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What You Should Know About Leasing Terminology

Aug 17, 2007
Sometimes the terminology in transactions can be confusing; the following definitions on leasing terminology will help equip you to better negotiate a good lease deal.

Acquisition fee: The fee levied by a leasing company to purchase a vehicle and institute a lease. This is also sometimes called an initiation fee. The average charge is $450-$500.

Cap Cost: The price the leasing company is paying the dealer for the vehicle. This can be negotiated. You payments will be correspondingly lower, the lower this figure is.

Cap Cost Reduction: Any down payment or trade in reducing the cap cost. Any increase in this figure will lower the amount financed as well as your payments.

Closed end lease: Leasing company takes all the risk for any decline in value from excessive depreciation. With this type of lease you can just walk away. This is the type of lease you want.

Depreciation: This is the difference between cap cost and residual.

Disposition Fee: This is the fee charged at the end of the lease for turning in the vehicle. This should be negotiated before you sign the lease. Only agree to pay one fee, either the acquisition fee or the disposition fee. Never pay both fees. The disposition fee is usually from $200-$400.

Early Termination Penalty: This the cost levied for ending a lease early. Be sure you know this in advance, it can add up to thousands of dollars.

Excess Mileage Charge: This is a penalty for exceeding the mileage allowed in the lease. This is customarily 12 to 15 cents per mile. Beware low mileage leases, these penalties can cost you thousands of dollars.

Gap Insurance: Policy to cover difference in balance owed on lease and regular insurance coverage. This is needed in case of theft or total loss accident. It should be included in the lease.

Lease Rate: This is the monthly rate charged by the leasing company which is similar to an interest rate. The lease rate is found by the following factor: Lease rate=[final cap cost + residual] x money factor.

Money Factor: This is used to determine the lease rate. This can be negotiated and should not be greater than the loan rate would be. Money factor=[annual interest rate divided by 24]

MSRP: This stands for Manufacturer's Suggested Retail Price. This is almost always open to negotiation.
Open end lease: In this type of lease the lessee, which means you, assumes the risk for any excessive depreciation. With this type of lease you may have to purchase the vehicle for more than it is worth or sell at a loss and pay the leasing company the difference. Not good.

Residual value: This is the estimate of the wholesale value of the vehicle at the end of the lease. A higher residual should give you lower payments. If you want to buy the car, offer a lower price.

Term: This is the length of the lease. Never lease longer than three years.
About the Author
Gregg Hall is a business consultant and author for many online and offline businesses and lives in Navarre Florida with his 16 year old son. For patented car care products go to http://www.stopwaxing.com
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