Car Leasing Terms Explained in Plain English
Contrary to what most people think, car dealers are not the ones who suggest leases. Leases are actually done through leasing companies, banks, or the finance division of a car manufacturer (such as GM Financial or Ford Motor Credit).
When you lease a car, the dealer sells the vehicle to the leasing company at the price you negotiate (read our negotiating guide). The leasing company then turns around and leases the car to you based on that purchase price.
This is why it’s so significant to negotiate the selling price of the car very first before leasing. Car dealers love the confusing nature of a lease because it’s effortless for them to pad on extra profits without you ever realizing it.
Leasing Terms Explained in Plain English
In order to understand leasing, you need to understand the following terms used to calculate your monthly payments. (don’t worry, it’s elementary once you understand).
This is the most significant part of a lease, sometimes referred to as "cap cost". It’s the negotiated selling price of the car plus any extra fees you might want to include in the monthly lease payment (such as acquisition fee). The lower you negotiate the purchase price of the car, the lower your monthly payment will be.
Most dealers will attempt to charge MSRP (Manufacturer’s Suggested Retail Price). Don’t fall for that – negotiate just like you would if you were buying the car outright.
Capitalized Cost Reduction
"cap reduction", this is basically anything that lowers the cap cost – such as a down payment, trade-in allowance, or rebates. Assuming you negotiated the purchase price at $25,000 and you put $Trio,000 as a down payment, your capitalized cost is now $22,000 and your capitalized cost reduction is $Trio,000. Adjusted Capitalized Cost
Sometimes referred to as "net capitalized cost", it’s the cap cost minus the cap reduction. This is the figure the leasing company will use to determine your monthly payments. Acquisition Fee
This is the fee leasing companies charge to arrange the lease and is usually just a straight profit for them. Not all leasing companies charge this fee, but when they do, it’s usually inbetween $400 and $750 – and it’s not negotiable. The acquisition fee can be bundled into the monthly lease payment by adding it to the Capitalized Cost. Depreciation
You’ve very likely heard the telling that the value of a fresh car drops 15% as soon as you drive it off the lot. This statement refers to depreciation.
Typically, the price of a fresh car drops 50% after three years. Reminisce that the leasing company actually wields the car and is "renting" it out to you.
The problem is, when you come back the car, it’s going to be worth a entire lot less than when you very first commenced leasing it and you’re going to have to pay for this loss in value.
Therefore, depreciation makes up the largest part of your lease payment so you need to pay close attention to this. Some cars depreciate more than others. Cars like BMW and Mercedes retain their value well, which explains why many of their sales go to leasing. (See: Best Cars to Lease if You Want a Excellent Deal)
This is the amount your car is worth at the end of the lease. Depreciation and Residual go palm in forearm – if you know one, you can calculate the other.
Let’s say you purchased a car for $30,000. After four years, the depreciation on the car is $20,000 – therefore, the residual is $Ten,000.
The residual value is calculated before you sign the lease. Most leasing companies use the Automotive Leasing Guide (ALG), an industry guidebook that calculates the predicted values of fresh cars after they come off lease.
This is what confuses most people when it comes to leases. Money factor is actually pretty plain, it just refers to the interest rate but is calculated differently. (Again, car dealers love the confusion since it permits them to add in hidden profits)
The money factor is represented as a number such as ".0029". To convert this to a more familiar interest rate, you simply multiply by Two,400. A money factor of .0029 equals harshly 7% interest.
Here’s a table showcasing you what each money factor converts to: