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Terms and Definitions

Below are definitions to terms that are the language of leasing which you should understand if you are to successfully negotiate a fair deal. Therefore, it is highly recommended that you take a few minutes to become familiar with this list.

 

MSRP
Manufacturer's Suggested Retail Price (List/Sticker Price). This value is used to calculate the Residual Value of the car.

Residual Value
This figure represents the estimated value of the car at the end of the lease. In a closed-end lease, you will have the option to purchase the car at the end of the lease from the leasing company for the residual value. The residual value, which is used to calculate the monthly payment, accounts for the car's depreciation over the lease period. In general, the lower the residual the higher your payment. Sometimes the residual is expressed as a percentage of the retail price (MSRP) of the car. Typical residuals range from 35% to 65%.

Note: The residual will vary widely depending on the length of the lease (number of months) and the type of car.

Money Factor
A decimal number that is used to calculate the lease payment. This number may be converted to an approximate interest rate by multiplying by 24. Example: A money factor of 0.00495 converts to an interest rate of about 11.9%.

Note: Different model cars from the same manufacturer may have different money factors. Also, the lease rate or factor will vary slightly with the length of the lease (number of months).

Effective Annual Rate / Lease Rate
The annual percentage rate (APR) for the lease. This rate is approximately equal to the money factor multiplied by 24.

Cap Cost
Or Capitalized Cost is analogous to the purchase price of the car on a conventional car loan. The cap cost is the price at which the dealer sells the car to the leasing company and is negotiated between you and the car dealer. This number includes the dealer's cost on the car plus a margin and is also used to calculate the monthly payment. The higher the Cap Cost the higher your payment. If a dealer tells you that the Cap Cost is the same as the MSRP, do not believe him (unless you are willing to pay sticker price for the car).

Margin
The amount over dealer's cost (from the manufacturer) that the dealer receives when the car is sold to the leasing company. By definition, margin is inclusive of dealer profit and cost of doing business such as advertising, rent, utilities, salaries, etc. The invoice price is intended to represent the dealer's cost on the vehicle. However, in reality, the dealer's actual cost for the car may be lower due to quantity discounts and factory-to-dealer incentives. And by the way, you are entitled to and should insist that factory rebates are paid to you in cash or applied to the Cap Cost.

Invoice Price
This is the published dollar amount that the dealer pays the manufacturer for the car. However, it is well known that the dealer's true cost is significantly less than invoice. When the dealer sells a vehicle, he gets a "hold back" allowance which typically ranges from 2% of base invoice to 3% of total MSRP. The dealer may also receive any number of additional discounts in the form of dealer rebates, volume incentive bonuses, and floorplan allowances. This means that the dealer can sell or lease you the vehicle at invoice price and still make a fair profit. If a dealer tells you he is losing money by selling at invoice, he is lying.

Cap Reduction
A Capital Reduction (Cap Reduction for short) payment is cash paid by you at the signing of the lease that is applied towards the capitalized cost of the car. In other words, a cap reduction payment reduces the price at which the car is sold to the leasing company and thereby reduces the monthly payment. If you are trading in a vehicle, the allowance for your trade is usually applied as a cap reduction. The fine print in "teaser" ads with very low payments on expensive cars often will require cap reduction payments of one to two thousand dollars.

Excess Mileage Fee
This is a flat fee that the consumer pays at the conclusion of the lease. The fee is usually expressed as number of cents per mile in excess of a specified number of miles driven in one year. For example, if the fee is $0.15 for every mile over 15,000 miles per year, and the mileage on the car at the end of a three year lease is 48,000 miles, the excess mileage fee would be $450. Some leasing experts maintain that this fee is negotiable.

Acquisition Fee / Lease Inception Fee / Origination Fee
This fee, which is typically $450, is one of the biggest rip-offs in automotive leasing (Does your bank or credit union charge you $450 to take out a car loan?). Many leasing experts feel this is a "paperwork fee" and is negotiable. However many leasing companies are insisting that this fee be collected. Ask that the fee be waived or absorbed in the dealer margin.

Disposition Fee
Another rip-off fee that is often buried in the fine print of the lease contract. This fee, which can be up to several hundred dollars, is paid at the end of the lease period if you do not exercise your option to purchase the car. Look for lease contracts that do not have disposition fees. If the contract has both a acquisition fee and a disposition fee, add the two together and ask yourself: "Am I willing to pay this amount for the privilege of leasing?" If the two fees together are more than $500, you should shop elsewhere or look into buying the vehicle.

Early Termination Fee
If for some reason you are compelled to break the lease, you will almost certainly be obligated to pay this fee. Depending on the wording of the lease agreement, this fee could be very substantial. Therefore, you should be sure to understand the terms under which the lease may be broken before you sign the contract.

 


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