One of the reasons leasing a car can be confusing for many people is the vocabulary of the business. After all, how many of us encounter phrases such as “cap costs” and “money factors” in day-to-day conversation?
Here’s a list of terms you’ll encounter when you’re wondering, “How does leasing a car work?” to help demystify the process.
Acquisition Fee: Fees imposed for setting up the lease. These can be paid as part of your down payment or included in the monthly payments. While sometimes negotiable, acquisition fees can run a few hundred dollars to around a thousand.
Buyout Price: This is what you can expect to pay if you decide to keep the car at the end of the lease —or any time during the contract. The amount will vary depending upon how close you are to the end of the lease term.
Cap Cost Reduction: Also known as your down payment, it can also be a trade-in, a rebate or any other incentive an automaker provides. Cap cost reductions usually lower your lease payments, though they can also reduce the amount you’ll need to pay at signing as well as the monthly note.
Capitalized Cost: The capitalized cost (AKA the “cap cost”) is the selling price you agree upon for the vehicle. You should negotiate this just as if you’re buying the car outright. With that said, automaker lease deals might preclude negotiating as they are based upon specific models and pricing.
Closed-End Lease: The value of the car at the end of the lease is fixed as the residual value, period. You can walk away at the end of the contract — regardless of how the actual market value of the car compares to it.
Disposition Fee: Disposition fees are imposed to help the dealer prepare the car for resale when you bring it back. It’s sometimes waived if you go right into another lease with the same manufacturer.
Due at Signing: This is what your lease will require you to pay when you sign the contract. Also known as the down payment, you’ll need to scrutinize the elements of these charges carefully to ensure nothing extra has been “inadvertently” added. BTW, this nomenclature is potentially misleading, as it sometimes does not include taxes, registration fees and the like.
Lease Term: This is the amount of time you agree to make payments on the car before returning it. This usually runs anywhere from two to four years. However, they can actually be written for whatever you and the leasing company agree upon. Keep in mind that manufacturer-subsidized lease deals almost always have specific terms.
Lessor: Another way to say “leasing company,” this is the entity with which you’ll enter the leasing contract. While some people might think they’re leasing car from the dealer, it’s actually from a bank, a car financing company or an auto manufacturer’s financial subsidiary.
Lessee: You — if you’re the person signing the contract.
Mileage Cap: The maximum distance you agree to drive over the course of the lease period. In most cases this is 12,000 miles annually on mainstream cars and 10,000 miles per year on luxury cars. Extremely high-end cars can come with mileage caps of 6,000 miles annually. You’ll be expected to pay $.25 per mile or more if you exceed the agreement.
Money Factor: The interest rate applied to the money borrowed to finance the lease. This can vary based upon what your credit score entitles you to, although it should be noted a strong credit score is required to lease a car in the first place. Usually expressed as a four- or five-digit number preceded by a decimal point, you simply multiply it by 2400 to find out what it comes out to be as an annual percentage rate (APR).
Residual Value: The value the car is expected to retain if all of the parameters of the lease are met in terms of mileage, maintenance and etc. In other words, it’s what the car is expected to be worth, once depreciation has taken its toll on the value of the car — assuming you take good care of it.
Security Deposit: Cash the leasing company holds on to in case you do something stupid. It’s usually waived if your credit score is particularly strong or you’re a returning customer. The cost of putting the car straight will be deducted from this amount if there is excessive wear and tear and/or you exceed the mileage cap or damage the car in some other way. And yes, you’ll be expected to come out of pocket if it costs more than the deposit to fix it.
Hopefully, this list of the terms you’ll encounter when leasing a car makes it easier for you to follow along when communicating with salespeople. After all, it’s a lot easier to negotiate when you have at least a modicum of understanding.