Understanding Lease Terms and Financial Definitions are as important as the numbers.

Auto Lease Glossary
Did you know that the secret to a great auto lease can be found in the form of a simple online calculator? The use of a tool such as this validates the argument that any auto lease – if done correctly – can be just that: Simple.

It is important to understand that leasing an automobile is more than just negotiating the Sell Price. There are many different aspects to a lease, and knowing what these factors are and how they interact with one another, will help you through the process.

Below you will find a list of lease terms and definitions that are commonly used in today's auto lease programs. Variations of the terms are included, as well as examples of their use (where applicable).

NOTE: Not all terms are used directly in the calculator. Some are characteristics of the lease and will define how it is managed or disposed of.

Acquisition FeeThis is a fee that covers the dealership's administrative costs for preparing the lease. If you add it to your CAP Cost, you will pay taxes and finance charges on the fee every month for the term of your lease. If you pay for it upfront (at closing), you can reduce your monthly payments.

Adjusted Capitalized CostSee: Net CAP Cost.

Allowable MileageThis is the amount of miles (per year) you are allowed to drive during your lease. If you are in a 36 month lease and are allowed 12,000 miles per year, your Allowable Mileage on your lease is 36,000 miles. Any miles over at the end of the lease may be subject to an Excess Mileage Charge. Depending on the type of vehicle, this charge may vary between $0.10 and $.20 per mile.

NOTE: The Allowable Mileage should be noted on your lease agreement.

CAP AdjustmentAny value that reduces the CAP Cost (Down Payment, Rebates, or Trade-Ins). In addition to CAP Reduction, CAP Adjustments could be values that increase the CAP Cost (Acquisition Fee or GAP Insurance).

Capitalized Cost ReductionAlso known as CAP Reduction.

See: CAP Adjustment.

Closed-end LeaseA lease that allows you to return the vehicle at the end of the term with no further financial obligations (assuming that you have complied with all the terms of the lease). A Disposition Fee may be required, as well as any Excess Mileage or Wear and Tear, but any difference between the Residual Value and the Realized Value is not your responsibility.

DepreciationThe amount the vehicle declines in value over the term of the lease. If a vehicle that is worth $30,000 today will only be worth $18,000 in 3 years, the difference ($12,000) is what you are paying for in your lease.

Destination ChargeTypically included in the MSRP, this charge is the cost to have the vehicle delivered to the dealership - which is passed on to the consumer.

Disposition FeeIf you decide not to purchase the vehicle at the end of the lease, you may be required to pay a Disposition Fee that covers the cost of having the vehicle prepared for resell.

NOTE: The Disposition Fee MUST be disclosed in the lease agreement.

Document FeeDocument Fees are typically the administration costs of doing the lease and are charged by the dealer.

Down PaymentThe amount of money you want to put down (at closing) to reduce the CAP Cost. Other than a small monthly savings, some believe that there are no true benefits for putting money down upfront.

On a 36 month lease @ .0025 money factor with 8.25% state tax, a $1,000.00 Down Payment will save you an extra $32.78 in monthly payments, totaling $1,180.08 for 36 months. Your total savings on the lease will be $180.08 ($1,180.08 Total Monthly Savings - $1,000.00 Down Payment), which is a net savings of $5 per month ($180.08 / 36 months).

Dealerships have been known to blur the definition of a Down Payment (as it refers to reducing the CAP Cost), with money down, plus tax, title, and fees. When you say, "I want to put X dollars down", make certain you clarify its intent is to reduce the CAP Cost.

Due at SigningAlso known as Drive Off Amount or as some Dealerships like to call it, "Down Payment" (do not get this confussed with the Down Payment for reducing the CAP Cost). Dealerships are notorious for taking your Down Payment and pulling out of it money for other fees. What is left is applied to reducing the CAP Cost (which in fact is not much) leaving you with about the same monthly payments as if you put nothing down.

The amount of money Due at Signing is a total of any money you put down to reduce the CAP Cost (true Down Payment), taxes on that Down Payment, Security Deposit (if required), Title, and Fees.

GAP Ins. FeeThis is a type of insurance that covers the difference between the value of the vehicle and the amount still owed on the lease if the vehicle is damaged or stolen. Although not required, if you decide to purchase GAP Insurance, do so through your Insurance Company, not the dealership.

Gross Capitalized CostAlso known as (Gross) CAP Cost.

See: Selling Price.

Lease TermThe period of time (months) that covers the lease agreement. 36 months is typically the optimal term for most leases.

Local State TaxAll U.S. states (except Alaska, New Hampshire and Oregon) require a sales tax when purchasing or leasing a vehicle.

Money FactorAlso known as the Rent Charge, Lease Charge, or Finance Fee, this value determines your Monthly Finance Charges. Unlike complex loan formulas, the finance charge for a lease is quite simple to calculate:

(Net CAP Cost + Residual) * Money Factor

The APR equivalent is calculated by multiplying the Money Factor by 2400. This value should be comparable to the current APR for new car loans.

MSRPManufacturer suggested retail price (Sticker Price). Most vehicles start with a base MSRP, and by adding additional options (Leather Interior, Technology Package, Sunroof, etc.), the MSRP will increase. The Residual Value is based on the Total MSRP (base MSRP + options). Destination Charge is typically included in the MSRP.

Net CAP CostAlso known as Adjusted Capitalized Cost, this value is any CAP Adjustments made to the CAP Cost (Selling Price). It is also one of the values that determine the Base Monthly Amount and Monthly Finance Charges of the lease.

Open-end LeaseA lease that requires you to pay the difference (if any) between the Realized (current) Value and the Residual Value stated in the agreement at the beginning of the lease.

If the Residual Value was $18,000 and the Realized Value is $16,000, you owe $2,000.
If the Residual Value was $18,000 and the Realized Value is $20,000, you are owed a refund of $2,000.

Optional EquipmentWhen customizing your vehicle, the cost of those added features and options are added to the base MSRP. Technology/Navigation Packages and Satellite Radio are examples of optional equipment.

Purchase OptionIf it is specified in your lease agreement, you may have the right to purchase the vehicle during, or at the end of the lease.

Realized ValueThe current value of the vehicle at the end of the lease. The ideal Realized Value would be the Residual Value given to the vehicle at the beginning of the lease. Due to market fluctuations and other industry factors, the Realized Value may not always be the same as the projected Residual Value.

Registration, Title, License FeesThese are state and local government fees and are required when purchasing or leasing a vehicle.

Residual ValueThis is the determined value of the vehicle at the end of the lease. The longer the Lease Term, the less the vehicle will be worth. Since you are only "renting" the vehicle, and the dealership plans to sell it for this value once returned, you do not have to pay for the Residual Value - only the Depreciation.

NOTE: The Residual Value is based on the Total MSRP (base MSRP + options).

Security DepositA refundable deposit (typically equaling one monthly payment but not always required) that is collected at the beginning of the lease to offset any charges due under the term of the lease.

Selling PriceAlso known as the Gross Capitalized Cost or CAP Cost, this is the price that you agree to pay (finance) for the vehicle. This item may be the most important value in any auto lease. The lower this value is, the lower your monthly payments will be.

NOTE: The Selling Price is, and should be negotiated.
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