Car Lease Glossary

When you're negotiating a car lease, the terminology can be pretty confusing.  Even if you're just looking through advertisements, it's sometimes hard to figure out what the dealer is really telling you.  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've already published 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 even have a full line of car loan calculators that use these same terms.  If that's not enough, we have a financial dictionary 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 sort this leasing glossary into several sections so that you better understand the process behind a car lease deal.  Generally, a car lease is structured in such a way the dealer can 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 the total amount of capital, or money, which is part of the leasing agreement.  This is the starting point for all car 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 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 used 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 a charge that is usually in the $250 to $700 range.  It's the money charged to a customer for the dealership to generate the 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 a 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 items 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 upfront.  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.  You need to 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 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 effect 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.  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.  Traditionally, the most common lease terms were 2 years (24 month), 3 years (36 month), and 4 years (48 months).

Sales Tax

Everyone wants to be 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 are 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 without 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, which 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 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 5,000 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.

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