Leasing Terms Explained
Leasing is a world unto itself with a complex language all its own. Here is a
quick guide to common terms.
Acquisition Fees
An acquisition fee is a charge for processing the lease and is probably not
negotiable. On a shorter term lease, the acquisition fee can have a larger
impact on the cost of the lease.
Acquisition Fee Rate Penalty
This is the impact on the net interest rate of any acquisition fee.
Bank Loan Rate
Based on published rates for new car loans with 20 percent down and 48 month
terms, this is calculated as the average loan interest rate for the month. Rates
available in any market may differ substantially from this average and this
average is only intended as a guide.
Base Interest Rate
Represents the interest paid on the usage of the vehicle in a lease. It is the
'cost' of a lease before factoring in discounts, fees, and penalties. Subsidized
leases are often less costly because manufacturers lower the base interest rate.
The phrase 'money factor' measures the same cost, but expresses it in a less
understandable fashion.
Buy at end-of-term interest rate
This is the effective interest rate for the lease if, at the end of the lease,
the car is purchased at the end-of-lease purchase price.
Capitalized (Cap) Cost
This is the total price of the vehicle-in effect, its purchase price. In theory,
the cap cost should equal the amount you would pay for the vehicle if you were
purchasing the vehicle. When a lease is made, the dealer sells that vehicle to
the leasing company, which then leases the vehicle to you. The capitalized cost
is the price the dealer actually receives for the vehicle.
Capitalized (Cap) Cost Reduction
This is a fancy name for a cash down payment, money you pay up front that is
applied to the final purchase price. A large cap cost reduction will, of course,
reduce the monthly payments, but it will also negate one of the big advantages
of leasing. However, if you own your present car, you may be able to use it, as
a trade-in, to satisfy the cap cost reduction to start the lease.
Another source of capital cost reduction may be dealer or manufacturer
participation. Dealers and manufacturers will sometimes simply lower the cap
cost or offer a rebate that reduces the cap cost. A dealer or manufacturer cap
cost reduction does lower your total out-of-pocket dollars, unlike a cap cost
reduction that you must pay.
Closed and Open End Leases
Most leases offered today are closed-end leases, meaning that the residual value
is fixed and stated in the lease contract (the stated residual value). The
lessee's financial obligations are unaffected by what the vehicle is actually
worth when the lease ends. In other words, the lessee assumes no risk for the
depreciation of the vehicle.
With an open-end lease, there is still a residual value set at the beginning of
the lease. However, if the car is worth less than the residual value at the
lease's end, the lessee must pay the difference. In other words, the lessee
assumes the risk for depreciation with an open-end lease.