Car Lease Glossary
Acquisition Fee – A fee charged by some lease companies to process the lease paperwork. Sometimes called an assignment or processing fee.
Capitalized Cost – The value of the vehicle at the beginning of the lease. This dollar amount can be negotiated just as if you were planning to purchase the vehicle with an auto loan rather than a lease.
Capitalized Cost Reduction – Any cash, trade-in, rebate, or incentive that reduces the capitalized cost of the vehicle.
Closed-End Lease – A type of lease that established the residual value of the vehicle at the beginning of the lease. This is the only type of lease car buyers should consider unless they are very familiar with other lease options. At the end of the lease, the car may be purchased for the residual value, but there is no obligation to do so.
Default Charge – A penalty for making a late monthly payment.
Depreciation – The drop in value between when the car enters the lease and when the car leaves the lease. Part of your lease payment goes toward depreciation.
Destination Charge – The fee charged to the dealership by the manufacturer for transporting the vehicle from the factory to the dealer lot. This is a fixed fee that is not marked up by the dealer. This fee is almost never negotiable. All dealerships are charged the same destination fees, whether their showroom is directly across the street from the factory, or 2,000 miles away. Sometimes called a Destination Fee.
Disposition Fee – A negotiable fee that covers preparing the returned vehicle for sale or re-lease and charged by dealers when the vehicle is turned back in when a lease has expired. Sometimes called a disposal fee. This fee may not be disclosed up front and may be located under the terms and conditions found in the end of lease requirements section of your contract.
Early Termination Fee – Ending the lease before the lease term officially expires results in an early termination fee that can amount to thousands of dollars.
End of Lease Payments – Any payment due at the end of the lease. These payments may include disposition fees, excess mileage fees, or excess wear and tear charges. These payments should be spelled out before the lease is signed.
Excess Mileage – Leases are mileage-limited, meaning you are allowed a certain number of miles over the term of the lease before extra charges take effect. Today’s leases usually allow 10,000 to 15,000 miles per year. If you have a 3 years lease with a 30,000 mile limit and you return the vehicle with 35,000 miles on it, you are responsible for 5,000 miles worth of excess mileage charges. This charge is usually 10 to 15 cents per mile. This fee may not be disclosed up front and may be located under terms and conditions found in the ‘fine print’ of the lease. Also called mileage charges.
Excessive Wear Charge – An end of lease charge for excess wear and tear inflicted upon the vehicle. This can include damage, dings, scratches, dents, or cracked glass. This charge can also include consumable items such as burnt out lights or worn tires. Make sure the standards of excess wear are clearly explained in writing before accepting any lease as “reasonable wear & tear” means different things to different people.
Gap Insurance – Gap insurance will insure the difference between what is owed on the vehicle and what the insurance company says the vehicles is worth in the vent the vehicle is totaled in an accident or stolen. For example, if an insurance company claims a totaled vehicle is worth $10,000 and the owner owes $15,000 then gap insurance protects the owner from having to pay the $5,000 difference out-of-pocket to settle the vehicle loan.
Lease Charge – The fee that provides profit to the leasing company. The lease charge is similar to interest on a conventional auto loan, but not calculated the same way. The lease charge take into account a money factor, rather than an interest rate. Sometimes called a finance fee or rent charge. The formula for the lease charge is as follow:
Lease Charge = (Net Capitalized Cost + Residual Value) x Money Factor
Lease Term – the length of the lease, common lease terms are 12, 24, and 36 months.
Money Factor – The money factor determines the profit to the leasing company, and is usually expressed as a very small number such as .004. Multiply this number by 2400 to arrive at the equivalent annual percentage rate (APR) for loan to lease comparison purposes. For example, a money factor of .004 would be the equivalent of a 9.6% APR (.004 x 2400 = 9.6).
MSRP – An acronym for manufacturer’s suggested retail price. This is the retail price as determined by the manufacturer and seen on the vehicle information sticker as required to be found in the window of every new vehicle. Optional equipment and factory-installed packages are seen as line items on the information sticker. Sometimes called sticker price. MSRP does not include financing charges, taxes, or destination charges. Dealer-installed options may increase the price of a vehicle over MSRP.
Net Capitalized Cost – The capitalized cost after capitalized cost reductions are taken into account. In other words, the capitalized cost minus all capitalized cost reductions.
Open-ended Lease – A type of lease where the customer pays the difference between the anticipated residual value and the actual value of the vehicle at the end of the lease term. The primary difference between a close-ended lease and an open-ended lease is that with a close-ended lease the consumer and the dealer have an agreed-on residual value at the onset of the lease while in an open-ended lease the residual value is determined when the car is returned. By taking an open-ended lease the consumer is making the bet that the car will have a greater residual value than what the dealer or lease company estimates at the onset of the lease. See Closed-End Lease.
Purchase Option Price – At the end of the lease, the consumer may have the option to purchase the vehicle. The purchase option price is often an agreed on amount or the residual value of the vehicle when the lease expires.
Residual Value – This is the value of the vehicle at the end of the lease, expressed as a dollar amount, usually as a percentage of the MSRP. The lower the residual value, the more you will pay for your lease. In a closed-end lease, the residual value is agreed upon at the onset of the lease.
Sales Tax – Leases are taxed monthly, rather than in a lump sum as is the case with a traditional auto purchase loan. Advertised lease payments often do not include the monthly sales tax.
Subsidized Lease – A lease where the manufacturer has given the dealer a certain amount of subsidizing to help lower the cost of the lease payment. The dealer has a certain amount of discretion as to how this money is applied to the lease, but the manufacturer gives guidelines. Subsidized leases are often used to move slow-selling or year-end models. Also called a subvented lease.
Upside Down – A situation in which the car buyer owes more money on their trade-in than the dealership is willing to give for the trade-in. The difference is applied to the lease amount.