Capitalized Cost Reduction

Definition

The car leasing term capitalized cost reduction refers to any cash a leaseholder pays upfront in order to reduce monthly payments.  This can include a down payment, trade-in credit, or rebate.

Calculation

The capitalized cost reduction payment serves to lower the monthly lease payment by reducing the net capitalized cost of the lease as demonstrated by the following equation:

Net Capitalized Costs = Capitalized Costs - Capitalized Cost Reduction

Explanation

The capitalized cost reduction payment decreases, or reduces, the total amount being financed through the lease.  The difference between net capitalized cost and the residual value of the automobile is used to calculate the monthly lease payments.

Including a capitalized cost reduction payment is perhaps the easiest way for a leasing company to make the monthly lease payments look more attractive (lower) to potential leaseholders.

Related Terms

closed end lease, open end lease, residual value