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Lease Glossary

Lease Glossary

Is the use of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. The key difference in a lease is that after the primary term (usually 2, 3 or 4 years) the vehicle has to either be returned to the leasing company or purchased for the residual value.

Vehicle leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be. Any sales tax is due only on each monthly payment, rather than immediately on the entire purchase price as in the case of a loan. Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease expires, allowing a consumer to drive a new vehicle every few years without the responsibility of selling the old vehicle, or possible repair costs after the expiry of the manufacturer’s warranty. A lessee does not have to worry about the future value of the vehicle, while a vehicle owner does. For a business lessor, there are tax advantages to be considered.

The “lease company” is an institution that is purchasing the vehicle from the dealer and leasing it back to you. This may be a financial arm of one of the manufacturers, such as Ford Motor Credit, General Motors Acceptance Corp., or Toyota Motor Credit. There are, however, independent leasing companies, frequently backed by banking institutions, such as Chase Manhattan, Wells Fargo, General Electric Capital Auto Lease (GECAL), Bank of America, etc. In all cases, the lease company is buying the vehicle from the dealership and leasing it back to you for a specific period of time. The best lease company for a specific vehicle varies based on market conditions and regional availability of particular lease companies.

The lease term is the duration of the lease contract. 24, 36, and 48 month leases are frequently advertised, but other terms are available from some lease companies

Manufacturer’s Suggested Retail Price, sometimes referred to as “list price” or “sticker price.” It is the price that appears on the vehicle’s window sticker. The residual value of the vehicle is based on this number.

The “invoice price” theoretically represents what the dealer paid for a specific vehicle. In actuality, other discounts may result in the dealer’s true cost being significantly lower. In any event, since the invoice price is the same from dealer to dealer, it makes an excellent fixed reference point from which to compare dealer markups and markdowns and from which to calculate the lease or purchase cost of the vehicle. There is an invoice price for the base car and an invoice price for each factory installed option.

A fee is charged by the leasing company for the work your lender has to put into setting up your lease agreement, usually $250 – $900. It’s also called a “bank fee”. Sometimes you pay the fee upfront at inception or amortized in the monthly payment

Amount of money you have to pay to begin the lease. Typically includes 1st monthly payment, bank fee, title, registration, tag, and all fees. If you want to reduce the amount of monthly payment you will need to put down payment.

“Capitalized Cost,” often referred to as “cap cost,” should be separated into “gross” cap cost and “adjusted” cap cost. Gross cap cost includes the agreed upon price of the vehicle, any fees, extended service plans, gap insurance premiums, or other add-ons that you may be required to pay. Adjusted cap cost is the gross cap cost less any reductions by trade-in, cash downpayment, or rebates. Adjusted cap cost is the amount actually financed over the term of the lease. Many lease ads and some dealerships imply that cap cost is the same as MSRP. This is untrue. Leasing a vehicle with a cap cost of MSRP is the equivalent of buying a vehicle for full sticker price, which is much more than most customers should pay.

This is lease-speak for a downpayment. Your combination of any cash downpayment, value of a car you trade in, and rebate you assign to the dealer, results in a reduction of the capitalized cost. The bigger your capitalized cost reduction (the more you put down), the lower the amount you will be financing and the lower your monthly payment will be.

“Residual value” is the value the lease company theoretically estimates that the vehicle will have at the end of the lease term. For example, a $20,000 MSRP vehicle with a residual value of 56% on a two-year lease is estimated to be worth $11,200 ($20,000 times 56% equals $11,200) at the end of those two years. The difference between the residual value and the capitalized cost is the amount of money you will have to pay off during the time of your lease (you will also have to pay a finance charge, or interest, on the amount of money the leasing company has tied up in the car). Residual values change dramatically with the term of the lease and the number of miles driven per year. Some makes and models of vehicle are known to keep their resale value better than others, and therefore have higher residual values. In addition, manufacturers sometimes agree to buy back cars at lease-end at more than the car is likely really to be worth on the market. By subsidizing the residual value in this way, the car manufacturer keeps lease payments lower than they otherwise would be in hopes of leasing more cars. Subsidizing the residual value has much the same effect as a factory-to-customer rebate would have. The residual value sometimes bears little relation to reality, but it is very important because it is used to calculate your monthly payments.

Generally, lease contracts give you the right to purchase your vehicle at the end of the lease for the residual value. For example, if the residual value will be $11,200 after two years, you’ll be able to purchase the car by paying the lease company $11,200 at the end of your two-year lease term.

The drop in value that the car is predicted to have during your lease. It’s the difference between the adjusted capitalized cost and the residual value. Depreciation is part of what your monthly payments are paying for. That’s why you want the lowest cap cost and the highest residual value:
Monthly Depreciation Fee = ( Net Cap Cost – Residual ) ÷ Lease Term
If you lease a car for 36 months whose net cap cost is $18,000 and the dealer says the car is worth $14,000 at lease end, your monthly depreciation fee is ($18,000 – $14,000) ÷ 36 = $111.11. This is 1 of 3 components of your monthly payment, along with finance fee (interest) and taxes.

The “money factor” is a figure used to calculate your lease payment. It roughly approximates the “annual percentage rate” (APR) of the lease when multiplied by 2400. For example, a money factor of .00336 is roughly the equivalent of an APR of 8.1% (2400 times .00336 equals 8.1). Money factors are different for different models of vehicles and lease terms, and different lease companies usually have different money factors. Everything else being equal, a lower money factor means lower payments. Leasing companies may use either money factors or APRs to express the financial terms of a lease.

The amount of cash you put down to reduce the capitalized cost, and hence your monthly payments. It is subtracted from the car’s capitalized cost, before the monthly payment is calculated.

The monthly lease payments made over the term of the lease. Monthly lease payments are made up of 3 parts: 1) depreciation, 2) rent charge and 3) sales tax. You pay the leasing company for the loss in value of its car, as well as interest on the money they have tied up in the car. Many ads show a low ball monthly payment that don’t include tax.

They usually tax the monthly lease payment at the local sales tax rate and add it to the base payment to get your total monthly payment.

“Allowable miles” are the miles the lease allows you to drive at no additional charge. Typically this is between 7,500 and 15,000 miles per year.

“Additional contracted miles” are miles you contract for in advance, above the “allowable miles.” Additional contracted miles are contracted for, if you want them, at the time the lease is executed for an extra charge, usually expressed as cents per mile.

“Excess uncontracted miles” are miles you use above the “allowable miles” and above any additional “contracted miles” you’ve built into the lease. You are charged a penalty for excess contracted miles at the end of the lease. This penalty, usually expressed as a cents per mile charge, can be quite costly.

WARNING: Not anticipating your actual mileage needs can be very costly. Try to estimate accurately the number of miles you will drive the vehicle per year.

Don’t pay for extra mileage up front, you won’t get a refund if you don’t drive excess miles.

This is the amount the dealer is giving you for your trade-in, after paying off any loan balance on your trade-in. If you were upside down on your loan, whatever is left is financed into the lease, effectively increasing the adjusted capital cost of the leased car. They don’t go out of their way to inform you about this either. Many dealers run ads yelling out “We’ll pay off your car no matter how much you owe”. So you are tricked into thinking your old loan is gone, but it’s not. They just moved your loan balance over to the lease and blended it in.

If you choose not to purchase the vehicle at the end of your lease, some leases charge an administrative fee, usually referred to as a “disposition fee.”

Most leases call for severe penalties if you end your lease before the contracted term. Make sure the lease term you choose is correct for you.


“Gap Insurance” is for your protection in the event that your leased vehicle is stolen or totaled in an accident. From the lease companies’ point of view, total loss of the vehicle is a form of early termination of the lease. Typically, your insurance company would pay off the claim. But what happens if the market value of the vehicle is less than the amount you owe the lease company? This possible difference is known as the gap, and you would be responsible for paying it to the lease company. Some leases provide a “gap waiver,” protecting you against such an insurance shortfall if you meet certain insurance requirements, but others do not. Gap insurance covers your risk in those leases that do not offer a “gap waiver.”

A “security deposit,” typically one month’s lease payment rounded up to the nearest twenty-five dollars, is usually due upon execution of a lease. You are entitled to the return of the security deposit at the end of the lease unless it must be used to pay off excess charges you have incurred. Try to get out of paying a security deposit.

Leases typically offer the option to purchase the vehicle at the end of the lease term. If the option is available, you are able to purchase the vehicle at a predetermined price (frequently the residual value of the vehicle) plus any applicable purchase option fee. In either valuation method, this is a purchase “option.” You can always return the vehicle at the end of the lease if you do not wish to buy it.

Lease plans have stringent requirements regarding the condition of a leased vehicle when it is returned. Damage or wear on the car beyond normal wear and tear. Many people are frustrated when hit with a large bill for “wear and tear” at the end of the lease, even if the car is in good condition. The car must have 4 matching tires, or they’ll bill you for 4 new tires at full retail.

No down payment no inception fees, and all fees included. Only for well-qualified customers.
Payments exclude sales tax.

You do not have to pay a down payment only Inception fees: tag, title, registration, bank, and dealer fees.
Payments exclude sales tax.