Terms and Definitions
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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 floor plan 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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