Car Leasing Terms Explained

Car leasing can be an excellent option for those who want to avoid the long-term commitment of owning a vehicle. Before jumping into a lease agreement, it’s essential to understand the key terms and concepts involved. Here are ten simple car leasing terms.

Acquisition Fee: A fee charged by a lessor to cover the administrative costs of preparing, approving, and administrating the lease. It may be paid upfront or included in the gross capitalized cost.

Adjusted Capitalized Cost: The amount capitalized at the beginning of the lease, after adding any fees or other charges to be included and subtracting any capitalized cost reductions, such as discounts, trade-in allowances, and cash reductions.

Capitalized Cost: This is the price of the car you’re leasing. Negotiating a lower capitalized cost can result in lower monthly payments.

Capitalized-Cost Reduction: The total of any cash payment, trade-in allowance, or discount used to reduce the gross capitalized cost. The capitalized cost reduction is subtracted from the gross capitalized cost to get the adjusted capitalized cost.

Captive Finance Company: A leasing or finance company owned by or otherwise associated with a particular vehicle manufacturer or distributor.

Closed-End Lease: A lease that allows the lessee to return the vehicle at the end of the lease term with no further financial obligation, assuming that the lessee has complied with all of the lease terms. The lessee may be responsible for a disposition fee if it is part of the lease agreement. According to the lease terms, there may be additional charges for any excess mileage or wear. The lessee is not responsible for any difference between the residual value, as stated in the lease, and the vehicle’s actual value at the lease’s end.

Depreciation: The amount of the vehicle’s decline in value over the lease term. Depreciation may be calculated by subtracting the residual value from the adjusted capitalized cost. Using this method, the depreciation amount will also include any amounts added by agreement to the vehicle’s price to arrive at the gross capitalized cost.

Disposition Fee: The fee charged by the lessor if the lessee does not purchase the vehicle at lease-end for costs associated with preparing the vehicle for resale and selling it. The disposition fee must be disclosed in the lease agreement.

Early Termination: Ending a lease before the scheduled termination date. The lessee is typically required to pay an early termination charge as described in the lease agreement.

Early Termination Charge: The fee charged to a lessee in the event of an early termination of a lease. Penalties vary from lease to lease, and the calculation method is determined at lease inception and explained in the lease agreement.

Early Termination Payoff: The total amount the lessee owes if the lease is terminated early before subtracting any credit for the vehicle’s value. The payoff is calculated as described in the lease agreement.

Excess Mileage Charge: The fee for each mile exceeds the predetermined mileage limit, as set forth in the lease agreement. The excess mileage charge varies depending on the type of vehicle and is typically between $0.10 and $0.25 per mile.

Excessive Wear and Tear Charge: A charge collected by the lessor at the end of the lease for damage to the vehicle beyond what is allowed by the lease terms. In a consumer lease, excess wear and tear or normal wear and tear will be precisely defined.

Gap Coverage: A type of insurance coverage that covers the difference between the payoff of the lease and the amount covered by other insurance coverage when a vehicle is damaged or stolen during the lease term. Most gap coverage requires that the lessee not be in default under the terms of the lease.

Gross Capitalized Cost: The negotiated price of the vehicle, plus any other amounts you agree to include in the capitalized cost, such as fees, insurance premiums, service contract premiums, or prior vehicle loan or lease payoff.

Lease Term: The period covered by the lease agreement.

Lessee: The party entitled to possession and use of the vehicle according to the lease terms.

Lessor: The legal owner of the property that is leased.

Mileage Allowance or Mileage Limit: The vehicle’s total mileage may be driven over the lease term without incurring liability for additional mileage charges.

Money Factor: A number often used by lessors to calculate the average monthly rent charge portion of the lease payment.

MSRP: The manufacturer’s suggested retail price.

Open-End Lease: A type of lease in which the lessee is responsible for the difference between the residual value and the realized value at the end of the lease. The lessee may be entitled to a refund if the realized value exceeds the residual balance.

Purchase Option: The lessee’s right to purchase the leased vehicle, either at the end of the lease or during the lease term, as specified in the lease agreement. The lease agreement may or may not include a purchase option.

Purchase Option Fee: A fee in addition to the purchase price required to exercise a purchase option, according to the lease terms.

Realized or Residual Value: A value assigned to the vehicle at lease termination. Check your lease agreement for a definition that may range from the value received by the lessor, the highest offer accepted by the lessor, the vehicle’s “fair market value,” the wholesale or retail value.

Rent or Rent Charge: The portion of the monthly lease payment in addition to the depreciation and amortized amounts.

Residual Value: The vehicle’s lease-end value is established at the lease’s beginning. This value is used to determine the monthly lease payment. The residual value is also used to determine the depreciation and other amortized amounts that go into determining the monthly lease payment.

Security Deposit: A refundable deposit, usually equal to one monthly payment, collected by the lessor at the beginning of the lease to offset any amounts due under the lease term.

Subvented Lease: A lease that the manufacturer or other lessor subsidizes. Many subvented leases offer lower monthly payments by utilizing a higher residual value than other lessors or offering a lower monthly payment rent portion.

Wear and Tear: You are responsible for excessive wear and tear on the car beyond everyday use, which could result in additional charges at the end of the lease.

Understanding these key car leasing terms can help you navigate the leasing process and make informed decisions when considering a lease agreement. Be sure to carefully read your lease contract and ask our Spitzer Honda Cleveland fiance specialists any questions you have before signing on the dotted line. We look forward to working with you!