FRB: Vehicle Leasing: Leasing vs. Buying: Rate Disclosure

	Glossary
Leasing vs. Buying Rate Disclosure

Leasing	Buying
Federal law does not require a uniform calculation and disclosure of a lease rate.	Federal law requires a uniform calculation and disclosure of an annual percentage rate (APR) for credit.
No federal rate standard. In leasing, there is no federal requirement for lessors to disclose a lease rate. There is also no mandatory federal formula for calculating a lease rate. Standardizing the lease-rate calculation would be extremely complex. It would also involve use of certain estimates that can vary among lessors. Because of certain limitations, a lease rate is not a reliable measure of the total lease cost. Problems in defining a lease rate. For example, the residual value would be one factor in a lease-rate calculation. The residual value is the end-of-term value of the vehicle established at the beginning of the lease. Because the actual end-of-term value of the vehicle is not known at lease inception, lessors must select a residual value when calculating a lease rate. Lessors use different methods for selecting the residual value. Some lessors use residual value guidebooks; others may develop estimates based on area market conditions and their own experience. Variations in the lease rate can result because lessors use different good-faith methods to set residual values. Also, because reducing the residual value can lower a lease rate, the residual value could be used by less-scrupulous lessors to manipulate the lease rate to make it look more attractive.	Reliable federal rate standard. In credit transactions, such as vehicle loans, federal law requires disclosure of the annual percentage rate (APR). The APR is an annualized rate that reflects the total cost of credit, including interest and certain other charges. Federal law requires the use of a specific formula in calculating the APR.

Leasing

Buying

Federal law does not require a uniform calculation and disclosure of a lease rate.

Federal law requires a uniform calculation and disclosure of an annual percentage rate (APR) for credit.

No federal rate standard. In leasing, there is no federal requirement for lessors to disclose a lease rate. There is also no mandatory federal formula for calculating a lease rate. Standardizing the lease-rate calculation would be extremely complex. It would also involve use of certain estimates that can vary among lessors. Because of certain limitations, a lease rate is not a reliable measure of the total lease cost.

Problems in defining a lease rate. For example, the residual value would be one factor in a lease-rate calculation. The residual value is the end-of-term value of the vehicle established at the beginning of the lease. Because the actual end-of-term value of the vehicle is not known at lease inception, lessors must select a residual value when calculating a lease rate. Lessors use different methods for selecting the residual value. Some lessors use residual value guidebooks; others may develop estimates based on area market conditions and their own experience.

Variations in the lease rate can result because lessors use different good-faith methods to set residual values. Also, because reducing the residual value can lower a lease rate, the residual value could be used by less-scrupulous lessors to manipulate the lease rate to make it look more attractive.

Reliable federal rate standard. In credit transactions, such as vehicle loans, federal law requires disclosure of the annual percentage rate (APR). The APR is an annualized rate that reflects the total cost of credit, including interest and certain other charges. Federal law requires the use of a specific formula in calculating the APR.

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Last update: May 5, 2003