What it means
The rule applies to leases of personal property, such as vehicles or furniture, that run for more than four months and are made to individuals mainly for personal, family or household use. There is also a ceiling on the total contractual obligation covered, which is adjusted over time.
Business leases and short rentals are generally outside its scope. Before the lease is signed, the lessor must give the customer a written statement of the main terms.
These include the amount due at signing, the monthly payment and the number of payments, the total of those payments, and the fees and charges for ending the lease early or for wear and tear. Seeing these items in a standard format makes comparisons simpler.
The rule also controls advertising. If an advertisement mentions a payment amount or the number of payments, it must also state certain other terms, such as the total due at signing and whether the customer must pay a purchase price at the end.
This stops a low monthly figure from being shown without the full picture. One nuance is that a lease is not a loan, so it does not include an annual percentage rate.
The costs are expressed in dollars and terms rather than as a rate, which is why consumers often find leases harder to compare with a purchase on finance. A good rule of thumb is to add up everything paid across the whole lease.
Please note that the same letter is used by the Securities and Exchange Commission for a different rule, which restricts manipulation of prices around securities offerings. The two share a name only, so it is worth checking the context before assuming which one is meant.
In practice the safest way to compare leases is to ask for the total of all payments and charges across the full term. That single figure allows a fair comparison between two lease offers, or between leasing and buying with a loan.
A salesperson who focuses on the monthly figure may be steering attention away from the up-front and end-of-lease costs.
In practice
Real-world examples.
Example
A car dealer advertises a lease at $299 per month. Under the rule the advertisement also has to state the amount due at signing, the number of payments and other key terms, not just the monthly figure.
Example
A furniture retailer offers a 24-month lease on a home office set for individual customers. Before the customer signs, the retailer provides a written disclosure setting out the payments, the total and the charge for early termination.
Example
A small company leases a delivery van for its business. Since the lease is for business use, the consumer leasing rule does not apply, although the lessor will still provide contract terms.
Formula
Calculation
Total cost of the lease = amount due at signing + (monthly payment x number of payments)
A customer leases a car with $2,000 due at signing, a monthly payment of $350 and a 36-month term. Payments over the term = $350 x 36 = $12,600. Total cost = $2,000 + $12,600 = $14,600, before any end-of-lease charges such as excess mileage or wear.Case study
Seen in the real world.
Summit Motors is an illustrative, fictional car dealership that ran a promotion for leases advertised at a low monthly payment. A compliance review found that the advertisements did not state the amount due at signing, which was a significant $3,500.
The dealership rewrote its adverts to show the amount due at signing and the number of payments, and trained its sales staff to hand over the written disclosure before the customer signed. Customer complaints about surprise costs fell. The illustrative lesson is that a headline monthly payment alone tells only part of the story, and clear disclosure builds trust.
Summit Motors also created a one-page lease summary that showed the total of payments over the term next to the monthly figure. Sales staff reported that customers asked fewer questions after signing because the cost picture was clear from the start.
Watch out
Common mistakes.
- Comparing leases using only the monthly payment, when the amount due at signing and the end-of-lease charges can change the total cost significantly.
- Assuming every lease is covered, when business leases and very short-term rentals fall outside the rule.
- Mixing this rule up with the Securities and Exchange Commission's rule of the same name, which deals with trading around securities offerings.
Questions
People also ask.
Does a consumer lease have an interest rate?
Not in the way a loan does, because the rule requires dollar amounts and terms instead, although lessors often use an internal rate to set the payment.
How long must a lease be to be covered?
It generally applies to leases with a term of more than four months.
Who enforces the rule?
Federal consumer protection and banking agencies enforce it, and consumers may also have a right to bring claims for violations.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related