AutoLeasingGuide03/22

Don’t Be Taken for a Ride

Guide to

Auto Leasing

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

If you are considering leasing a vehicle, you should know that . . . . 2

Why do people lease? . . . . . . . . . . . . . . . . . . . . . . . . . 2

What is a lease? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

How often do you purchase a new vehicle? . . . . . . . . . . 3

What can you afford? . . . . . . . . . . . . . . . . . . . . . . . . . 4

Do you put a lot of wear and tear on a car? . . . . . . . . . 4

Understand the effect of trade-ins and down payments . . . . 5

Be on the lookout for special factory-subsidized lease deals . . . 5

Balloon-Note Financing . . . . . . . . . . . . . . . . . . . . . . . 5-8

O.K., so you think leasing is a good idea for you? . . . . 8

Know the language of the industry . . . . . . . . . . . . . . . . 8

Auto Leasing Guide Glossary . . . . . . . . . . . . 9-18

Let’s review the basics of buying a car . . . . . . . . . . . . . 18

Now, let’s look at leasing . . . . . . . . . . . . . . . . . . . . . . 19

Learn how to calculate the interest rate or “money factor” . . . . 20

What are your insurance needs? . . . . . . . . . . . . . . . . . 21

The Buy-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Advertising requirements for lessors . . . . . . . . . . . . . . 21

What to expect at the end of the lease . . . . . . . . . . . . 23

In Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Introduction

In recent years, the number of drivers who lease rather than buy

their cars has increased tremendously. A large percentage of New

Jersey residents now lease a vehicle. Unfortunately, as the number of

leases has increased, so has the number of complaints of consumer

fraud and deception.

New Jersey’s Consumer Protection Leasing Act (“C.P.L.A.”),

N.J.S.A. 56:12-60 et seq., established what are perhaps the strongest

motor vehicle leasing standards in the nation. The law ensures

greater protection for New Jersey consumers by requiring lessors to

disclose detailed information about crucial terms of their leases.

On October 1, 2005, the New Jersey Streamlined Sales and Use Tax

Agreement became effective. This legislation made significant

changes to the New Jersey Sales and Tax Use Law and changed the

formula for calculating the tax on auto leases. Additionally, effective

January 1, 2018, the New Jersey Sales and Use Tax Rate is 6.625%.

The C.P.L.A. requires the Division of Consumer Affairs

(“Consumer Affairs”) to educate consumers about leases. As part of

its statutory obligations, Consumer Affairs has prepared this book-

let. With the help of this booklet, the “Don’t Be Taken For a Ride

Guide to Auto Leasing,” you can determine whether leasing or buy-

ing is right for you and, if you do lease, how to ensure that you will

negotiate the best possible deal.

If you are considering leasing a vehicle, you should know that...

The most important right you have as a lessee is to be free from

fraudulent practices. However, you should also realize that you

have a right to receive important information that is accurate,

including the material terms and conditions that will be a part of

your lease, without having to endure undue sales pressure and con-

fusing or mysterious language. The C.P.L.A. and the Consumer

Fraud Act (“C.F.A.”), N.J.S.A.

56:8-1 et seq., incorporate these

rights for New Jersey consumers into law. .

Why do people lease?

The lure of a lease is its monthly price. Consumers often find that

they can lease cars at lower monthly payments than they would if

they were purchasing. Advertisements of “no down payments,”

“low monthly payments” and “more car for your dollar,” are natu-

rally very appealing.

According to Consumer Reports, the average price of a new car is

approximately $47,000. As a result, some consumers are leasing as

an alternative to buying new vehicles

Before you make up your mind and lease that fancy sports car or

sport utility vehicle, ask yourself two basic questions:

1) “Will it be cheaper in the long run to buy or lease this

vehicle?” and

2) “If I lease, how do I get the best deal?”

What is a lease?

A lease is basically a long-term rental agreement – more than 120

days – to drive a vehicle owned by someone else. You are paying for

the right to drive that vehicle and for the value of the car while

you drive it. When the lease is over, you must give the vehicle

back, unless you have the option to buy it

Before you sign the lease contract, take the time to review it care-

fully. Write down any questions that may arise during your review,

and be sure to pose any questions you may have to the salesperson.

Make sure you understand the answers to your questions before

signing the contract. Also, be certain to get everything in writing.

For example, if you’re told that you can turn the car in early with-

out having to pay an extra penalty, don’t take the salesperson’s

word for it; get that information in writing and as a lease adden-

dum signed by the dealer/lease company, not just on a blank piece

of paper signed by the salesman. Usually, if it is not on the printed

contract, it is not binding.

Under the C.P.L.A., you are given a one-day cooling-off period to

review the lease contract. This innovative provision allows you to

bring the unsigned agreement home to review the numbers and to

determine whether that agreement is right for you. Not doing so

could prove costly.

A lessor may suggest that you waive your right to review the

contract; however, you might not want to do that. In fact, you should

think long and hard before doing so. Remember, there are very few

deals that are so good that they will not be available 24 hours later.

Pursuant to regulation at N.J.A.C. 13:45A-28.8, the waiver must

state: I HAVE BEEN ADVISED THAT UNDER THE NEW JER-

SEY CONSUMER PROTECTION LEASING ACT, N.J.S.A.

56:12-60 et seq., I AM ENTITLED TO REVIEW THE LEASE

CONTRACT FOR ONE 24-HOUR BUSINESS DAY BEFORE

SIGNING. I CHOOSE TO WAIVE THAT RIGHT AND SIGN

THE LEASE NOW. In addition, this waiver must include certain

elements of the lease disclosure required under N.J.S.A.

56:12-62.

How often do you purchase a new vehicle?

When you consider buying versus leasing, you need to ask yourself

how long you plan to keep the vehicle. The average consumer buys

a new vehicle every four years. If you are one of these consumers or

if you trade in your car every two or three years, a good leasing deal

may be better for you. If you tend to keep your car for a longer peri-

od of time, purchasing a vehicle may be better. The longer you

drive a car for which payments are no longer due, the lower the

average of your monthly costs are likely to be.

Example: A car priced for sale at $20,000 and with $20,000

financed will cost $555.56 a month for 36 months, $416.67 a

month for 48 months or $333.33 a month over 60 months, plus

interest costs. When leasing that same car, monthly payments are

fixed at a lower amount because you are not paying off the entire

purchase price and there is a residual value you have not paid –

regardless of the length of the lease

Another consideration is crucial. At some point, the owner of a car

no longer makes payments and drives it for “free.” When he or she

goes to buy or lease another vehicle, he or she has the car which

has been paid for in full as an asset to trade in towards his or her

next purchase or lease. In contrast, when a consumer returns his or

her leased vehicle, he or she has nothing to trade in towards the

cost of a new lease or purchase.

What can you afford?

Many consumers are attracted to lease deals because of advertised

low monthly prices. While everyone likes low prices, there may be

additional, less obvious costs associated with leasing. In the long

run, these expenses may cost you more than buying the car. Lessors

charge any number of fees at the beginning and end of the lease

which may not appear when you purchase a vehicle. These fees add

up and may make that “good” deal less appealing.

Do you put a lot of wear and tear on a car?

If you are rough on your automobile, then leasing is probably NOT

for you. Lessors typically charge for “excess wear and tear.” The

C.P.L.A. helps you sort out what this phrase means, but if your cars

tend to become scratched or dented, you can expect additional

charges at the end of your lease. These repairs that need to be made

become an out-of-pocket expense for you.

Understand the effect of trade-ins and down payments

The key thing to remember is that any money you put down on

your lease or any vehicle that you have used as a trade-in to reduce

your monthly payments are resources that are no longer available

to you and that you will not get back at the end of the lease. While

you are able to lower your monthly payment, you will not have

that money to purchase another car at the end of the lease. You

also will not have one car to trade in for another. At the end of the

lease, whether you have put no money down or have put several

thousand dollars down, the leasing company will charge you the

same amount of money for the car should you choose to purchase

it. The only things you accomplish with a down payment or a

trade-in are to lower your monthly payments and reduce the

amount you have to pay in taxes.

Be on the lookout for special factory-subsidized lease deals

To make a lease more attractive to consumers, car manufacturers

may adjust the residual value (see page 15) or lower the finance

charges on the vehicle being leased. Doing this allows them to

offer leases through their companies at lower money factors (see

page 13) than those offered by banks. The car manufacturers real-

ize that consumers who lease vehicles from them do more repeat

business than consumers who purchase vehicles. The dealer’s prof-

it is the difference between the price the dealer paid for the vehi-

cle and the price the dealer sells the vehicle to the leasing compa-

ny for, in addition to items such as service contracts, alarms, and

undercoating the car.

Balloon-Note Financing

A form of auto financing that is similar to a lease that has gained

in popularity is called “balloon-note” financing. It is structured like

a lease in that the consumer makes payments on the vehicle for the

term of the contract (usually a term of 24, 36, or 48 months). At

the end of the contract a balance or a “balloon-note” amount

remains.

The balloon-note amount is the value the financial institution

determines the vehicle will be worth at that time. This is usually

several thousand dollars. That value is the expected market value,

which is normally determined using a residual guide in the same

manner the residual value of a lease is computed. Thus the con-

sumer only pays the amount the vehicle depreciates during the

term of the contract. One difference between balloon-note financ-

ing and leasing is that the vehicle is owned by the consumer

instead of a leasing company. It is considered a financed transac-

tion so leasing regulations do not apply; however, financing regu-

lations do apply. Another consideration in a balloon-note transac-

tion is that the consumer pays sales tax on the entire purchase

price of the vehicle. On a lease, the tax is only on the amount of

the payments and other taxable items that you may pay for sepa-

rately. However, there is no tax paid in the beginning on the resid-

ual value. Thus, if the consumer wishes to keep the vehicle at the

end of the payment portion of the contract there is no additional

sales tax due on a balloon-note vehicle, but on a lease there is tax

on the residual purchase price.

Since the payment amount on a 48-month (or any term) balloon-

note financed vehicle is significantly less than on an installment

sales contract where the entire vehicle is paid off at the end of the

contract, many consumers find it advantageous to finance this way.

Consumers should look into all aspects of the various financial

arrangements and choose what they feel is best for them.

Consumers should also carefully consider every detail of a leasing

agreement, such as the number of miles that will be driven as well

as being responsible for any excess wear and tear when the vehicle

is turned in..

At the end of your balloon-note contract, in most cases you would

have several options. You can pay the final balloon payment and

keep the vehicle, refinance the balloon note into equal payments

and keep the vehicle, or turn it in to the financial institution and

pay the predetermined fee. Keep in mind the contract usually calls

for a mileage limitation and condition qualifications, just as there

are on a lease.

One of your primary considerations should be, once you have

decided on the vehicle you want, to find out the particulars of the

different financing and leasing plans available and then pick the

one that best suits your needs. If you are not sure if you want a lease

or a purchase with a balloon-note, you can ask the dealer to com-

pute the payments on each plan on the same vehicle with the same

amount paid down. All things being equal, the balloon-note

should have slightly higher payments due to the higher amount of

tax being paid up front. However, this is not always the case

because the incentives in the balloon-note deal may be different

from the incentives in the leasing plan. It is important that all

aspects of the program are explained to you by the dealer.

It is also important that the dealer explains to you, and you under-

stand, that it is a balloon-note and that the vehicle will not be paid

off at the end of the contract. You need to fully understand all of your

choices. It is also critical that you read and understand the contract

and any associated paperwork prior to signing the paperwork.

Balloon-note financing is done predominantly by captive (manu-

facturer’s) finance companies such as GMAC, Ford Motor Credit,

Chrysler Credit, etc. Many larger banks such as Chase may also

offer the plan. GMAC calls it “Smart Buy” and has a separate rider

that must be signed in addition to the base contract. Ford’s con-

tract is called a “Simple Interest Balloon Contract,” and

DaimlerChrysler’s contract is called “Fixed Value.” Read the con-

tract carefully – look to the section that lays out the number and

amount of each payment, this may be the only indicator of bal-

loon-note financing. At that spot the contract should show an

additional payment with the large balloon amount.

This is just one more way to obtain a vehicle, but remember that

it is up to you to decide what is best for you. If you do not feel com-

fortable about how the dealer is explaining things or answering

your questions, you do not have to lease or purchase the vehicle. It

is O.K. to tell the dealer you need more time to do research or to

think about whether or not balloon-note financing is the option

for you. In addition, any different terms or arrangements should be

noted in the contract and if they are not there, they must be on a

separate form on the dealership’s letterhead and this form must be

signed by the dealership’s management, not just by your sales rep-

resentative. Obtaining a vehicle should be a comfortable and

pleasant experience and in most cases, if a deal feels too good to be

true, it usually is.

O.K., so you think leasing is a good idea for you?

You have asked yourself all the right questions and the answers add

up to the same conclusion: you want to lease. Now is the time to

ask yourself two crucial questions. First, “How does the lessor cal-

culate the monthly payment?” Second, “Can I get a lower month-

ly rate?” You can’t answer the second question unless you know the

answer to the first. Once you understand how the lessor sets the

monthly rate, you can negotiate with the lessor on even footing.

Know the language of the industry

The first step is to understand the key terms of the lease. Many of

the terms in a lease have special meaning – particularly the key

words. Before you negotiate your lease, you should learn these spe-

cial definitions. You may know terms such as “down payment” and

“MSRP,” but you may not be familiar with others such as “cap cost”

and “gap coverage.” Once you understand the terms used by lessors,

you will be better prepared to negotiate your lease. The following

glossary will help you to become more familiar with the terms used

in leasing and, as a result, help you to be better prepared to nego-

tiate your lease.

NOTES

Auto Leasing Guide

Glossary

Adjusted Capitalized Cost –

This is the amount used in calculating your base monthly pay-

ment. It is the Gross Capitalized Cost minus any Capitalized

Cost Reduction.

“After-Sell” Items –

This is any product or service sold to the consumer by the

dealership which is not otherwise standard equipment. These

additions could be items such as an alarm system, life and dis-

ability insurance, extended service contracts, undercoating, etc.

Administrative Fee –

This term is also referred to as a bank fee or an acquisition fee.

This is a fee charged by a leasing company to process a con-

sumer’s lease application. It is usually incorporated in the Gross

Capitalized Cost. However, this amount may be paid up front

as a separate charge.

Capitalized Cost, Cap Cost or Gross Capitalized Cost –

This is equivalent to the selling price. This is the starting point

for calculating your lease costs and includes a dollar value for

the car plus any additional charges such as:

service contracts;

taxes;

fees;

additional equipment including an alarm system,

undercoating, etc.; and

any outstanding prior balance on a trade-in.

You do have the option to be provided with a separate list of

the items included in this cost if they are not already listed in

the contract. Also included is the 6.625 % New Jersey Use Tax.

Capitalized Cost Reduction –

This is similar to a down payment. This can include amounts

to be paid in cash, non-cash credit, rebate and/or trade-in

allowance. Since this reduces the monthly lease payments, it is

taxable, except for the trade-in, which is not taxable. This is

one way to reduce your monthly payment but it is not money

that you will recover at the end of the lease. You are basically

paying part of the monthly payments in one lump sum, there-

by reducing the amount due each month.

Car Lease –

This is a form of renting a car for a longer term (over 120 days),

as defined by New Jersey law. The vehicle is usually leased at a

dealership. The vehicle and the lease are then purchased by a

leasing company. The lease is memorialized in a written con-

tract. There are two types of leases: closed-end leases and open-

end leases.

Closed-End or “Walk-Away” Lease –

A lease where the lessee returns the car without owing any

money at the end of the lease term except for excess mileage

and wear and tear. “Open-End Lease” is the other type of lease

and is defined here in the glossary. (See page 14 for the defini-

tion of “open-end lease.”)

Depreciation –

The value that the vehicle loses during the lease term. It is the

difference between the vehicle’s capitalized cost and the vehi-

cle’s value when the lease expires (residual value).

Disposition Fee –

This is very important for consumers to understand before sign-

ing the lease. A “disposition fee” is defined also as a recondition-

ing fee, an end-of-term fee or a termination fee. It is a charge,

usually no more than $500, that must be paid upon termination

of the contract. If the consumer has made a security deposit, the

disposition fee could be taken from that and the consumer will

be billed for the remaining balance, if any remains.

Down Payment –

See “Capitalized Cost Reduction.”

Early Termination –

There are two basic ways of pursuing the early termination of a

lease. This can be done by paying the remaining amount on the

lease and returning the car to the lease company, or by mailing

the remaining lease payments as well as the purchase price and

then buying the vehicle.

You may be able to negotiate a reduction of any of the unearned

rent charge when you terminate your lease early. Read the con-

tract carefully to understand how early termination charges will

be calculated. Remember, if you default on the lease, the

charges can be substantially more, depending on the contract.

Excess Mileage Charge –

Some leases charge from 10 to 30 cents a mile for any miles over

the agreed amount in the contract. For example, .20 x 10,000

miles over the allowable miles = $2,000 due at the end of the

lease. Check for a “per-mile charge” in writing and be realistic

about your mileage before you sign the contract. The contract

allows for a standard number of miles, but you do have the

option to purchase additional miles. You may want to consider

padding the miles that you expect to use since it is less expensive

to contract for the additional miles before the contract is signed,

than to pay a charge that is calculated per mile after the lease is

terminated. Determine the amount that you will be charged over

the mileage that you have agreed to in the contract.

Gap Coverage or Gap Insurance –

This is a special type of coverage offered to consumers who lease

automobiles. It is intended to protect consumers, if the leased

vehicle is lost or stolen, for the difference or “gap” between the

consumer’s actual outstanding lease obligations and the amount

of coverage a consumer’s auto insurance policy provides.

Typically, auto insurance policies pay only the market value at

the time of the loss of a vehicle, while leases frequently require

the lessee to pay all of the leased obligations. The difference

could be thousands of dollars. This coverage may be included

in the lease agreement. Check to see if the coverage is already

provided so that you do not pay for it twice. Gap coverage is

not required by law and technically is not “insurance.”

Inception Fees –

This refers to any and all fees that must be paid up front by the

consumer at the time of delivery. Look for this under “Amount

Due at Lease Signing or Delivery” on the face of the contract.

Lease Contract –

A lease contract is the written document which sets forth all of

the terms of the entire lease transaction, and it is typically

signed and a copy is issued to the consumer when he or she

picks up the vehicle.

Lease Rate –

This is the equivalent of the interest rate on a purchase.

Lease Term –

This is the number of months the lessee will rent a vehicle.

Lessee –

This is the person who will lease a vehicle.

Lessor –

This is the owner of the vehicle that will be leased.

Maintenance Agreement –

This is a contractual agreement arranged by the dealer with the

lessee for routine maintenance services, such as oil filter and oil

changes, tire rotation and chassis lubrication. It is typically an

after-sell item that requires an additional fee incorporated in

the overall lease price or capital cost. You can negotiate the

cost of the maintenance agreement with the salesperson.

Manufacturer’s Suggested Retail Price or “MSRP”–

This is the list price of the vehicle or the window sticker price.

On new vehicles this is found on the “Monroney Label” that is

usually attached to a window on the vehicle. You should make

sure you get a copy of it, if not the original, when you take

possession of the vehicle.

Money Factor –

It is similar to an interest rate on a car loan when purchasing a

vehicle. State and federal law do not require lessors to disclose

this key term of your contract, but it is an important factor that

affects the amount of your monthly payment. The higher the

money factor, the higher your monthly payment will be. The

figure is typically negotiable, so have the dealer get you the

lowest rate. The money factor is not expressed in an annual

percentage rate, so you need to know how to calculate it. The

money factor typically appears as a decimal of four or more dig-

its that, when multiplied by the number 24 (no matter what

the term of the lease), will give you a good sense of what your

annual interest rate will be. The closer the four-digit decimal is

to .0000, the lower the monthly payment will be. The better

your credit rating is, the lower you should expect the money fac-

tor to be.

Example: 24 x .0045= 10.8%

or 24 x .0065=15.6%

Motor Vehicle Fees –

These are the actual fees the dealer pays the State to title and

the yearly registration fees up front for the number of years in

your contract, up to four years. If your lease is scheduled to end

mid-year such as with a 30-month lease, you would be required

to pay for three years of registration fees. These fees can be paid

up front or incorporated into the gross capitalized cost of the

lease. In addition, there is a $1.50 fee for each tire which,

including the spare, would total $7.50. Also, as of July 15, 2006,

there is a 0.4% surcharge on new vehicles on which the sale

price of the vehicle is $45,000 or more. In the case of a lease it

will be the gross capitalized cost of the vehicle. This surcharge

will also be added on if the average E.P.A. gas mileage is less

than 19 miles per gallon (MPG). This figure is obtained by

adding the city and highway mileage on the window sticker and

dividing by two. This applies to any vehicle registered as a non-

commercial vehicle. This money is collected up front by the

dealer and submitted to the New Jersey Division of Revenue.

The only exception will be if the average MPG is over 40 or the

vehicle is certified as a “zero emission vehicle.”

Open-End Lease –

This is a lease in which the lessee’s liability at the end of the

lease term is based on the difference between the residual value

of the leased vehicle and its realized value (the amount for

which the car can be sold). This type of lease is not usually used

for consumer leasing. It is used mostly by businesses when leas-

ing a large number of vehicles at one time.

Price Quote –

The price may truly be a good one or it may appear competi-

tive because it does not include all of the other costs. Also, the

cost of the vehicle is negotiable so if you can get the dealer to

lower the cost, it will lower your monthly payment. After you

negotiate your best deal, make sure that you get a breakdown of

any additional charges such as bank fees, taxes, documentary

fees or motor vehicle fees. You can then shop and compare the

overall cost of each deal.

Purchase Option at the End of the Lease Term –

This is the price stated in your contract for which you may pur-

chase the vehicle at the end of the lease term, and it is usually

based on the residual value. If you do not have the option to

purchase the vehicle, it should be stated in the lease.

Refundable Security Deposit –

This amount is used to cover any damage or outstanding

charges due when the lease term expires. There is no require-

ment for the lessor to pay interest on the money held.

Rent Charge –

When a consumer purchases a vehicle, this is referred to as a

finance charge. This is the amount charged in addition to the

depreciation and any amortized amounts.

Residual Value –

This is the value of the vehicle at the end of the lease. It is used

in calculating the base monthly payment. This value is usually

nonnegotiable and is based on a percentage of the MSRP as

calculated by industry guidebooks which may vary between dif-

ferent leasing companies. Sometimes leasing companies keep

this number a little high because the higher the residual, the

lower your monthly payment and the more attractive and

affordable the deal. However, if you plan to purchase the vehi-

cle at the end of the lease, the higher residual would generally

make the purchase price higher.

Retail Order Form –

A retail order form may be called a Retail Buyers Order

(R.B.O.) and is an agreement executed by the seller and pur-

chaser or, as in this case, the lessor and lessee, which memori-

alizes in writing the negotiated selling price or negotiated

monthly lease payments along with various other material

terms of the deal. The lease contract should align with the

terms of the retail order form and, if during the course of nego-

tiations the terms change, an updated retail order form should

be completed prior to the execution of the final lease contract.

Of course, you should be given a copy when you sign it.

Sales Tax or Use Tax –

Effective January 1, 2018, the New Jersey Sales and Use Tax

Rate, which is applicable to the sale of most personal property

including motor vehicles, is 6.625%. For example, the 6.625%

(tax rate) x $15,000 = $993.75 (total tax).

As noted previously, the New Jersey tax law regarding leases

changed dramatically effective October 1, 2005.. Previously, in

New Jersey, taxes on leases were almost always calculated on

the difference between the Gross Capitalized Cost and the

Residual Value.. Under current law, the consumer is directly

responsible for paying the tax as opposed to the previous law

where it was the responsibility of the leasing company. You will

not be required to physically make the tax payments. In gener-

al, the tax is based on the total dollar amount of the lease pay-

ments and is collected up front and paid by the dealer, at the

beginning of the lease, in a manner similar to the way it is

done when a consumer is purchasing a motor vehicle. So, in

this situation, the tax should be included in your contracted

lease payment.

You, the consumer, should make sure you understand the tax

information that is listed and disclosed on the lease contract.

This is complicated because some of the components of the

lease are taxable and some are not taxable. Keeping this in

mind, the tax amount, which is then added to and included in

the monthly lease payment, is subject to rent/finance charges,

which in turn are taxable. It may be advantageous to you to

obtain documentation from the leasing dealer regarding how

the tax was calculated.

People leasing vehicles from a New Jersey dealer who are out-

of- state residents or have dual residences, and who are going

to register and use the vehicle in another state, do not have to

pay New Jersey taxes. However, they may be responsible for the

taxes in the state in which they register the vehicle.

Consumers who have leased a vehicle in New Jersey and paid

the taxes in New Jersey, and who then, during the term of the

lease, move to another state, may file for a pro-rata refund

based on the remaining payments due on the lease.

Service Contract –

Also known as an “extended warranty,” this is a contract sold

by the dealer on top of the manufacturer’s warranty. Like the

manufacturer’s warranty, service contracts typically cover the

components of a vehicle, such as the engine and transmission.

However, they usually last longer than the average manufactur-

er’s warranty in time and in mileage. You should make sure that

you get a complete breakdown of what is covered and discuss

whether the coverage is limited or not. You may still be respon-

sible for the routine maintenance of the vehicle either way.

Also, most cars have a three-year warranty, so if you choose a

three-year lease, you may not have any need for a service con-

tract. Remember, service contracts are never mandatory, but

they may be worthwhile if you plan to purchase the car at the

end of the lease.

Total of Base Monthly Payments –

This is the difference between the Adjusted Capitalized Cost

and the Residual Value plus the Rent Charge, which is then

divided by the lease term to get the Base Monthly Payment,

which when multiplied by the number of months for which the

car is leased, gives you the total.

Wear and Tear –

This is the incidental damage done to a car while leased. If this

is deemed “excessive,” this will cost you money at the end of

the lease when you return the car. There is no “formula” for

determining what defines “excessive.” Individual leasing com-

panies determine what they are going to charge. The C.P.L.A.

requires that a description of the standards used by the lessor in

determining excessive wear and damage be spelled out in the

contract. Many leasing companies inspect the vehicles prior to

the end of the lease. If there is damage, consumers may find it

less expensive to repair it themselves.

There is nothing mystical about how your lease

payment is configured if you know how the transaction

works. Before you look at the leasing process, let’s

review the basics of buying a car.

When buying a new vehicle, one of the first things you probably do

when you walk into the dealership is check the selling price of the

car you intend to buy. The car has something called a Monroney

Label (commonly known as the “window sticker”) on it, which

lists the manufacturer’s suggested retail price (“MSRP”). Very few

people offer to pay the sticker price. Consumers typically look at

the sticker price and begin negotiations. The ultimate cost is deter-

mined by your counteroffer based on this price, how much you will

seek for your trade-in and how much you are able to provide as a

down payment. Once the haggling is over, many consumers begin

to think about financing the car and getting the best interest rate,

knowing that the higher the interest rate, the more they will pay

each month and, eventually, over the life of the deal. A smart con-

sumer not only shops for the best purchase price, but also shops for

the best interest rate, expressed as the annual percentage rate

(A.P.R.). The dealer may have a good rate, but your credit union

or local bank may have a better rate. The choice is yours.

Now, let’s look at leasing.

When people lease, a different approach is often used. Leasing adver-

tisements emphasize low monthly payments. The monthly payment

is important –how much you will have to pay each month – but if

you ignore how that payment is calculated, you may surrender the

best chance of negotiating a better deal and a lower payment.

The place to start is still at the MSRP. This figure gives you a

rough idea of what the car would cost if you were buying it. It is

also probably not far off from the “gross capitalized cost” of the

vehicle – the starting figure that determines your lease costs and

monthly payments.

Under State law, the lessor has to list the MSRP on the contract if

the gross capitalized cost is more than the MSRP. Once you know

the gross capitalized cost, you are ready to make crucial evaluations.

If you are trading in your car as part of the deal, the credit for your

trade should be subtracted from your gross capitalized cost. If you

make a cash payment toward your lease, that should be subtracted

from your gross capitalized cost, as well. Once you have subtracted

these payments and added in any fees charged by the lessor, you have

reached your “adjusted capitalized cost.”

Now you’re ready to do some more subtracting. The banks, the les-

sor and financial institutions all keep estimates of what your leased

car will be worth when your lease is over. This is known as the “resid-

ual value” of the vehicle. In theory, this residual value is

determined by a percentage of the vehicle’s original sticker price or

MSRP. These are exact percentages which are printed in automotive

lease guides provided by leasing companies for internal use by

automobile dealers when doing business with leasing companies. You

will not have use of the car when the lease is over, so you do not pay

for that portion of the car’s costs. You should subtract the

residual value from the adjusted capitalized cost. This leaves a lump

sum which you will pay over the life of your lease. That means you

will pay finance charges on the value of the car for the time you have

it. Remember, you are also paying finance charges on the residual.

These are known as the “rent charges.”

Learn how to calculate the interest rate which is also

known in leasing as the “money factor.”

What interest rate? You are indeed paying interest, even though

lessors are not always eager to disclose this fact, much less the

rate, to you. This may also be called the “rent factor” or “rent

charge.” New Jersey law does not require a lessor to tell you about

this charge, but you should insist that they inform you about the

interest rate.

If the lessor quotes a rate, it will likely be in the form of a money

factor, which is similar to an interest rate. It is not hard to trans-

late the money factor into a finance rate. This can be done simply

by multiplying the money factor by 24; for more detail, see “Money

Factor” in the Glossary. This process will convert the money factor

to a percentage which is closer to the A.P.R. that you are more

accustomed to seeing. Compare that to the A.P.R. on a purchase

and you will have crucial information on the interest rate. You also

need to know whether this is the best rate the lessor can give you.

Your lessor usually has an array of financing institutions from

which they can get the financing. If you don’t like the rate that you

are quoted, make the lessor shop for a better rate. Remember, your

goal is to get the lowest possible payment.

What are your insurance needs?

Even after you’ve done all of this, there are other issues to consid-

er. You will you need to purchase the automobile insurance cover-

ages that the State of New Jersey and the leasing company require,

such as liability, collision and comprehensive, but it may be advan-

tageous to purchase a coverage sometimes called “gap insurance” or

“gap coverage.” Remember, gap coverage is technically not insur-

ance but it is a type of coverage that protects you from owing the

difference between an insurance settlement and the leasing com-

pany’s payoff figure. There is usually a difference between the value

of the car at any point in time and the amount actually owed on

the lease. In most cases, the value of the car is less than the amount

still owed on the lease. Many leasing companies will automatical-

ly provide you with gap coverage. Ask your dealer if gap coverage

is included in your contract. If it is, you should not be charged any

additional insurance costs.

The Buy-Out

Most leases give the consumer an opportunity to buy the car at the

end of the lease. This is known as the “purchase-option.” If you do

not have the option to purchase, it should be clearly stated in the

lease. The purchase-option price is set by the leasing company based

on guidelines which establish the value of the vehicle at the end of

a lease. This purchase-option price is usually the residual value,

although it may be higher. The consumer may want to renegotiate

the purchase-option price, and the time to do this is at the conclu-

sion of the lease. Either the exact dollar amount or the method for

determining the purchase price must be spelled out in detail.

Advertising Requirements for Lessors

N.J.A.C. 13:45A-26A.6 also requires advertisements for leases to

include the following disclaimers:

that the transaction is a lease;

the amount of the payment required at the

inception of the lease, or that no payment is required;

the number, amounts, due dates, or periods of scheduled

payments and the total amount of all of the payments;

the name and address of the advertiser; and

a toll-free telephone number for more information.

In all written advertisements, this information must be in at least

10-point boldface type. If the advertisements are broadcast, the

information must be stated while the commercial is being aired.

All of the text that is flashed across the screen must be displayed

for at least five continuous seconds. Anyone who calls the toll-free

number must be provided with the following information:

the advertiser’s business name and address;

identification of the transaction as a lease;

whether the advertised price refers solely to a business lease;

whether the transaction is an open-end or closed-end lease;

the number, amounts, due dates, or periods of scheduled

payments and the total amount of all of the payments;

all other itemized payments, such as security deposits or

capitalized cost reductions required at the start of the lease;

the cost of the lease;

the MSRP;

a statement that the price includes all of the costs to be

paid by the consumer except for licensing, registration

and taxes;

whether you have the option to purchase the advertised

vehicle, at what price and over what period of time;

how the advertiser determines any liability that is

imposed on the customer at the end of the lease;

a statement indicating that the customer will be liable

for the difference between the estimated value of the

vehicle and its actual value when the lease is up; and

a statement which clearly explains what is considered

standard equipment; whether the transmission is standard

or automatic; whether the brakes and steering are power

or manual, and whether the vehicle has air conditioning.

What to expect at the end of the lease.

In most cases, the leasing company will contact you to give you

instructions for returning the vehicle. They may want to inspect

the vehicle prior to your turning it in. They usually want the vehi-

cle returned to the original dealer, but alternate arrangements can

usually be worked out if another dealer works with your leasing

company. To protect yourself, you should always coordinate with

the leasing company a mutually agreeable location and date for the

return of the vehicle at lease maturity. If you keep it longer than

the maturity date, you may be subject to additional charges.

Remember, if your vehicle has excess wear and tear, as defined in

your contract, it may be more economical for you to repair it prior

to returning it rather than taking the chance that the leasing com-

pany’s estimate will be more expensive. Read your contract careful-

ly for all of the details. It is best to read it prior to signing the lease.

You should demand a dated condition report with both your signa-

ture and that of the representative accepting the car, the mileage

clearly stated, and a detailed review of the condition of the car at

the time that you turn it in. If you do not get this receipt, it could

cost you money down the road. If the leasing company is going to

assess you for excessive wear and tear, the company is required by

the C.P.L.A. to do so within 10 business days of the return of the

vehicle. You then have seven (7) business days, from the earlier of

the date of mailing or delivery of the invoice, to demand a

third–party inspection, which would be binding on both parties. In

addition, they are required to return your security deposit within

15 business days if there are no charges against it.

If you are going to purchase your vehicle at the end of the lease

term, you should read the contract carefully and follow the specif-

ic instructions. In many cases, the leasing company may be able to

finance the purchase for you.

Remember, by having your specific obligations clearly indicated in

your contract, it is less likely you will be upset by a “surprise.” This

abundance of information will also decrease the likelihood that

anyone will be able to take advantage of you. If you take the time

to read your entire contract, front and back, before you sign it, you

will understand the responsibilities and obligations of both the les-

sor and the lessee.

In Conclusion

The Division of Consumer Affairs can make no recommendations

about the benefits of leasing versus buying. If you are thinking seri-

ously about leasing, educate yourself about the lease agreement to

be certain that the deal you are considering is truly the deal that is

right for you.

Don’t Be Taken for a Ride

Guide to

Auto Leasing

NOTES

April 2022

Office of the Attorney General

Division of Consumer Affairs

P.O. Box 45027

Newark, NJ 07101

1-800-242-5846 Phone

Don’t Be Taken for a Ride

Guide to

Auto Leasing

800-242-5846800-242-5846

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New Jersey Division of Consumer Affairs