In order to get the best leasing deal, it's imperative to understand leasing's complicated vocabulary. Read through our leasing glossary below to ensure you understand the basics.
A fee charged by a lessor to begin a lease. An acquisition fee is also known as an initiation fee, or a bank fee if the lessor is a bank rather than a dealer. Acquisition fees start at about $300 and seldom are negotiable.
adjusted capitalized cost
The final amount on which lease payments are calculated. This is the figure arrived at by subtracting the capitalized cost reduction from the gross capitalized cost. Let's say you plan to lease a new sport utility vehicle where the negotiated value plus taxes and fees comes to $19,005. To lower your payments, or because the deal requires it, you make an up-front payment of $5,000 and factor in a $1,000 manufacturer rebate. The adjusted capitalized cost then becomes $13,005.
See acquisition fee.
capitalized cost reduction
A down payment or other credit that lowers the capitalized cost of a lease. The down payment may come in the form of cash and/or a rebate, trade-in allowance or other credit. Let's say you decide to lease a car with a manufacturer's suggested retail price of $19,675, but you negotiate that down to $18,000. Let's say the sales tax in your area is 5 percent, which equals $900. Your gross capitalized cost becomes $18,900. In addition, you have an older trade-in vehicle valued at $5,000 and you're benefiting from a $1,000 manufacturer rebate. You would subtract these from the $18,900, and your adjusted capitalized cost would be $12,900.
captive lease company
A lease company that is the finance division of an automaker. Examples include BMW Financial Services, Ford Motor Credit Co. and Toyota Financial Services. Most often, attractive lease deals that use low money factors or high residual values to lower monthly payments come from these captives. When the parent auto manufacturers want to move a particular model, such subsidized lease deals are one way of doing so.
A lease that doesn't require the consumer to buy the vehicle at lease end or pay any difference between the residual value and market value. Closed-end leases, which are the most common type, usually allow lessees to buy the car if they so desire. To do so, the lessee may have to pay off the residual value, the market value or whichever is higher when the lease ends, depending on the contract. Though the buying price in the lease contract is supposed to be fixed, in some cases the leasing company will negotiate a lower price.
Consumer Leasing Act
A Federal Reserve Board regulation that requires lessors to disclose all leasing costs. Also known as Regulation M, the Consumer Leasing Act took effect Jan. 1, 1998.
dealer preparation fee
A fee that dealers may charge for getting a car ready for purchase or lease. Such preparation consists of little more than washing the car and filling it with gas. You sometimes can negotiate this fee out of a lease contract.
A penalty fee charged to the lessee for a late monthly lease payment.
The difference between the amount owed on a leased vehicle and the current cash value. If you have a serious accident early in the lease, such a deficiency may result in an insurance payoff that does not cover your obligations. For that reason, you want to be sure to have GAP insurance that will make up the difference.
depreciation fee or charge
The component of a monthly lease payment that accounts for the value the car loses during the lease term. Depreciation is the difference between the vehicle's list price and the projected residual value at lease end. This figure, divided by the number of months in the lease, determines one part of the monthly fee, while the money factor is the other. For instance, let's say a sport utility vehicle has a list price of $38,980. The industry benchmark ALG estimates that after a three-year lease, this SUV will be worth 34.6 percent of its original value, or about $13,500. Therefore, the difference, or $25,480, is the total depreciation charge. On a 36-month lease, that becomes a $708 monthly charge. But if you can negotiate a lower gross capitalized cost, you lower your depreciation charge and your monthly payment.
See termination fee.
The ending of a lease, by a lessee, before the agreed-upon end of term. Early termination can result in hefty fees. Early termination isn't always voluntary; if the car is stolen or totaled, the lease terminates, and early-termination fees still may apply. Good GAP insurance plans cover penalties such as this, in addition to the lease balance.
Pays off the lease balance if a leased vehicle is stolen or totaled. GAP insurance also typically covers any penalties for early termination. GAP stands for Guaranteed Auto Protection and represents the "gap" between what your insurance company pays and what you owe the lessor at the time the car becomes history — potentially tens of thousands of dollars. The deals that captive lease companies offer for GAP insurance as part of the lease typically do not cost more than you could get from your own insurer, so it often makes sense to take GAP insurance there.
gross capitalized cost
A leased vehicle's negotiated purchase price. This also accounts for taxes and any other items you elect to fold into the lease and pay over time rather than up front. Let's say you decide to lease a new car with a manufacturer's suggested retail price of $19,675, but you negotiate that down to $18,000. Let's say the sales tax in your area is 5 percent, which equals $900. Your gross capitalized cost becomes $18,900.
See lease fee or charge.
The beginning of a lease.
Any fees that are due at lease inception. Inception fees may include a down payment, security deposit, acquisition fee, first month's payment, taxes or title fees. In order to reduce monthly payments, some lease deals are structured so that a combination of the down payment and assorted fees can total several thousand dollars.
A lease contract provision that absolves the lessor from charges incurred by the lessee. Because the leased vehicle is in the name of the lessor, this indemnity section is necessary to shift responsibility for parking and traffic tickets to the lessee.
See acquisition fee.
interest rate (leasing)
See money factor.
lease fee or charge
The cost of leasing a vehicle, excluding the depreciation, based on the money factor. The lease charge is sometimes called the rent charge or implied interest, though it's not interest in the traditional sense. You can get some idea of the equivalent annual percentage rate if you multiply the lease fee money factor by 2,400; this calculation will be slightly above the equivalent APR that the money factor represents. If a dealer quotes you a money factor such as 3.1, which sounds like a low APR, you can multiply that by 2.4 in order to get the equivalent APR. In this case, the rate would be akin to a 7.44 percent APR.
The person who agrees to lease the vehicle; the consumer.
The company that grants a lease, such as a dealer, automaker or bank. The dealer effectively sells the car to the lessor, who then "rents" it to the consumer. If you buy the car when that lease is over, you are buying it from the lessor — usually either a bank or captive lease company — rather than the dealer.
The maximum number of miles a leased vehicle can be driven per year without incurring a penalty. The allowance is stated in the lease contract. An allowance of 12,000 miles annually is typical, though the amount may be negotiable, depending on the lessor. If you think you need additional miles, negotiate them up front. You often can add miles for 10 cents each at the start of a lease, while the penalty for those same miles might be 15 cents each at lease end.
A charge levied if the lessee exceeds the mileage allowance on a leased vehicle. This penalty typically is calculated per mile and sometimes is as high as 25 cents per mile. Negotiating or paying for extra miles at lease inception is almost always less expensive than the penalty for exceeding the allowance.
A fractional number, such as .0042, used to calculate a lease fee or charge. The monthly payment combines the resulting fee with the depreciation fee or charge. The money factor is not an interest rate; it is based on a formula that lessors devise to determine their profit. Consumers should look for a lower number. While lessors are not required by the Consumer Leasing Act to disclose the money factor, you still can insist on knowing it before entering a lease. You can get a rough equivalent of an annual percentage rate if you multiply the money factor by 2,400; this calculation will be slightly above the equivalent APR that the money factor represents. If a dealer quotes you a money factor such as 3.1, which sounds like a low APR, you can multiply that by 2.4 in order to get the equivalent APR. In this case, the rate would be akin to a 7.44 percent APR.
A lease that requires the consumer to pay the difference between the vehicle's residual value and its actual value when the lease ends. This amount is called the deficiency. Conversely, if the car's value at lease end exceeds the residual value, the consumer can purchase the car and collect the difference on resale. Most residual values are calculated to prevent this outcome, regardless of how well the vehicle is preserved, so open-end leases are a gamble — with poor odds. Such leases are rare, and you should never accept one.
See dealer preparation fee.
The opportunity for the lessee to buy the car at the end of the lease. The price to buy the vehicle is stated in the lease contract and usually is equal to the residual value.
The Federal Reserve Board's Consumer Leasing Act, which requires full disclosure of all leasing costs.
A term used to describe the lease fee or charge, most notably in the federal Consumer Leasing Act disclosures form.
The car's wholesale value at the end of the lease, as projected at the beginning by the lessor. Higher residual values translate to lower monthly payments but increase the cost to buy the car at the end of the lease.
A cash sum that lessors require at lease inception as a safeguard against nonpayment. Lessors often require a security deposit of about $500 or the amount of one monthly payment. The lessor enjoys the interest on this amount throughout the term of the lease. In theory, you should get this deposit back at the end of the lease, but the lessor often will keep it as part of any excess wear-and-tear charges that are assessed.
A lease in which the consumer can pay all of the lease fees and payments at the beginning, along with the down payment. This newer type of lease isn't a likely option for most consumers. Spendthrifts who are concerned about spending this money and not being able to make monthly payments might choose this plan simply to keep the money out of their hands. A likely user is an affluent buyer who could pay cash to buy a car but wants to have a new vehicle every three years or so and doesn't want to bother with selling or trading the old one.
A lease subsidized by an automaker, usually by its captive lease company, to make the vehicle more attractive. The subsidy is seen in a higher residual value or a lower money factor.
The amount lessees must pay at the end of a closed-end lease if they choose not to pay the residual value and buy the car. This fee can include administrative charges, any penalties, the dealer's cost to prepare the car for resale and other charges, real or imagined. Make sure this is stated clearly in the contract, and is agreeable. At termination, you are in no position to negotiate, and the lessor can apply your security deposit toward this fee.
Charges for damages to a leased car that are greater than "normal" or "reasonable." Be sure these are defined in the lease agreement, and are agreeable, or you could pay hefty fees at lease end. For example, dings in the doors may seem normal to you, but would they to the lessor? Some captive lease companies now offer deals where, by adding $10 or less to your monthly payment, you are exempt from up to $2,500 in these charges at the end of the lease.