Guide to lease terms

Be familiar with the language of leasing

Last updated: February 2014

Leasing has its own language. To successfully navigate the process, it helps to be familiar with the following terms:

Acquisition fee. Covers expenses such as obtaining a credit report and verifying insurance coverage.

Adjusted (or net) capitalized cost. The total amount upon which the lease payments are based, including the cost of the vehicle, minus any down payment, and any fees or other charges not paid up front.

Base monthly payment. The portion that covers depreciation, any amortized amounts, and finance charges. Monthly sales/use taxes and other fees are added to determine the monthly payment.

Capitalized cost reduction. The same as a down payment when buying a vehicle with a loan.

Closed-end lease. A typical lease, where the consumer does not owe a difference if the actual value of the car at the end of the agreement is less than the residual value that was set at the beginning.

Depreciation. This is charged to cover the vehicle’s projected decline in value during the lease term. It’s calculated as the difference between the net capitalized cost and the vehicle’s residual value.

Disposition fee (disposal fee). A fee charged to defray the cost of preparing and selling the vehicle at the end of the lease.

Early termination. Ending the lease before the scheduled termination date, whether voluntarily or involuntarily. In most cases, you must pay an early-termination charge.

Excess mileage charge. A fee, usually 10 to 25 cents per mile, for mileage in excess of the maximum specified in the agreement.

Excessive wear and tear charge. Charged to cover wear and tear on a leased vehicle beyond what is considered normal. It usually covers both interior and exterior damage.

GAP coverage (Guaranteed Auto Protection). This makes up the difference if your car is stolen or destroyed, and you owe more money on the lease than your insurance company will reimburse. One type of coverage is a waiver by the lessor of the GAP amount if the vehicle is stolen or totaled. The other is a contract by a third party to cover the GAP amount.

Gross capitalized cost. The vehicle price on which the lease is based. Negotiate it.

Lessee. The party to whom the vehicle is leased, i.e., you. The lessee is required to make payments and meet any other obligations in the agreement.

Lessor. A person or organization that leases, offers to lease, or arranges for the lease of a vehicle.

Mileage allowance (or limitation). The fixed mileage limit for the lease term. This can be negotiated, but you may have to pay an excess mileage charge. You can pay for extra miles up front, but you won’t get your money back if you don’t use them.

Money factor (or lease factor). A number, often given as a decimal, used by some lessors to determine the rent (interest) charge portion of your monthly payment.

Purchase option. Your right to buy the vehicle dur--ing or at the end of the lease, according to terms in the agreement.

Residual value. The vehicle’s estimated projected value at the end of the lease. It’s set at the beginning of the lease and used in calculating your base monthly payment. The residual value is deducted from the adjusted capitalized cost to determine the depreciation. The vehicle’s actual value at the end of the term may be higher or lower.

Sales/use taxes. States differ in which amounts are taxed and when the taxes are assessed. In a lease, sales/use taxes may be assessed on (1) the base monthly payment, (2) any capitalized cost reduction, or (3) in a few states, the adjusted capitalized cost. In most states, the sales/use tax on the base monthly payment is paid monthly.

Security deposit. An amount that can be used by the lessor in case you default or at the end of the lease to offset any money you owe.

Subvention. This is a program or plan in which certain vehicles or items are subsidized by the manufacturer, such as for a slow-selling vehicle.

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