It’s important to know the terminology associated with a lease – in fact, a lot of the reason why people find leasing confusing is because dealers and lessors use unfamiliar terms to describe things that are commonly understood when it comes to buying a car with a loan, or leasing other things (like an apartment). This list of common terms with their definition specific to auto leasing should help. If you have further questions, don’t hesitate to reach out to us and ask!
| Term/Phrase | Definition |
| Acquisition Fee | A fee charged by the lessor for setting up the lease which usually ranges from $300 to $1000, depending on the lessor and the vehicle being leased. You can either pay this fee up-front to reduce your capitalized cost, or you can roll it into your monthly payments. |
| Capitalized Cost | Also called cap cost. This is the total amount amount financed by the lease. It includes the selling price of the car, plus any taxes or fees. In most states, sales tax is not included in the capitalized cost. |
| Capitalized Cost Reduction | Down payments or other credits like rebates or trade-ins that reduce the amount financed by the lease. Security deposits do not reduce the capitalized costs. |
| Depreciation | This is the difference between the capitalized cost and the residual value of the vehicle at the end of your lease, and makes up a portion of your monthly payment. |
| Disposition Fee | The fee you will owe to the lessor if you return the vehicle at the end of your lease rather than exercising your purchase option. This fee generally ranges from $300 to $400. You will never pay this if you decide to purchase the car at the end of your lease (although there may be a purchase option fee then), and in some cases, may be avoided if you lease another car of the same brand. |
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| Lessee | The person who is leasing the car. (borrower) |
| Lessor | The bank that is financing the lease. (lender) |
| Money Factor | This is the rate of interest for the lease. To translate this number into a more relatable term, multiply the money factor by 2400 and add a percentage sign. This will represent the annual percentage rate. Example: A money factor of 0.00125 x 2400 = 3.00% APR |
| Rent Charge | This makes up a portion of your monthly payments, and is the equivalent to the interest on the lease. This is calculated as (capitalized cost + residual value) x money factor = rent |
| Residual Value | The expected value of the vehicle at the end of the lease. It is either a percentage of the selling price of the car, or a fixed value. The residual value, and method used to calculate it, are decided by the lessor. |
| Sales Tax | In most states, sales tax is only charged on the depreciation of the leased vehicle, and is part of the monthly payment. But in other states, sales tax may be charged on the total sale price of the car, and added to the capitalized cost- you may decide to pay this at signing to reduce the cap cost. |
| Security Deposit | This a refundable amount paid at signing, and may or may not be required. The security deposit is a multiple of $50 that is closest to your monthly payment, so if you have a monthly payment of $332 your security deposit would be $350. Sometimes, you can put down multiple security deposits to present yourself as a lower risk to a lessor to reduce your money factor. Security deposits are not included in capitalized cost reduction. |
| Term | This is the length of the lease in months. Auto leases generally will have shorter terms, but the longer the lease term, the lower your monthly payments will be because cars depreciate less in later years. |