Common Lease Terms and Definitions


Definitions of Lease Terms

Acquisition Fee: A charge for processing a lease. Even though this seems like a nonessential fee, it may not be negotiable.

Allowable Mileage: This is the number of miles you are allowed to drive over the term of the lease. Often this is stated as the number of miles per year you can drive. Most leasing companies allow 12,000 miles a year. On a three-year lease, that means you can drive a total of 36,000 miles. If the allowable miles are exceeded, you typically must pay between 12 and 15 cents per mile.

Capitalization cost (cap cost): The total price of the vehicle, which the lessor uses to calculate the amount that the customer will be paying. This is equivalent to the purchase price of a vehicle that's sold.

Cap Cost Reduction: Equivalent to a down payment on a purchased vehicle, this is the amount that you pay when signing the lease, in addition to any separate fees that are assessed. When you pay a larger sum initially, monthly payments will be lower. A smaller cap cost reduction means a higher monthly payment. The value of your trade-in (if any) can be applied as part of this amount.

Closed-End Lease: A lease that fixed the vehicle's residual value initially, stating it in the contract. Most vehicle leases are closed-end, which means the customer won't owe an additional sum at the end of the term if the car turns out to be worth less than anticipated.

Dealer Participation: An amount that the dealer contributes to lower the total price of the vehicle, in an attempt to secure the customer's business. Any dealer contribution is applied to the cap cost reduction.

Depreciation: The amount by which a vehicle loses its value over a specified period of time, which is the difference between its original price and its residual value later. No specific figure for depreciation appears in lease contracts, but it's taken into account in setting residual values.

Disposition Fee: An amount to be paid at the end of the lease term, to cover costs of preparing the returned vehicle for sale.

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Drive-off Fees: This is the amount of money you must pay to begin the lease. Typically, this includes various DMV and leasing fees plus a security deposit. Some people who want to reduce the amount of their monthly payments will also make a cap reduction payment. This is cash, paid up front, and it becomes part of the drive-off fees.

Early Termination Fee: A penalty assessed if you choose to end the contract earlier. Lessors justify this because depreciation is highest in the early portion of a vehicle's life, so a prematurely terminated lease cuts heavily into their earnings. The penalty is likely to be hefty.

End-of-Lease Purchase Price: An agreed-upon price that you will pay when the lease is up, if you choose to keep the vehicle.

Excess Mileage Charge: A per-mile amount charged if you drive the vehicle more than the stated maximum, which is typically 12,000 to 15,000 miles per year. A charge of 15 cents per additional mile is typical, but it could get be higher. If you expect to drive farther than the contract allows, you can usually negotiate a lower figure for the excess miles.

Excess Wear-and-Tear: If the vehicle is returned in good condition, there should be no extra charge. A certain amount of wear-and-tear is permitted, but significant body damage or evidence of improper maintenance will trigger additional sums to be paid for necessary repairs.

Gap Insurance: In most cases, your regular auto insurance covers the leased vehicle. If the vehicle is totally wrecked, however, it could be worth less than an insurer will pay. Gap insurance covers the difference between the cash value of the vehicle and what you still owe on the lease contract. Some leases include this is in the contract.

Lease Term: A period of months during which you have use of the vehicle and will pay agreed-upon monthly payments. Lease terms of 24 and 36 months are most common, but 12-month leases and 60-month contracts can be obtained.

Lessee: The person who leases a vehicle from a dealer or other organization.

Lessor: The dealer or other organization that leases a vehicle to a customer.

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Money Factor: You probably won't hear or see this term, but it's the cost of money, equivalent to an interest rate.

Monthly Payment: Amount that you are required to pay to the lessor or its agent every month, through the lease term.

MSRP: This stands for Manufacturer's Suggested Retail Price. Many dealers will try to base their leases on MSRP or above. However, you can negotiate a lower price to base the lease on.

Payoff Amount: Sometimes called buyout amount, this is the amount of money you have to pay to own the car. The payoff amount might be different from the residual value because of a refunded security deposit.

Purchase Option: The right to buy the vehicle that you've leased, at the end of the lease term, for a stated price.

Residual value: A prediction of what a vehicle is likely to be worth as it ages, usually expressed as a percentage of its original price. Residual values may be supplied for vehicles that are 24, 36, or 48 months old.

Sales Tax: A portion of every monthly lease payment is paid for sales tax. However, you pay tax only on the amount of the car's value you are using. In other words, rather than paying 8 percent sales tax on a $20,000 car, you pay 8 percent of the $8,000 the car declines in value as you drive it. People who hate paying taxes love this part of leasing.

Security Deposit: A deposit, usually refundable, required before the lease contract takes effect.

Subvented Lease: A lease with favorable terms, due to a manufacturer's decision to absorb a portion of the cost. The manufacturer "subsidizes" part of the total price, by use of a special incentive-a low interest rate, higher-than-normal residual value, or a discount provided by the manufacturer.

Term: This is the length of the lease agreement. Typical leasing lengths are 24, 36, 48 and 60 months. However, sometimes lease agreements are for 36, 38 or 40 months (to make the lease payments appear smaller). We recommend that consumers choose a 36-month lease term.

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