Capitalized Cost

Capitalized Cost is a term used in car leasing that refers to the total amount of money to be financed over the term of the lease. Capitalized costs include the negotiated price of the car plus any fees or taxes that will be financed.  Capitalized cost reduction payments will serve to reduce the monthly lease expenses by lowering the net capitalized costs, where:

Net Capitalized Costs = Capitalized Costs - Capitalized Cost Reduction

The difference between net capitalized cost and the residual value is used to calculate the monthly lease payments.

In other words, the leasing company first calculates all of the costs of the car:  the price of the car, licensing and lease initiation fees, taxes and interest.  This is the capitalized cost.  To make the monthly payments more affordable, the leaseholder may ask for a capitalized cost reduction payment.  This is money upfront, such as a down payment.  They payment is used to lower the capital, or money, the leasing company is lending the leaseholder.

Since the car has residual, or terminal, value at the end of the lease, the monthly payment needs to cover the net capitalized costs minus the residual value.