasing company may cancel the lease and the charges for doing so; and
- whether or not you can buy the property and, if you can, when and at what price.
What are open end leases and balloon payments?
One decision that will affect leasing costs and terms is whether you choose an "open end" (or "finance") or "closed end" lease. In an open end lease, you run the risk of owing extra money depending on the value of the property when you return it. This payment is often called a "balloon payment." For example, when you sign a three-year open end car lease, the leasing company may estimate that the car will be worth $4,000 after three years of normal use. If the car is worth only $3,300 when you return it, you may have to pay a $700 balloon payment.
In a closed end lease, you are not responsible for the value of the property when you return it and will not have to make a balloon payment. As a result, closed end leases usually have higher monthly payments than open end leases.
You should know that in an open end lease:
- The leasing company must tell you that you may have a balloon payment and how it is calculated.
- At the end of the lease you have the right to obtain an estimate of the property's worth from an independent appraiser. Both parties must abide by the estimate.
Limits on Balloon Payments.
You should also know that the law limits a balloon payment in an open end lease to no more than three times the average monthly payment -- unless you agree to make a higher payment or you have used the property more than average (for example, if you put more than average mileage on a car). The leasing company may also seek a larger payment by going to court. If it goes to court, the company has the burden of proving that its original estimate of the value of the property, although wrong, was reasonable and made in good faith. The company must pay your attorney's fees in such a lawsuit, whether or not it wins.
How do I shop for a lease?
First, decide whether you want to buy with cash, buy on credit, or lease. When making your decision, be sure to take into account such expenses as the cost of insurance, maintenance, and special fees.
To help you compare the cost of buying on credit with the cost of open end leasing, you must be told the total amount you are responsible for under the lease, the value of the property at the beginning of the lease, and the difference between the two. For example, a three-year open end car lease might show:
36 monthly payments of $225 = $8,100 + Estimated value of car at end of lease 4,000.
Amount you are responsible for under lease 12,100 - Value of car at beginning of lease = 10,700. Difference = $1,400
You could compare this "difference" of $1,400 with the finance charge you would pay if you bought the car on credit.
If you decide to lease, shop around for the best price and terms. Your overall costs will be lower if you bargain for the lowest lease price, just as you would to purchase the car for cash or credit. If you don't bargain, you won't get the lowest price, which affects other lease costs. Compare the costs and advantages of open end and closed end leases, and look at such options as whether the leasing company will pay for repairs and maintenance.
What about advertising?
The law also regulates the advertising of leases. If a leasing company advertises the amount or number of payments or that any or no downpayment is required, it must also mention several other important terms, including the total of regular payments, your responsibilities at the end of the lease, and whether or not you may purchase the property. This is to make sure you receive enough information from the advertisement to understand the offer and to compare it with others.
What are the penalties?
You as an individual may sue a leasing company if it fails to give you the required information or does so improperly. You may sue for 25 percent of the total of the monthly payments (but not less than $100 or more than $1000) plus any actual damages. If an advertisement violates the law, you may sue the leasing company for your actual damages. In any successful lawsuit, you are also entitled to court costs and reasonable attorney's fees. You must file your suit within one year of the termination of the lease agreement. The law also provides criminal penalties for intentional violators.
For More Information
A number of Federal agencies are responsible for enforcing the Consumer Leasing Act. The Federal Trade Commission (FTC) enforces the law for almost all leasing companies other than banks.
You can file a complaint with the FTC by contacting the Consumer Response Center by phone: 202-FTC-HELP (382-4357); TDD: 202-326-2502; by mail: Consumer Response Center, Federal Trade Commission, Washington, DC 20580; or through the Internet, using the online complaint form. Although the Commission cannot resolve individual problems for consumers, it can act against a company if it sees a pattern of possible law violations.
The FTC publishes free brochures on many consumer issues. For a complete list of publications, write for Best Sellers, Consumer Response Center, Federal Trade Commission, Washington, D.C. 20580; or call (202) FTC-HELP (382-4357), TDD (202) 326-2502.
If you wish to file a complaint about a financial institution, contact the appropriate Federal agency listed below.
Comptroller of the Currency
Mail Stop 7-5
Washington, D.C. 20219
State Member Banks of the Federal Reserve System
Board of Governors of the Federal Reserve System
Consumer and Community Affairs
20th & C Sts., N.W.
Washington, D.C. 20551
Non-Member Federally Insured Banks
Federal Deposit Insurance Corporation
Office of Consumer Programs
550 Seventeenth St., N.W.
Washington, D.C. 20429
Federally Insured Savings and Loans, and Federally Chartered State Banks
Office of Thrift Supervision
Consumer Affairs Program
1700 G St., N.W.
Washington, D.C. 20552
Federal Credit Unions
National Credit Union Administration
1776 G St., N.W.
Washington, D.C. 20456