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18 terms you should know before leasing a car

Road & Track logo Road & Track 2/19/2015
18 terms you should know before leasing a car© Provided by Road and Track 18 terms you should know before leasing a car

Leasing is more confusing than buying. Purchasing a vehicle comes down to the terms of financing and a negotiation on price. In a lease, you're basically paying for the vehicle's loss of value over the term of the agreement, plus a finance factor, a.k.a. the interest rate. But it's never that simple. The language, plus a daunting number of line items and special fees, can turn leasing into a salesman's shell game. Dealers exploit the complex maze of leasing terms and numbers to enhance their profits by manipulating the many figures to their favor. Study our leasing form, because nothing makes a dealer wealthier than an ignorant buyer.


Capitalized Cost Reduction This is how much you've managed to reduce the price of the car. This may be due to your negotiation skills, rebates and incentives, or a down payment.

Acquisition Fee Some leasing companies charge this fee, sometimes also called a document fee, to take delivery of the leased vehicle. Occasionally, this is rolled into the capitalized cost and is therefore hidden.

Sales and Use Taxes A lease doesn't incur sales tax on the entire cost of the vehicle. Instead, only the lease payments are subject to that tax.

Refundable Security Deposit Before you take delivery, you'll likely have to pay a refundable sum to the manufacturer to pay for any damage present at the end of the lease.

Related Link: Research New Car Deals

Title Fees A paper-shuffling charge for procuring a title from the state for you.

Registration Fees The cost of registering the car in your state.

Net trade-in allowance The amount the dealer pays for your old hooptie.

Rebates and non-cash credits The incentives and the amount you've negotiated off the MSRP.

Gross Capitalized Cost This is the full sticker price of the car. Leases, like purchases, are based on vehicle prices that are negotiable. The lower the vehicle's price, the less the lease will cost you.

Adjusted Capitalized Costs This is the price—hopefully much lower than the gross cap cost—on which the lease is based after negotiation, rebates, and any other MSRP reductions.

Residual Value This is what the carmaker estimates the vehicle will be worth when the lease ends. The less it's worth, the higher the lease payments.

Depreciation How much value the car loses over the lease period. This is essentially what you are paying for.

Rent Charge The amount of the lease payment that comes from interest charges. To calculate the rent charge, add the adjusted cap cost to the depreciation and multiply by the finance factor. (Adj cap cost + depreciation) x finance factor x length of lease in months = rent charge.

Base Monthly Payment The amount paid per month. It consists of the depreciation and the rent charge divided by the number of months in the lease.

Total Monthly Payment The base monthly payment with sales tax. Get used to writing checks in this amount.

Excessive Wear and Use If you drive farther than the distance stipulated in your lease, you will be charged for each extra mile. Typically the charge is 15 to 20 cents per mile.

Purchase option at End of Lease Term It's possible to buy the car at the end of the lease for the residual value plus whatever processing fees the manufacturer creates.

Finance Factor This is the interest rate you'll be paying. It's a heavily manipulated number and the one that helps turn that $199 advertised lease into the $299-a-month payment when you actually walk out the door. To compare with a conventional interest rate, multiply the finance factor by 2400. The finance factor is based on buyer credit but can be negotiable. Our advice: Read the advertised lease's fine print and calculate the finance factor. When you visit the dealer, make sure you're getting what you expect.

Read More: 15 Vehicles That Won't Break Your Budget


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