Leasing Terminology

Depreciation
A reduction or decline in vehicle value over the lease term. It is one of the factors used in establishing Base Monthly Payment.

MSRP
Manufacturer's Suggested Retail Price (List/Sticker Price). This value is used to calculate the Residual Value of the car.

Residual Value
This figure represents the estimated value of the car at the end of the lease. In a closed-end lease, you will have the option to purchase the car at the end of the lease from the leasing company for the residual value. The residual value, which is used to calculate the monthly payment, accounts for the car's depreciation over the lease period. In general, the lower the residual the higher your payment. Sometimes the residual is expressed as a percentage of the retail price (MSRP) of the vehicle. Typical residuals range from 35% to 65%.
Note: The residual will vary widely depending on the length of the lease (number of months) and the type of vehicle.

Money Factor
A decimal number that is used to calculate the lease payment. This number may be converted to an approximate interest rate by multiplying by 24. Example: A money factor of 0.00495 converts to an interest rate of about 11.9%.
Note: Different model cars from the same manufacturer may have different money factors. Also, the lease rate or factor will vary slightly with the length of the lease (number of months).

Current Lease Buyout
This is the figure that one may purchase a leased vehicle for prior to scheduled lease termination. Typically, this fee is calculated by adding the residual value, the total of the remaining monthly payments, and any early termination or purchase option fees, which may apply. In some instances this fee is negotiable with the Lessor.

Effective Annual / Lease Rate
The annual percentage rate (APR) for the lease. This rate is approximately equal to the money factor multiplied by 24.

Capitalized Cost
The cap cost is the price at which the dealer sells the car to the leasing company and is negotiated between you and the car dealer. This number includes the dealer's cost on the car plus a margin and is also used to calculate the monthly payment. The higher the Cap Cost the higher your payment. If a dealer tells you that the Cap Cost is the same as the MSRP, do not believe him (unless you are willing to pay sticker price for the car).

Margin
The amount over dealer's cost (from the manufacturer) that the dealer receives when the car is sold to the leasing company. By definition, margin is inclusive of dealer profit and cost of doing business such as advertising, rent, utilities, salaries, etc. The invoice price is intended to represent the dealer's cost on the vehicle. However, in reality, the dealer's actual cost for the car may be lower due to quantity discounts and factory-to-dealer incentives. And by the way, you are entitled to and should insist that factory rebates are paid to you in cash or applied to the Cap Cost.

Invoice Price
This is the published dollar amount that the dealer pays the manufacturer for the car. However, it is well known that the dealer's true cost is significantly less than invoice. When the dealer sells a vehicle, he gets a "hold back" allowance which typically ranges from 2% of base invoice to 3% of total MSRP. The dealer may also receive any number of additional discounts in the form of dealer rebates, volume incentive bonuses, and floor plan allowances. This means that the dealer can sell or lease you the vehicle at invoice price and still make a fair profit. If a dealer tells you he is losing money by selling at invoice, he is lying.

Capitalized Reduction
A Capital Reduction (Cap Reduction for short) payment is cash paid by you at the signing of the lease that is applied towards the capitalized cost of the car. In other words, a cap reduction payment reduces the price at which the car is sold to the leasing company and thereby reduces the monthly payment.

Excess Mileage Fee
This is a fee that the consumer may pay at the conclusion of the lease. The fee is usually expressed as number of cents per kilometer in excess of a specified number of kilometers driven in one year.

Acquisition Fee
A fee charged by the lessor bank used to cover the costs associated with the leasing process. Also known as the Bank Fee or Initiation Fee.

Disposition Fee
A fee charged by many lessors to cover the expenses associated with the reselling of a vehicle at lease end. Also known as a Termination Fee.

Early Termination Fee
If for some reason you are compelled to break the lease, you will almost certainly be obligated to pay this fee. Depending on the wording of the lease agreement, this fee could be very substantial. Therefore, you should be sure to understand the terms under which the lease may be broken before you sign the contract.