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How to Understand Car Lease Terminology

CarMan@EdmundsCarMan@Edmunds Member Posts: 38,514
edited March 2019 in General
Learn how to decipher advertised lease payments with this handy guide to understanding common phrases that appear in the world of leasing.

Step 1: Learn the definition of "acquisition fee."

An acquisition fee, aka a bank fee, is a fee that is charged by the bank that you are leasing through. Almost all banks that lease vehicles to consumers charge one. Acquisition fees vary from bank to bank, but they usually range from $400 to $795. Individual dealers do not have the authority to waive this charge, but they occasionally are allowed to mark it up to add additional back-end profit to deals. This is why it is important to know what the base acquisition fee is for the bank that you are going to lease through prior to entering into negotiations.

Step 2: Learn the definition of "capitalized cost."

A vehicle's capitalized cost, or cap cost for short, is the amount of money that is being financed on a lease. A vehicle's capitalized cost is calculated by subtracting any down payment that is being made from its selling price.

Step 3: Learn the definition of "capitalized cost reduction."

A capitalized cost reduction is essentially the down payment on a lease. The larger a vehicle's down payment is, the lower its monthly payment will be. It really is not a good idea to make large capitalized cost reductions on leases though because consumers who make them risk losing them if their vehicle is totaled in an accident or stolen and never recovered.

Step 4: Learn the definition of "disposition fee."

A disposition fee is fee that is charged by banks on leases, like an acquisition fee, but it is charged at the end of leases instead of at the beginning. The amount of the disposition fee, or whether one is even charged at all, varies from bank to bank. Banks will usually waive the disposition fee for consumers who agree to lease another vehicle through them when their current lease is up.

Step 5: Learn the definition of "due at signing."

The amount that is due at signing for a lease essentially represents how much money you will have to pay to drive off in the vehicle that you want to lease. It typically includes your vehicle's first month's payment, its security deposit, its acquisition fee, and any required state taxes or fees.

Step 6: Learn the definition of "excess wear and tear."

All banks that lease vehicles inspect them when they are returned at lease-end. Lessees are charged for any wear and tear that their vehicle has that is outside the limits that the bank they are leasing through allows, such as excessively worn tires, large dents, long scratches, etc... What exactly is considered to be excess wear and tear varies from bank to bank. Check with the bank that you are leasing through to find out exactly what its guidelines are.

Step 7: Learn the definition of "gap insurance."

Gap insurance on leases covers the difference between what your insurance company will pay for your vehicle and the amount that you still owe on it in the event that your car or truck is totaled in an accident or stolen and never recovered. Some banks automatically include gap incurance on leases at no additional charge. If one leases through a bank that does not include gap insurance automatically, they will have to purchase it separately.

Step 8: Learn the definition of "mileage allowance."

A leased vehicle's mileage allowance is the number of miles per year the lessee is allowed to drive it without having to pay an excess mileage penalty. Leases usually include 10,000, 12,000, or 15,000 miles per year.

Step 9: Learn the definition of "money factor."

A money factor is a number that banks use to calculate the interest portion of vehicles' lease payments. It is expressed in the form of a five digit decimal, such as .00255. One can convert a money factor into an approximate interest rate equivalent by multiplying it by 2400.

Step 10: Learn the definition of "MSRP"

The term MSRP is short for "Manufacturer's Suggested Retail Price." It represents the price of a new car or truck without any sort of discount.

Step 11: Learn the definition of "residual value."

Residual values are usually expressed in the form of a percentage, like 52%. This percentage is multiplied times vehicles' MSRPs to calculate their dollar residual value. This dollar residual value represents the vehicle's lease-end purchase option price and is used to calculate the depreciation portion of lease payments.

Step 12: Learn the definition of "security deposit."

Most banks that lease vehicles charge security deposits. Security deposits are equivalent to vehicles' monthly lease payments rounded up to the nearest $25 or $50 increment. Some banks allow lessees to make additional security deposits on top of the required one and provide a discount in vehicles' money factor for every additional deposit.

Step 13: Lean the definition of "term."

The length of a lease is called its term. Typical leases are 24 to 48 months. Generally speaking, the shorter a lease is, the higher its monthly payment is. This is because short leases have fewer monthly payments to spread out the large initial depreciation hit that new vehicles experience out over. Exceptions to this rule occur when automakers provide lease support on shorter terms to steer consumers towards them.

Step 14: Make use of your new knowledge

Now it's time to make use of your new knowledge and negotiate an attractive deal on the car or truck that you've been dreaming about.

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