Glossary of Car Leasing Terms

Editor’s note: This article was last updated on March 6, 2018. It has been reviewed by Cars.com Senior News Editor Jennifer Harrington and is still accurate.

To get the best car lease deal, it’s imperative to understand leasing’s complicated vocabulary. Read through our leasing glossary below to ensure you understand the basics.

Related: How Does Leasing a Car Work?

Acquisition fee (or bank fee or initiation fee): A fee charged by a lessor to begin a lease. An acquisition fee is also known as an initiation fee or a bank fee if the lessor is a bank rather than a dealership. Acquisition fees typically start around $400 and seldom are negotiable.

Adjusted capitalized cost: The final amount on which lease payments are calculated. This is the figure arrived at by subtracting the capitalized cost reduction from the gross capitalized cost.

Let’s say you plan to lease a new SUV where the negotiated value plus taxes and fees comes to $29,005. To lower your payments — or because the deal requires it — you make an upfront payment of $5,000 and factor in a $1,000 manufacturer rebate. The adjusted capitalized cost then becomes $23,005.

Capitalized cost reduction: A down payment or other credit that lowers the capitalized cost of a lease. The down payment may come in the form of cash and/or a rebate, trade-in allowance or other credit.

Let’s say you decide to lease a car with a manufacturer’s suggested retail price of $19,675, but you negotiate that down to $18,000. Add to that a sales tax of 5 percent (varies from state to state), which equals $900. Your gross capitalized cost becomes $18,900. In addition, you have an older trade-in vehicle valued at $5,000 and you’re benefiting from a $1,000 manufacturer rebate. You would subtract these from $18,900, and your adjusted capitalized cost would be $12,900.

Captive lease company: A lease company that is the finance division of an automaker. Most often, attractive lease deals that use low money factors or high residual values to lower monthly payments come from these captives. When the automakers want to move a particular model, subsidized lease deals are one way of doing so.

Closed-end lease: A lease that doesn’t require the consumer to buy the vehicle at the end of the lease, or to pay any difference between the residual value and market value. Closed-end leases, which are the most common type, usually allow lessees to buy the car if they want. To do so, the lessee may have to pay off the residual value, the market value or whichever is higher when the lease ends, depending on the contract. Though the buying price in the lease contract is supposed to be fixed, in some cases the leasing company will negotiate to a lower price.

Consumer Leasing Act: Requires lessors to disclose all leasing costs. Also known as Regulation M, the Consumer Leasing Act took effect Jan. 1, 1998.

Dealer preparation fee (or prep fee): A fee that dealers may charge for getting a car ready for purchase or lease. Such preparation consists of little more than washing the car and filling it with gas. You sometimes can negotiate this fee out of a lease contract.

Default charge: A penalty fee charged to the lessee for a late monthly lease payment.

Deficiency: The difference between the amount owed on a leased vehicle and its current cash value. If you have a serious accident early in the lease, such a deficiency may result in an insurance payoff that does not cover your obligations. For that reason, you should have guaranteed auto protection, or gap, insurance to make up the difference.

Depreciation fee or charge: The component of a monthly lease payment that accounts for the value the car loses during the lease. Depreciation is the difference between the vehicle’s list price and the projected residual value at lease end. This figure, divided by the number of months in the lease, determines one part of the monthly fee, while the money factor is the other.

For instance, let’s say an SUV has a list price of $38,980. Let’s estimate that after a three-year lease, this SUV will be worth 34.6 percent of its original value, or about $13,500. Therefore, the difference, or $25,480, is the total depreciation charge. On a 36-month lease, that becomes a $708 monthly charge. But if you can negotiate a lower gross capitalized cost, you lower your depreciation charge and your monthly payment.

Early termination: When the consumer ends the lease before the agreed-upon time. Early termination can result in hefty fees. It isn’t always voluntary; if the car is stolen or totaled, the lease terminates, and early-termination fees still may apply. Good gap insurance plans cover penalties such as this, in addition to the lease balance.

Gap insurance: Gap, or guaranteed auto protection, represents the “gap” between what your insurance company pays and what you owe the lessor at the time the car becomes history, which can potentially be tens of thousands of dollars. Gap insurance pays off the lease balance if a leased vehicle is stolen or totaled. Gap insurance also typically covers any penalties for early termination. Captive lease companies offer gap insurance as part of the lease, and their cost is typically no higher than you could get from your own insurer, so it often makes sense to take gap insurance there.

Gross capitalized cost: A leased vehicle’s negotiated purchase price. This also accounts for taxes and any other items you elect to fold into the lease and pay over time rather than up front.

Let’s say you decide to lease a new car with a manufacturer’s suggested retail price of $19,675, but you negotiate that down to $18,000. If the sales tax in your area is 5 percent, that equals $900 and your gross capitalized cost becomes $18,900.

Inception/lease inception: The beginning of a lease term.

Inception fees: Any fees that are due at lease inception. Inception fees may include a down payment, security deposit, acquisition fee, first month’s payment, taxes or title fees. To reduce monthly payments, some lease deals are structured so that a combination of the down payment and assorted fees can total several thousand dollars.

Indemnity: A lease contract provision that absolves the lessor from charges incurred by the lessee. Because the leased vehicle is in the name of the lessor, this indemnity section is necessary to shift responsibility for parking and traffic tickets to the lessee.

Lease fee or charge (or implied interest): The cost of leasing a vehicle, excluding the depreciation, is based on the money factor. The lease charge is sometimes called the rent charge or implied interest, though it’s not interest in the traditional sense.

You can get some idea of the equivalent annual percentage rate if you multiply the lease fee money factor by 2,400; this calculation will be slightly above the equivalent annual percentage rate that the money factor represents. If a dealer quotes you a money factor such as 3.1, which sounds like a low APR, you can multiply that by 2.4 in order to get the equivalent APR. In this case, the rate would be akin to a 7.44 percent APR.

Lessee: The person who agrees to lease the vehicle; the consumer; you.

Lessor: The company that grants a lease, such as a dealer, automaker or bank. The dealer effectively sells the car to the lessor, who then “rents” it to the consumer. If you buy the car when that lease is over, you are buying it from the lessor, usually either a bank or captive lease company, rather than the dealer.

Mileage allowance: The maximum number of miles a leased vehicle can be driven per year without incurring a penalty. The allowance is stated in the lease contract. An allowance of 12,000 miles annually is typical, though the amount may be negotiable. If you think you need additional miles, negotiate them up front. You often can usually add miles at the start of a lease for far less than the penalty you’d be hit with for those same miles at lease end.

Mileage charge: A charge levied if the lessee exceeds the mileage allowance on a leased vehicle. This penalty typically is calculated per mile. Negotiating or paying for extra miles at lease inception is almost always less expensive than the penalty for exceeding the allowance.

Money factor (or interest rate): A fractional number, such as 0.0042, used to calculate a lease fee or charge. The monthly payment combines the resulting fee with the depreciation fee or charge. The money factor is not an interest rate; it is based on a formula that lessors devise to determine their profit. Consumers should look for a lower number. While lessors are not required to disclose the money factor, you still can insist on knowing it before entering a lease.

You can get a rough equivalent of an annual percentage rate if you multiply the money factor by 2,400; this calculation will be slightly above the equivalent APR that the money factor represents. If a dealer quotes you a money factor such as 3.1, which sounds like a low APR, you can multiply that by 2.4 to get the equivalent APR. In this case, the rate would be akin to a 7.44 percent APR.

Open-end lease: A lease that requires the consumer to pay the difference between the vehicle’s residual value and its actual value when the lease ends. This amount is called the deficiency. Conversely, if the car’s value at lease end exceeds the residual value, the consumer can purchase the car and collect the difference on resale. Most residual values are calculated to prevent this outcome regardless of how well the vehicle is preserved, so open-end leases are a gamble. Such leases are rare and you should never accept one.

Purchase option: The opportunity for the lessee to buy the car at the end of the lease. The price to buy the vehicle is stated in the lease contract and usually is equal to the residual value.

Regulation M: The Federal Reserve Board’s Consumer Leasing Act, which requires full disclosure of all leasing costs.

Rent charge: A term used to describe the lease fee or charge, most notably in the federal Consumer Leasing Act disclosures form.

Residual value: The car’s wholesale value at the end of the lease as projected at the beginning by the lessor. Higher residual values translate to lower monthly payments but increase the cost to buy the car at the end of the lease.

Security deposit: A cash sum that lessors require at lease inception as a safeguard against nonpayment. Lessors often require a security deposit of about one monthly payment. The lessor enjoys the interest on this amount throughout the term of the lease. In theory, you should get this deposit back at the end of the lease, but the lessor often will keep it as part of any excess wear-and-tear charges assessed.

Single-payment lease: A lease in which the consumer can pay all of the lease fees and payments at the beginning, along with the down payment. This newer type of lease isn’t a likely option for most consumers. Spendthrifts who are concerned about spending this money and not being able to make monthly payments might choose this plan. A likely user is an affluent buyer who could pay cash to buy a car but wants to have a new vehicle every three years or so and doesn’t want to bother with selling or trading the old one.

Subvented/subsidized lease: A lease subsidized by an automaker, usually by its captive lease company, to make the vehicle more attractive. The subsidy is seen in a higher residual value or a lower money factor.

Termination fee (or disposal or disposition fee): The amount lessees must pay at the end of a closed-end lease if they choose not to pay the residual value and buy the car. This fee can include administrative charges, any penalties, the dealer’s cost to prepare the car for resale and other charges, real or imagined. Make sure this is stated clearly in the contract, and is agreeable. At termination, you are in no position to negotiate and the lessor can apply your security deposit toward this fee.

Wear-and-tear charges: Charges for damages to a leased car that are greater than “normal” or “reasonable.” Be sure these are defined in the lease agreement, and are agreeable, or you could pay hefty fees at lease end.

For example, dings in the doors may seem normal to you, but would they to the lessor? Some captive lease companies now offer deals where, by adding $10 or less to your monthly payment, you are exempt from up to $2,500 in these charges at the end of the lease.

More From Cars.com:

• How to Negotiate a Car Lease
• Can You Lease a Used Car?
• Is Now the Time to Buy Out Your Car Lease?
• Can You Lease a Car With Bad Credit?
• How Much Does It Cost to Lease a Car?

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