Auto Lease Glossary
Glossary of all the terms used in auto leasing, and how they are used against you so you'll be prepared to make sound decisions in leasing your dream car.
Leasing terminology confuses sharpest of people. Print out this article and take it with you as you shop. Better yet, study it and know all terms and how they are interrelated before you go shopping.
A fee charged by the leasing company, usually $250 - $500 and is sometimes amortized in the monthly payment. Sometimes you pay the fee up front at inception. It's pretty hard to negotiate out either the acquisition fee or termination fee. Don't ever sign a lease that has both. Here's why this fee is such a joke. They claim it's a necessary fee to process the lease paperwork. But think about this: Has your bank ever charged you an acquisition fee for a car loan?
Adjusted Capitalized Cost or Net Capitalized Cost
This is the "capitalized cost" (selling price), less deductions to reduce the price of the car, like down payment, non-cash credits, trade-in credit, rebate. Adjusted cap cost is used to calculate your base monthly payment. Think of it as "amount financed."
Another fee they tack on for the leasing company. They should call it the put my wife in a Beamer fee. See also Dealer Service Fee.
Base Monthly Payment
The part of your monthly payment that is made up of just the depreciation during the lease. This is calculated as (Net Capitalized Cost - Residual) ÷ (number of months in lease). The base monthly payment is added to your monthly interest and tax to arrive at your total monthly payment.
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The selling price of the car, options, warranties, insurance, rust proofing, or other goodies. Think of this as the value of your car at the beginning of the lease, whereas the residual value is the value of the car at the end of the lease.
Capitalized Cost Reduction
A fancy name for cash down. It's anything that reduces the capitalized cost before the monthly payment is calculated. It includes cash down, trade-in credit and manufacturer's rebate, etc. Usually they try not to give you the factory rebate if you lease. As far as the factory is concerned, the dealer still sold the car and still qualifies for the rebate.
Closed End Lease
The only kind of lease you ever want to get. At the end just return the car, no obligations. You can buy it if you like at the residual value, but no obligated.
Dealer Service Fee
A useless fee tacked on for more profit. If they lease you the car at MSRP, they are already making too much money. They should call it the put my wife in a Beamer fee. See also Bank Fee.
The drop in value that the car is predicted to have during your lease. It's the difference between the adjusted capitalized cost and the residual value. Depreciation is part of what your monthly payments are paying for. That's why you want the lowest cap cost and the highest residual value:
Monthly Depreciation Fee = ( Net Cap Cost - Residual ) ÷ Lease Term
If you lease a car for 36 months whose net cap cost is $18,000 and the dealer says the car is worth $14,000 at lease end, your monthly depreciation fee is ($18,000 - $14,000) ÷ 36 = $111.11. This is 1 of 3 components of your monthly payment, along with finance fee (interest) and taxes.
A charge by the leasing company at lease end to "fix it up for resale." Many people don't realize this fee is not declared on the first page of the lease with the other numbers, it's buried in the fine print of the "end of lease requirements" section. Some dealers claim this helps pay for cleaning up the car before resale. But they charge the next owner for that, right? Did you ever hear the dealer justify their high cost on a used car by saying they "had to recondition it?" The dealer is trying to collect twice. Tell them to let the next owner of the car pay for it, not you.
The amount of cash you put down to reduce the capitalized cost, and hence your monthly payments. It is subtracted from the car's capitalized cost, before the monthly payment is calculated.
Early Termination Fee
A very nasty penalty that you must pay if you terminate your lease early or total the car in a wreck. This could be several thousand dollars. Early lease termination should be avoided at all costs. Ending a lease is like ending a marriage. It's very painful and costs a lot of money. It's similar to a red neck divorce: somewhere, somehow, somebody's going to lose a trailer.
You are limited to 10,000 - 15,000 miles annually. Any more and you'll pay fines of 15 cents per mile. Watch the mileage, or you'll owe a lot at the end. An extra 2,000 miles a year on a 3 year lease could cost you $900. Don't pay for extra mileage up front, you won't get a refund if you don't drive excess miles. The dealers don't tell you about this little clause, it's buried in the writing, and by signing the lease you effectively said that you read and understood everything.
Excess Wear & Tear
Damage or wear on the car beyond normal wear and tear. Many people are frustrated when hit with a large bill for "wear and tear" at the end of the lease, even if the car is in good condition. Read the lease and understand what it says about excess wear and tear. Have the dealer explain their standards of "excess" wear. Try to get out of paying a security deposit. The car must have 4 matching tires, or they'll bill you for 4 new tires at full retail.
Finance Fee, also called Lease Charge or more commonly Rent Charge
This is the "interest" or profit that the leasing company charges you. Here's how they calculate it:
Finance Fee = ( Net Cap Cost + Residual ) × Money Factor
Interest on a loan and interest on a lease are NOT the same thing.
You read correctly, it's not an error. They add Net Cap Cost and Residual. It's not double counting, it's a simple method to arrive at the finance fee without using complex formulas. This makes calculating rent charges for leasing much easier than those for loans, which use a more complex formula. The money factor takes into account the addition, so don't panic. To get the equivalent APR interest rate, multiply the money factor by 2,400. This gives us an idea of what interest rate is being used as the "seed" into the rent charge formula. This is where the similarity between leases and loans ends. Loans use a complex formula for interest, and some calculators can figure out loan payments. Now here's the difference. Lease interest payments use a different formula than loans. For leases, I prefer to say "rent charge," which is less confusing than interest rate, so you don't use the wrong formula. Rent charge uses the Finance Fee formula above. A money factor of .00333 is "equivalent" to 8% APR, but it's not an interest rate, it's just a number used as a seed into their calculations. In a loan they have a fancy formula for interest, but with leases, rent charge = (Adjusted cap cost + residual) * money factor. With leasing, you don't need a business calculator to figure out the rent charge, just one that can add and multiply.
If your leased car is stolen or totaled, your insurance will pay for the damage or loss. It won't help you make payments still owed to the leasing company. Gap insurance covers the gap, between the value of your car and the amount you still owe on your lease, including a possible penalty for early termination of the lease. It's illegal for a dealer to require that you buy it for any reason, including bad credit, or qualifying for a loan. If they say it's required, tell them to put that in writing, then turn it over to the State Attorney's office. Everyone who leases should buy gap insurance, but try to buy it through your insurance agent instead of the dealer, or you'll be charged double the cost.
Gross Capitalized Cost
Selling price of the car. Sometimes dealer acquisition fees are included in this amount.
Leases require huge insurance coverage: bodily injury or death liability: $100,000 per person / $300,000 per occurrence, property damage liability: $50,000, comprehensive & collision for full vehicle value with a maximum $500 deductible.
They don't quote interest rates with car leases. This way you can't check their numbers and discover that they forgot to give you credit for your trade-in, or slipped in that credit life insurance undetected. They quote "Money Factors" See definition below. To arrive at the equivalent APR interest, multiply the money factor by 2,400.
Manufacturer's Suggested Retail Price or "sticker price." Never pay MSRP.
A number used to calculate finance charges (interest) for your monthly payment. To get the APR, multiply the money factor by 2,400. For example, a money factor of .003333, yields an interest rate of (.003333*2,400) = 8%. If you were unaware of the 2,400, how could you check their numbers? This is how they hide extras, and slip in credit life insurance, because you can't tell what makes up your monthly payment, or even how to calculate it, until now. When converting money factor to APR, it should at least be comparable to, or lower than local new car loan interest rates. Like interest, the lower the money factor, the lower your monthly payments. Ford has a strange way of calculating money factor that is different from the rest of the industry.
The monthly lease payments made over the term of the lease. Monthly lease payments are made up of 3 parts: 1) depreciation, 2) rent charge and 3) sales tax. You pay the leasing company for the loss in value of its car, as well as interest on the money they have tied up in the car. Beware, many ads show a low ball monthly payment that don't include tax. The ad for a BMW or Lexus for a $399 a month has fine print that says "plus tax," meaning they are understating the real monthly payment by $23.94 (6% tax in Florida).
Net Trade-in Allowance
This is the amount the dealer is giving you for your trade-in, after paying off any loan balance on your trade-in. If you were upside down on your loan, whatever is left is financed into the lease, effectively increasing the adjusted capital cost of the leased car. They don't go out of their way to inform you about this either. Many dealers run ads yelling out "We'll pay off your car no matter how much you owe."So you are tricked into thinking your old loan is gone, but it's not. They just moved your loan balance over to the lease and blended it in.
Purchase Option Fee
A fee charged if you opt to buy the vehicle at the end of a lease. Negotiate it out. That's icing that belongs on your cake, not theirs.
Purchase Option Price
Selling price of the vehicle if you buy it at the end of the lease. This is usually the residual value.
The value leasing companies estimated the car will be worth at lease end, expressed as % MSRP. The residual value affects the amount of your monthly payment. Dealers have books estimating the residual value and the higher the residual value, the less you will pay each month to lease your car. You may get lucky and it will be lower than market value when the lease is up. You can then buy and sell the car, trade it in for something else, or just walk away. Ask your bank or credit union for residual values.
They usually tax the monthly lease payment at the local sales tax rate and add it to the base payment to get your total monthly payment. Check with the state to verify they are sending this full amount into the state or they could be in big trouble. Illinois & Texas dealers tax you on the full amount of the car, which is wrong, because you should only pay taxes on the portion you are using.
Usually equal to one month's payment paid up front as security for excess wear and tear. They usually call it "refundable," but you know they'll come up with some excuse to keep it at the end to keep it due to excess wear, or for new tires.
Another wasted fee. I still don't know why they need to charge this fee at the end, especially if they are already charging a disposition fee to "clean up the car" afterwards. Negotiate this toxic waste off the contract.