Vehicle Finance Glossary

We have compiled a list of the most common words and phrases utilized by lessors and banks, with simple definitions that can help you better understand the lease from inception to expiration.

We also offer additional information and insight in our “Frequently Asked Questions” section, answering many of the topics posed to us by existing clients, potential customers and dealers.

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A

ACH – An automatic withdrawal of payment from customer’s checking account or other bank account.

Acquisition date – The date the vehicle is acquired by the lessor by paying the dealer or seller.

Acquisition fee – A charge included in most lease transactions that either is paid up front or is included in the gross capitalized cost; may be called a bank fee, an administrative fee, or an assignment fee. This fee usually covers a variety of administrative or insurance costs. These may include the costs of obtaining a credit report, verifying insurance coverage, checking the accuracy and completeness of the lease documentation, entering the lease in data processing and accounting systems.

Addendum – A document to attach additional information to the original lease contract.

Additional insured – A party that is covered by another party’s insurance policy. The lessor typically requires you to name the lessor or assignee as an additional insured under your vehicle insurance policy.

Additional personal guarantor – A co-signer on a loan.

Adjusted capitalized cost – The amount capitalized (finance amount) at the beginning of the lease, equal to the gross capitalized cost (purchase price) minus the capitalized cost reduction (down payment). This amount is sometimes referred to as the net cap cost.

Advance – The amount being financed.

ALG – The Automotive Lease Guide, projecting accepted residual values for the automotive industry utilized by most lessors and banks.

Amount due at lease signing or delivery – The total of any capitalized cost reduction, monthly payments paid at signing, security deposit, title and registration fees, and other amounts due before you take delivery of the vehicle. Also see “Total Drive Off” or “Inceptions”. This amount may be paid to the dealer.

Amortized amounts – Amounts–such as taxes, fees, charges for service contracts, payments for insurance, and any prior credit or lease balance–that are included in the gross capitalized cost and are paid as part of the base monthly payment.

Amortization schedule – A schedule which shows how much of each payment is principal and how much is interest, including the principal balance on the loan after each payment.

Articles of incorporation – Documents filed with the state to validate the purpose and establish the creation of a company.

Assignee – A third party that buys a lease agreement from a lessor. You become obligated to the assignee, and the assignee generally assumes the responsibilities of the lessor, although some obligations may remain with the lessor. For purposes of Regulation M, an assignee may be a lessor when the assignee has substantial involvement in the lease.

Assignment – The sale of a lease agreement and transfer of the ownership rights for the leased vehicle from the lessor to an assignee. Many leases are assigned at the time the lease is signed.

Authorization for payoff – A written authorization which allows the lessor to obtain the payoff amount on a client’s loan at a different lending institution for the purpose of writing a new lease.

B

Balloon – Residual at the end of the lease.  Also see “Purchase Option”.

Bank fee – Fee charged by the bank for processing the loan. Also see “Acquisition Fee”.

Bank requirements – Various stipulations needing to be met by the lessee to prove necessary information, which may include Proof of Income (POI), Proof of Residence, Proof of Payoff, etc. (Also see Stipulations)

Base monthly payment – The portion of the monthly payment that covers depreciation, any amortized amounts, and rent charges; calculated by adding the amount of depreciation, any other amortized amounts, and rent charges and dividing the total by the number of months in the lease. Monthly sales/use taxes and other monthly fees are added to this base monthly payment to determine the total monthly payment.

Branded title – The labeling of a vehicle title signifying that a vehicle was junked, salvaged, dismantled, rebuilt or reconstructed.

Business lease – A lease of personal property to (1) an individual to be used primarily for business, commercial, or agricultural purposes or (2) an organization, such as a partnership, corporation, or government agency. The Consumer Leasing Act and Regulation M do not apply to business leases.

C

Capitalized cost – Shortened term for either gross capitalized cost or adjusted capitalized cost. Disclosure of both types of costs is required under federal law. Some states require that the term “capitalized cost” be used in state lease disclosures. See gross capitalized cost and adjusted capitalized cost.

Captive finance company – A finance company related to a particular automobile manufacturer or distributor.

Capitalized cost reduction – Also known as a Down Payment, which is the amount of any trade or cash that reduces the Gross Capitalized Cost or Purchase Price.

Carfax – An internet service that checks for any “red flags” on a vehicle (condition, liens, etc.) by researching the Vehicle’s Identification Number.

Cash collateral – Money held in an interest-bearing security account by the lending bank.

Closed-end lease – A lease in which you are not responsible for the difference if the actual value of the vehicle at the scheduled end of the lease is less than the residual value (though you may be responsible for excessive wear and excess mileage charges and for other lease requirements).

Consumer Leasing Act – A 1976 amendment to the federal Truth in Lending Act that requires disclosure of the cost and terms of consumer leases and also places substantive restrictions on consumer leases.

Co-applicant – A co-signer on the loan. Also see “Additional Personal Guarantor”.

Consummation – Generally, the time at which you and the lessor sign the lease agreement.

Corporate resolution – A written statement detailing who may act and sign on the behalf of a company.

Credit application – An application listing all of the pertinent information used to secure a customer’s credit history.

CRV – Current Retail Value

D

Dealer documentation fee – A fee charged by some dealerships (who may call it a dealer documentation fee) or other lessors to cover the cost of preparing lease documents.

Dealer license – The license required in most states for a dealer and/or leasing company to sell vehicles.

Depreciation – The amount charged over the life of the lease for a vehicle’s decline in value through normal use.

Disposition fee – A fee charged to the lessee if they decide not to purchase the vehicle at the end of the lease term.

DMV fee – A fee charged to the lessee at the inception of the lease or during the term to cover vehicle registration an titling expenses.  This fee varies by state.

Down payment – An initial cash payment in a lease that reduces the capitalized cost or is applied to other amounts due at lease signing. See Capitalized Cost Reduction.

Driver – The assigned driver of the vehicle, which is usually the lessee, or the personal guarantor for leases under a business name.

E

Early termination – Ending the lease before the scheduled termination date for any reason, voluntary or involuntary (for example, you return the vehicle early or default on the lease, or the vehicle is stolen or totaled).

Early termination charge – The amount you owe if your lease ends before its scheduled termination date, calculated as described in your lease agreement.

Early termination payoff (early termination balance or gross payoff) – The total amount you owe if your lease is terminated before the scheduled end of the term, before the value credited to you for the vehicle is subtracted. The early termination payoff is calculated as described in your lease agreement. It may include the unpaid lease balance and other charges.

Excise tax – A tax charged in some states that may be added in lieu of or to the Sales/Use Tax.

Equity – In an installment sale, loan or lease agreement, the positive difference between the trade-in or market value of your vehicle and the payoff amount.

Excess mileage charge – A charge by the lessor or assignee for miles driven in excess of the maximum specified in the lease agreement.

Excessive wear-and-tear charge – Amount charged by a lessor or assignee to cover wear and tear on a leased vehicle beyond what is considered normal. The charge includes but is not limited to: interior and exterior damage, such as upholstery stains, body dents and scrapes, and tire wear beyond the limits stated in the lease agreement.

F

Funding bank – The particular bank used for funding and collecting payments for the lease. Also see Lien Holder or assignee.

Fair market value – The amount that a willing buyer would pay to a willing seller to purchase certain property at a particular point in time.

Federal Trade Commission – The federal agency responsible for enforcing the Truth in Lending Act, of which the Consumer Leasing Act is part, among leasing companies, finance companies, lessors, and assignees not regulated by other federal agencies.

Fees and taxes (or official fees and taxes) – The total amount you will pay for taxes, licenses, registration fees, title fees, and official (governmental) fees over the term of your lease. Because fees and taxes may change during the term of your lease, they may be stated as estimates.

Fixed-price purchase option – Your right to purchase a leased vehicle at scheduled termination for a fixed price specified in your lease agreement.

G

Gap insurance – Voluntary Insurance carried to cover any shortfall of monies due from a lessee’s insurance company in the event of an accident. (Not available on vehicles over $150,000). A plan that provides you financial protection in case your leased vehicle is stolen or totaled in an accident. Some plans deny gap coverage if you are in default at the time of the loss. There are two types of gap coverage. One is a waiver by the lessor or assignee of the gap amount if the vehicle is stolen or totaled. The other is a contract by a third party to cover the gap amount. Under either type, you may remain responsible for the insurance deductible, for other amounts deducted from the insured amount of the vehicle by your insurance company, and for any past-due or other amounts you owe under the lease. You may also be responsible for the monthly payments until the lessor receives the insurance proceeds.

Gap amount – In the event a leased vehicle is stolen or totaled, the difference between the early termination payoff amount, not including any past-due amounts, and either the stated amount for or the amount the insurance company agrees to pay for such loss.  The insurance deductible and any other policy deductions are subtracted.

Gray market – A vehicle not manufactured for the U.S. Market and later brought into the U.S. These vehicles are often lower in value and require EPA and DOT documents in order to be driven in the U.S.

Gross capitalized cost (gross cap cost) – The agreed-upon value of the vehicle at the time you lease it, which generally may be negotiated, plus any items you agree to pay for over the lease term (amortized amounts), such as taxes, fees, service contracts, insurance, and any prior credit or lease balance.

H

I

Inceptions – The total dollar amount that is due before the vehicle will be delivered. Also see “Total Drive Off” or “Due on Signing”.

Independent leasing company – A leasing company that offers leases directly to consumers and businesses and is generally not affiliated with a particular automobile manufacturer.

Insurance binder/certificate – Document proving insurance is in place on specific vehicle, listing the limits of liability, deductibles, lien holder/loss payee, and additional insured. This is required before a lease can be funded.

Insurance verification – The process of obtaining written confirmation of required coverage from your insurance agent or company.

J

K

L

Late charge – A fee charged for a past-due payment. This charge is usually either a percentage of the lease payment or a fixed dollar amount assessed by the Funding Bank when a payment is more than ten (10) days late.

Late payment – A payment received after the specified due date. In most cases, a payment made after any grace period triggers a late charge.

Lease assumption – The process for changing the lessee on a given lease. In the case of a default the original lessee is still liable for the debt.

Lease – A contract between a lessor and a lessee for the use of a vehicle or other property, subject to stated terms and limitations, for a specified period and at a specified payment.

Lease balance (adjusted lease balance) – The unpaid portion of the adjusted capitalized cost of the lease. The lease balance is reduced as you make your monthly payments, usually calculated according to a standard method such as the Constant Yield (Actuarial) method. The lease balance is often a primary component of the early termination payoff amount.

Lease extension – Continuation of a lease agreement beyond the original term, often 1 month at a time. There may be a charge for extending the lease. If the extension continues beyond 6 months, new lease disclosures must be provided.

Lease factor (or Money factor) – A number, often given as a decimal, used by some lessors or assignees to determine the rent charge portion of your monthly payment. This number is not a lease rate and cannot be converted to a lease rate by moving the decimal point. Premier Financial Services utilizes a standard annual percentage rate (APR) in order to provide full disclosure to clients.

Lease payments –The number of payments in the lease agreement.

Lease rate – A percentage used by some lessors or assignees to describe the rent charge portion of your monthly payment. However, no federal standard exists for calculating the lease rate. Any rates or factors used in lease calculations do not have to be disclosed under federal law. If a lease rate is given as a percentage in an advertisement or on any lease form, the ad or form must also state, “This percentage may not measure the overall cost of financing this lease.” Some states may require disclosure of the lease rate calculated according to the state’s definition of the lease rate. Premier Financial Services utilizes a standard annual percentage rate (APR) in order to provide full disclosure to clients.

Lease term – The period of time for which a lease agreement is written.

Lemon laws – State laws that provide remedies to consumers for vehicles that repeatedly fail to meet certain standards of quality and performance. Lemon laws vary by state and may not cover leased vehicles.

Lessee – The party to whom the vehicle is leased. In a consumer lease, the lessee is you, the consumer. The lessee is required to make payments and to meet other obligations specified in the lease agreement.

Lessor – A person or organization that regularly leases, offers to lease, or arranges for the lease of a vehicle.

M

MSO – Manufacturer’s Statement of Origin (functions as a title for new vehicles).

Maintenance – Care for the vehicle required by the lease agreement. Maintenance may include manufacturer-recommended servicing and any repairs needed to keep the vehicle in good operating condition.

Mileage allowance (or mileage limitation) – The fixed mileage limit for the lease term. If you exceed this limit, you may have to pay an excess mileage charge.

Money factor (or Lease factor) – A number, often given as a decimal, used by some lessors or assignees to determine the rent charge portion of your monthly payment. This number is not a lease rate and cannot be converted to a lease rate by moving the decimal point. Premier Financial Services utilizes a standard annual percentage rate (APR) in order to provide full disclosure to clients.

Monthly payment – This term may refer to one of two required federal disclosures. See base monthly payment and total monthly payment.

Monthly sales/use taxes – The state and local taxes that you must pay monthly when you lease a vehicle. These payments, if any, are added to your base monthly payment and paid as part of your total monthly payment.

MSRP – Manufacturer’s suggested retail price, sometimes called the sticker price

N

New vehicle – A vehicle that has not been titled to an owner and is still on a MSO.

Note – A loan.

O

Open-end lease – A lease agreement in which you are obligated to satisfy a fixed purchase option at the end of the term.

P

Payoff – The balance due to satisfy a loan or lease.

Personal guarantor – The individual responsible for satisfying the requirements of a loan or lease agreement, including payments, maintenance, etc.

Power of Attorney – A Legal document authorizing an individual or business to sign on our behalf.

Privilege & Use Tax – A tax charged in some states that may be in lieu or added to the Sales/Use Tax.

Proof of income – Documentation proving income that might include: a tax return, W-2, or current pay stub.

Purchase option – Your right to buy the vehicle you have leased, before or at the end of the lease term, according to terms specified in the lease agreement.

Purchase price – The agreed upon value of the vehicle.

Q

R

Realized value – (1) The amount received by the lessor or assignee for the leased vehicle at disposition, (2) the highest offer for the leased vehicle at disposition, or (3) the fair market value of the leased vehicle at termination. The realized value may be either the wholesale or the retail value specified in the lease agreement.

Rent or rent charge – The portion of your base monthly payment that is not depreciation or any amortized amounts. This charge is similar to interest on a loan.

Resale certificates – A state certificate that verifies that a dealer or leasing company can buy/sell a vehicle without paying the sales tax because the vehicle is for resale.

Residual value – The end-of-term value of the vehicle established at the beginning of the lease and used in calculating your base monthly payment. The residual value is deducted from the adjusted capitalized cost to determine the depreciation and any amortized amounts. It is an estimate that may be determined, in part, by using residual value guidebooks. The residual value may be higher or lower than the realized value at the scheduled end of the lease.

Residual value guidebooks – Publications used, in part, by some lessors and assignees to establish vehicle residual values. Different guidebooks are more popular in different regions of the United States and with different lessors and assignees.

S

Sales/use taxes – Taxes assessed on leased and purchased vehicles. States differ in which amounts are taxed and when the taxes are assessed. In a lease, sales/use taxes may be assessed on (1) the base monthly payment, (2) any capitalized cost reduction, and (3) in a few states, the adjusted capitalized cost. In most states, the sales/use tax on the base monthly payment is paid monthly; in some states, however, the tax is due at lease inception. Sales/use taxes on the capitalized cost reduction and the adjusted capitalized cost are usually due at lease inception. If you exercise any purchase option, separate taxes may apply.

Security deposit – An amount you may be required to pay, usually at the beginning of the lease, that may be used by the lessor or assignee in the event of default or at the end of the lease to offset any amounts you owe under the lease agreement. Any remaining amount may be refunded to you.

Serial number – A 17-digit Vehicle Identification Number unique to each vehicle. Prior to 1985, VINs were not required to be 17 digits.

Signee – The individual signing the lease documents (not necessarily the lessee or driver, business leases may have a separate signatory).

Stipulations – requirements needing to be met by lessee to prove necessary information, which may include proof of income (POI), proof of residence, proof of payoff, etc. Also see “Bank Requirements”.

Standards for wear and use – Statements in the lease agreement defining what the lessor or assignee means by normal wear and use and setting the requirements for the vehicle’s condition at the end of the lease. Standards may address such items as the minimum amount of tread on the tires at the end of the lease or the type of dents or scratches that are acceptable. These standards must be reasonable.

Substitution of collateral – The process of replacing a vehicle listed on a specific lease with one of similar or greater value.

T

Terms – The number of payments, amount of payments, and purchase option for a specific lease.

Title – Legal document that identifies the owner of the vehicle. The lessor or assignee, not you, holds title to the leased vehicle.

Total contractual obligation – The sum of the capitalized cost reduction, the total of base monthly payments, and other charges due under the lease agreement. The total contractual obligation excludes any security deposit as well as sales taxes and any other fees and taxes paid to a third party.

Total monthly payment – The base monthly payment plus monthly sales or use taxes and any other monthly charges.

Total of payments – The sum of the periodic payments, the end-of-term disposition fee, any other charges, and all amounts due at lease signing or delivery, minus refundable amounts such as a security deposit and any monthly payments included in the amount due at lease signing or delivery.

Title Transfer – A legal document allowing for the transfer of ownership of a vehicle.

Trade equity – The value above the payoff on a vehicle being traded-in that can be applied to the capitalized cost.

Trade-in – The net value of your vehicle credited toward the purchase or lease of another vehicle. If you own the vehicle being traded in, you sell it to the dealer or lessor. If you are leasing the vehicle being traded in, you are turning in the vehicle (either at the scheduled end of the lease or upon early termination) to the dealer or lessor who has agreed to pay any remaining balance on your agreement. The amount credited may be positive or negative, depending on the agreed-upon value of the traded-in vehicle and any remaining balance on your agreement.

U

Used vehicle – A vehicle that has been purchased and titled previous to the pending purchase/sale transaction.

Used-car guidebooks – Publications that report current wholesale and (or) retail prices of vehicles. Wholesale values generally are determined from such factors as auto auction prices, other wholesale transactions, and regional demand. Prices are listed according to year, make, model, options, mileage, and condition of the vehicle. Retail prices are generally determined by such factors as dealership retail sales prices, other retail transactions, and regional demand.

V

Vehicle Identification Number – A 17-digit serial number unique to each vehicle. Prior to 1985, VINs were not required to be 17 digits.

Vehicle Inventory Tax – The tax charged on a sale of any vehicle purchased from a dealership in the state of Texas.

Vehicle return fee – A fee charged if the lessee does not purchase the vehicle at the end of the term of the lease. Also see “Disposition Fee”.

W

Warranty – A guarantee that the vehicle will function and perform as specified. A warranty usually covers specified mechanical problems during a specified period of time or number of miles and is usually provided by the vehicle manufacturer or selling dealer.

X

Y

Z

For more information on leasing terms visit http://www.federalreserve.gov/pubs/leasing/glossary.htm