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Car Leasing Terminology
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More than 30% of new car consumers choose to lease rather than purchase — yet car leasing terminology can be confusing. Add in a heavy dose of math and the stress of being under pressure in a car dealership and you have a recipe for a potentially expensive mistake.
Here is some common car leasing terminology that can help if you’re looking to lease.
- General terminology when you’re looking to lease
- Finance terminology at the start of a lease
- Finance terminology during the lease
- General terminology at the end of the lease
- The bottom line
General terminology when you’re looking to lease
From “who’s who” to “what’s what,” here is general car lease terminology you’ll probably see when you’re first looking at leasing a vehicle.
Lessee/co-lessee: The person or people leasing the vehicle. The average credit score of new car leasees tends to be in the 700s, according to Experian, although it is possible to get a car lease with bad credit (501 to 660).
Dealership/F&I manager: The dealership is the one selling the car, while the finance and insurance manager is the dealership representative signing the contract.
New vehicle: In a traditional car lease, you lease a specific new vehicle. As long as it’s within your budget, this could typically be any new vehicle you want on the lot.
Used vehicle: There are other leasing options though, including used car leasing from a dealership or car lot.
Term: This is how long the car lease lasts. It’s usually expressed in months: for example, a three-year car lease, which is often considered short-term car leasing, has a term of 36 months.
Mileage limit: This is the maximum amount of miles you could have on the car at the end of the lease without being charged a mileage overage fee. In a car lease contract, it’s usually expressed as the amount of miles per year. For example, you may be limited to 12,000 to 15,000 miles a year.
Mileage overage fee: This is the amount per mile you can be charged for each mile you go over the limit. For example, it could be $0.15 to $0.30 a mile. The lessor only checks the mileage on the car at the end of your car lease term. If you had a three-year car lease with 12,000 miles a year, you shouldn’t have more than 36,000 miles on the car at the end of the term.
Types of car lease contracts
- Close-ended: Most consumer car leases are close-ended, meaning they end on a specific date.
- Open-ended: An open-ended car lease is usually for businesses. It allows them to turn in the leased vehicle within a certain time period.
- Subscription: Subscription leasing is when you pay one monthly amount. You have the ability to choose different new vehicles to use during the lease contract. This is usually a very expensive type of lease that only a few automakers, such as Volvo, offer.
- One-pay: It’s a type of lease in which you pay the entire amount for the lease upfront in one payment, rather than borrowing the amount and making payments over time.
- Lease takeover: Rather than get a lease from the dealership yourself, you could look at taking over a car lease from someone else. By doing this, you might be able to save money and get the benefit of the original leasee’s down payment.
- Subsidized or subvented lease: Any lease that gets a rebate — whether the rebate reduces the vehicle price or reduces the money factor or APR (more on these later) — is called a subsidized lease because the automaker is subsidizing and reducing what you pay to incentivize you to lease the car.
Finance terminology at the start of a lease
In a car lease, you’re not buying the car — you’re buying the right to use the car for a set amount of time and miles. The right to use it for that set time and miles has a price. Here is the terminology used to clearly explain what that price is and how it is decided.
The amount due at signing
This is the total amount you will pay to the dealer when you sign the contract. You may be able to pay by cash, check, debit or credit card. This could include three main things: your down payment, your first month’s payment and any security deposit.
Down payment: This is the amount of money you put down. It decreases your monthly payment because it lowers how much you borrow in your car lease.
First month’s payment: Before you take off in your leased car, you need to make the first payment. With an auto loan, you make the first payment after your first 30 days of having the car. But with a car lease, you have to pay upfront.
Security deposit: The lender may require that you give a security deposit. At the end of the lease, the lender may return the entire deposit to you if there is no excess damage to the vehicle. If there is excess damage, the lender may deduct damage charges and fees from the security deposit.
Example No. 1: If you have $2,000 as your down payment, your lease payment is $300 and your security deposit is $300, your amount due at signing would be $2,600.
Example No. 2: If you can only pay $2,000 at the time you sign for the car and your lease payment and security deposit are $300 each, the dealer could make it so that your down payment is $1,400. This way, everything is covered and your total due at signing would be only $2,000.
The capitalized cost
This is the amount of money you are capitalizing — the amount of money you are borrowing. Since this is a bottom-line number, there are many things that can go into it.
Things that can increase capitalized cost
These are the major things that could increase how much you borrow for your car lease.
- Vehicle price: This is how much you and the dealer agree the vehicle you want to lease is worth. To make sure you are paying a fair price, you could look up the vehicle’s value on an industry site, like NADAguides or Kelley Blue Book.
- MSRP: Also known as the manufacturer’s suggested retail price, this is how much the automaker thinks the car is worth. It acts as a benchmark for the dealer and the consumer. Depending on when and where you shop, you may pay more or less than MSRP.
- Invoice price/dealer cost: This is how much the dealer pays the automaker to get the car. It is lower than the MSRP.
- Residual value/end-of-lease purchase price: This is the amount that you and the dealer agree the car will be worth at the end of the car lease.
- Depreciation: This is the difference between how much the car is worth now and the residual value.
- Lease inception costs/acquisition fee/assignment fee: This is how much the lender is charging you — as a fee — to give the lease to you. The fee covers the lender’s costs for things such as pulling your credit and processing your paperwork.
- Document and processing fees: These are the fees the dealership is charging you to file and process all your car leasing paperwork. You do have to pay them, but you can negotiate with the dealer to bring the price of the car down, which could help cover fees.
- Add-ons: You might be able to add things to your car lease contract, such as an extended warranty, a tire warranty, a service contract or GAP insurance. And they each have a price, which can increase how much you’re borrowing, unless you increase your down payment.
- TT&L: Tax, title and license refers to flat fees and percentage fees that the government charges for you leasing the car.
- Negative equity from a trade-in vehicle: If you have a trade-in and you owe more than it is worth (which is called being “upside down” or “underwater”), you still need to pay for that difference. You might be able to add this amount to what you will owe on your new leased car, so it would increase how much you borrow.
Things that can decrease capitalized cost
Capitalized cost reduction is the total amount of money that brings down how much you are borrowing for your car lease.
- Rebates and dealer discounts: Sometimes automakers and car dealers will offer deals on their cars to reduce the price. If the car costs less, you’ll borrow less to lease the car, which is how a lower sales price can translate to a lower capitalized cost.
- Down payment: Again, this is the amount of money you put toward the leased car, so it decreases how much you borrow in your car lease.
- Positive equity from a trade-in vehicle: If you have a trade-in that is worth more than what you owe on it, the positive amount can act like a down payment and decrease your capitalized cost.
Finance terminology during the lease
Here is some terminology you may come across when looking at car lease financing costs. There are only two situations in which you might not have to pay these costs. The first is if the manufacturer subsidizes your car lease so you pay zero in financing; the second is if you do a one-pay lease.
Money factor/lease factor/factor: This is a five-digit decimal number that lenders use as a way to express the interest charge you pay. You could convert this into an approximate interest rate equivalent by multiplying it by 2,400. For example, a money factor of .00055 would equal an interest rate of 1.32%.
Rent charge: This is another way to talk about the finance charge. In essence, it’s how much in interest you pay per month.
APR: Also known as annual percentage rate, this is how much the lender is charging you in fees and interest for lending you money. It’s expressed as a percentage based on time. If you pay off the lease early, you could pay less in interest.
General terminology at the end of the lease
This is the terminology you will probably see when you look at ending a lease.
Excess wear and tear/excess mileage: May also be referred to in tandem as “vehicle condition adjustment.” If you went over the mileage limit, you could be charged for it. If the vehicle has excess wear and tear, you could also be charged what the lender thinks is appropriate.
Early termination charge: This is a fee the lender charges if you end the lease early. How much it is depends on how early you end the lease; however, it is usually a substantial fee. The best ways to avoid end-of-lease fees is to be conscious of your mileage, generally take good care of your car and turn in your car on time.
Purchase option/buyout option: Most car lease contracts give the person leasing the car the right to buy it at the end of the lease. The leasee doesn’t have to buy the car, but it’s an option.
Purchase option charge: This is the fee the lender charges if you decide to purchase the car at the end of the lease.
Termination fee/disposition fee: This is the fee the lender charges if you decide to turn in the car at the end of the lease.
The bottom line
If car leasing terminology confuses you, don’t be afraid to stop and ask what things mean. Especially when you’re going over the car lease contract, it is the job of the F&I manager (do you remember what they do?) to explain the contract to you to your satisfaction.