5 Finance Terms You Should Know Before Leasing a Car

Car keys and toy car in the palm of a hand

Image via Flickr by free pictures of money

There are many benefits to leasing a new car rather than buying it outright or taking out a loan. Leasing is more affordable with lower monthly payments than repaying a loan. At the end of the lease term, you don’t own the vehicle, but you also don’t take the hit on the depreciation of its value.

However, when you are considering leasing your next new car, there are some terms in the contract that you need to understand before you dive in. Being aware of these five terms will help you to negotiate the price while knowing that you have got the right contract for you.

  1. Acquisition Fee

The acquisition fee is a charge made by the leasing company for arranging the lease. Although not all companies charge this fee, when they do, it is usually non-negotiable. It can be added into your monthly lease payments.

  1. Capitalized Cost

Often referred to as the cap cost, this is the most important term in your lease as it refers to the total cost of the lease. It includes the negotiated price of the car and any other fees to be added to your monthly payments such as the acquisition fee.

Anything that reduces the cap cost, such as a manufacturer’s rebate, a trade-in allowance, or a down payment made by you, is known as capitalized cost reduction. If, for example, you get a $1,000 rebate and make a down payment of $2,000, the cap cost reduction is $3,000.

The adjusted capitalized cost is the original cap cost less the cap cost reduction. It is this figure with which your monthly payments will be determined.

  1. Residual Value

This is the value of the car at the end of the lease, taking into account the depreciation. High-end cars tend to depreciate less than other models, which is why they are popular as lease vehicles. The residual is estimated at the beginning of the lease.

  1. Closed-End Lease

Most leases are closed-end which means the customer is not required to buy the car at the end of the lease period. You usually have the option to purchase the vehicle if you want to by paying the residual or market value. You may be able to negotiate a lower price.

  1. Disposition Fee

At the end of the lease period, if you choose not to buy the car, you will be required to pay a disposition fee, also known as a termination or disposal fee. This includes administration charges and the cost of preparing the vehicle for resale. Make sure that this fee is clearly stated in your lease contract at the beginning.

As well as the disposition fee, you might incur wear and tear charges if the vehicle has damage that is beyond what is considered normal or reasonable. These charges should also be defined in the contract. In some cases, you can add a small amount to your monthly payment to exempt yourself from a certain amount of wear and tear charges.

Knowing these terms is a great start to negotiating your next lease.