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 When you're negotiating a car lease, the terminology can get pretty confusing. Even if you're just taking a look through advertisements, it's sometimes hard to figure out what the deal is really all about. If you've never leased a car before and want a fundamental understanding of all the terms used in a car lease then keep on reading.
We just finished up an article that provides you with a way to calculate the monthly payments on a car lease. In that article we addressed quite a few of the terms you'd encounter.
We've even got a full line of car loan calculators that use these same terms. And if that's not enough we've also got a financial dictionary section that we're going to use to supplement some of the concepts used in this car lease glossary.
Car Leasing Glossary
We're going to break down this leasing glossary into sections so that you better understand the process behind the deal of a car lease. Generally, the way a car lease is structured is that the dealer needs to recoup, or recapture, the loss in the value of the car over the term of the lease. The dealer also needs to charge the customer for the cost of the "borrowed" money or capital. So the first terms we are going to define have to do with capitalized costs.
Gross Capitalized Costs
The gross capitalized costs are simply the total amount of capital - or money - that is part of the leasing agreement. This is the starting point for all lease calculations. Some of these costs are negotiated with the dealership - such as the base capitalized costs.
MSRP
MSRP is an abbreviation for the Manufacturer's Suggested Retail Price. This is also sometimes referred to as the "sticker" price of the car because the MSRP appears as a sticker in the window of every new car sold in America. Unless the car is in high demand, they are usually sold at a discount to the MSRP.
Base Capitalized Cost
The base capitalized cost is the negotiated price you'd be willing to pay for the car you're leasing if you decided to buy it from the dealer. Nearly always, the base capitalized cost is less than the MSRP. This is the starting point for the lease calculations, before additional lease costs are added and reductions are subtracted.
Additional Lease Costs
The additional lease costs are "adders" to the base capitalized cost to calculate the gross capitalized costs. The equation for this would be:
Gross Capitalized Costs = Base Capitalized Costs + Additional Lease Costs
Dealer Acquisition Fees
The dealer acquisition fee is perhaps the most common of the additional lease costs you will encounter. That's because nearly all new cars come with this charge that is typically in the $250 - $700 range. It's the money charged a customer for the dealership to generate a lease.
Extended Warranties
When a car is returned under a lease, the dealership expects the vehicle to be returned with "normal" wear and tear. If the car is leased for a term that is longer than the manufacturer's warranty (either in time or mileage), then you might want to pay this fee to extend the warranty until the end of the lease. Extended warranties are also included as an additional lease cost.
Capitalized Cost Reductions
The capitalized cost reductions are things that are subtracted from the gross capitalized lease costs. These can be in the form of dealer incentives or monies paid up front - such as a down payment.
Down Payment
A down payment is probably the most common and significant of the capitalized cost reductions. This is money the person leasing the car would need to provide up-front. Many times when you encounter an advertisement for a relatively high priced car with a seemingly low monthly lease payment, the lease requires a large down payment.
Trade In Allowance
If you own a car and want to sell the car to the dealer as part of the lease agreement, then this trade-in allowance serves to reduce the capitalized costs in the lease. When negotiating a lease, make sure you're getting a fair deal on your trade in and you understand exactly what the dealership is paying you for the car.
Adjusted or Net Capitalized Costs
The adjusted or net capitalized cost of the lease is the amount of money borrowed over the course of the lease. The formula below explains the simple relationship between all of the capitalized cost concepts:
Net Capitalized Costs = Gross Capitalized Costs - Capitalized Cost Reductions
Lease Calculation Terms
The next set of terms that you might encounter with a car lease have to do with factors that are not negotiated with the dealer, but have an affect on the calculation of monthly payments charged.
Residual Value
The residual value of the car is an estimate of the car's value at the end of the lease. Many times you can purchase the car for the residual value at the end of the lease. The lower the residual value quoted, the higher your monthly payments will be. That's because the lease payments need to make up for the difference between the car's value today and its value at lease termination.
Money Factor
The money factor is similar to the concept of annual percentage rate or APR on a car loan. If you want to get a good idea of the interest rate charged on a lease, the following calculation explains the relationship:
APR (%) = Money Factor x 2400
You can use this relationship to figure out if the dealership is offering you a competitive rate of interest on the lease.
Lease Term
The lease term is simply the duration or length of the lease; it is usually stated in years or months. The most common lease terms are 2 years (24 month), 3 years (36 month) and 4 years (48 months).
Sales Tax
Everyone wants a part of your lease deal, and if you live in a state where there is a state sales tax, then your monthly lease payment will reflect this charge.
Depreciation
Depreciation is the loss in the car's value over the course of the lease. You can get an estimate of the depreciation on a leased car by using the following calculation:
Depreciation = Net Capitalized Cost - Residual Value
Depreciation is one of the major factors driving the monthly lease payment. For example, if you have two cars with the same starting value and one car depreciates at a slower rate, then that car will have a lower lease payment.
Finance or Rent Charge
The finance or rent charges is the total of all fees paid over the course of a car lease that relate to the car's decline in value. The finance charge can be calculated using the following formula:
Rent Charge = (Net Capitalized Cost + Residual Value) x Money Factor
Other Lease Terms
No car lease glossary would be complete with a category of "other" lease terms. These terms do not affect the cost of the lease, but are other conditions, features, or terms and conditions under which the lease is sold.
Closed End Lease
A closed end lease is one that you can "walk away" from at the end of the lease. There is no other monetary obligation at the end of this kind of lease. With a closed end lease, the leasing company assumes the risk and reward that a car's value is the same as originally estimated.
Open End Lease
With an open end lease, you cannot simply walk away from the lease at the end of the term. With this kind of lease, the customer is assuming the risk and reward that a car's value is the same as originally estimated. These types of leases are much more common in a business-to-business environment.
Security Deposit
Most leases include a security deposit that is usually equal to one monthly lease payment. Security deposits are paid at the inception or start of a lease. Security deposits are also refundable at the end of the lease.
Purchase Option Price
The purchase price should be the same as the car's residual value. If you want to buy the car at the end of the lease, this is the price you would pay.
Gap Insurance
Gap insurance is designed to pay the outstanding balance owed on a lease in the event that the car is involved in an accident and the cost to repair the car exceeds the car's current market value.
Excess Mileage Charge
Car leases normally entitle the lease holder to drive a specified number of miles each year. Typically, the mileage allowance is anywhere from 10,000 to 15,000 miles per year. The excess mileage charge compensates the dealer when a car is driven in excess of the allowed miles and is usually stated in cents per mile.
Early Termination Fee
This is a fee charged by the dealership if the lease holder decides they want to terminate the lease early. These early termination fees are more like penalties to the consumer. In fact, these fees can be thousands of dollars and nearly equal to the cost of making all of the remaining monthly payments on the car's lease.
About the Author - Car Lease Glossary
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