Car Lease Dictionary: The Terms You Should Know
If you’ve never leased a car before, it can feel a bit confusing. It can sound like they are speaking a different language at the dealership and if you are unfamiliar with the terms, it can be a turn off. But when you know what the lingo is, it is easier to understand how leasing works and if you are getting a good lease deal.
Here are all of the car lease terms you should know before you shop for a new car.
Acquisition Fee
This covers the expenses of arranging the loan, such as obtaining your credit report and verifying that you have insurance.
Adjusted Capitalized Cost
The amount that the lease payments are based on. It is essentially the cost of the car minus any down payment, plus any fees.
Base Monthly Payment
Your lease payment will be based on the amount of depreciation that will occur over your lease period. Taxes and fees may be added onto this for your total monthly lease payment.
Capitalized Cost
The cost of the new car. This is also called the gross capitalized cost. You can (and should) negotiate this price as it is what your monthly payments will be based on.
Capitalized Cost Reduction
The amount of money you put down at the beginning of your lease. It is similar to a down payment.
Car Lease Buyout
When you purchase your car at the end of the lease period.
Car Lease Buyout Loan
A car loan that will help you to purchase your lease car.
Car Lease Buyout Price
The price that you can purchase your leased car for. It is the residual value of the car plus any taxes or fees.
Closed End Lease
The lessee will not have to pay the difference if the actual value of the car at the end of the lease differs from what is in the contract. This is how most leases work.
Consumer Leasing Act
This act, which took effect on January 1, 1998, requires lessors to disclose all leasing costs.
Credit Report
Your personal financial history. This keeps track of what accounts you have open, your payment history with each account, and the balance you have on each account. These reports are created by the three major credit bureaus: TransUnion, Equifax,and Experian. Lessors will request a copy of your credit report to determine if you are a good candidate for a lease.
Credit Score
A three digit number that is calculated based on your financial history to indicate your creditworthiness. The numbers range from 300 to 850, and the higher your score is the more creditworthy you are considered. You typically need to have a good credit score to be able to lease a car.
Dealer Preparation Fee
A fee that may be charged to cover preparing the car to be leased. It usually covers washing the car and filling it up with gas. It can often be negotiated down or eliminated from the lease.
Depreciation
The car’s decrease in value over the life of the lease. The depreciation of the car is what you are actually making payments on. It is the difference between capitalized cost and residual value.
Disposition Fee
The cost of preparing the car for sale at the end of lease. This is a nonnegotiable fee so that the car may be cleaned, serviced, and prepared for sale as a certified pre owned car.
Early Termination
Returning the lease before the agreed upon end date. There is usually a fee for ending the lease at an earlier
Excess Mileage Fee
A per-mile fee that is charged if you go over the mileage limit that is stated in your contract. This can vary from $.10 per mile to $.30 per mile depending on your lease agreement.
Excessive Wear-and-Tear Fee
If there is damage to the car that is above what is expected with daily use, you may be charged a fee. Excessive wear and tear may include the following:
- Broken or missing parts of the car
- Dents, scratches, or other damages to the body panels or trim
- Cracked glass
- Cuts, tears, and stains on the upholstery
- Excessively worn tires (often 1/8" tread at the shallowest point)
- Poor-quality repairs
Lease agreements usually list out what is considered excessive wear and tear. Fees will vary based on the cost to repair the damage.
GAP Coverage
GAP stands for Guaranteed Auto Protection. This is an optional insurance that will cover the difference between the money you owe on your lease and what your insurance company will reimburse.
Hard Inquiry
A formal request of your credit history from a lessor. When a lessor considers approving a car lease for you, they will request a copy of your credit report to review. This request will actually show up on your credit report and will cause a temporary ding on your credit score. Hard inquiries cannot be made without your permission.
Indemnity
A section in the lease contract that absolves the lessor from charges that are incurred by the lessee. The car is technically owned by the lessor, so this section shifts the responsibility of damage from the lessor to the lessee (i.e. parking and traffic tickets).
Lease Inception
The beginning of the lease’s term.
Lessee
The person who is leasing the car.
Lessor
The company that arranges for the car to be leased.
Lease Term
The length of your lease, typically 24-36 months.
Mileage Allowance
The amount of miles you are allowed to drive on your leased car. Mileage allowances help the lessors to control the amount of depreciation that will occur over the life of the lease. Allowances tend to be between 10,000 and 15,000 per year. Any overages will result in mileage fees.
Money Factor
The number that determines the interest you will pay on the lease. These numbers are expressed as small decimals, but multiplying the money factor by 2400 will give you an approximate interest rate that will be more recognizable to you.
Open End Lease
Open End leases require you to pay the difference between the residual value and the actual value of the car if there is a difference at the end of the lease period. These leases are uncommon and you should not accept one.
Proof of Employment
A statement or document that shows you are employed. This proof may be a paystub, a letter from your employer, or a W2. This shows the lessor that you can make your lease payments.
Proof of Insurance
Lessors require that you have insurance on your leased car. They typically require comprehensive and collision coverage. Many lessors will also require higher bodily injury liability limits, such as $100,000 per person and $300,000 per accident. To show that you have insurance coverage the lessor will usually require a copy of your insurance policy that states the amount of coverage.
Proof of Residence
You will need to show where you actually live as part of the leasing process. This cannot be a PO box. Lessors want to know where the car will physically be parked if they need to seize it because you have defaulted on your lease.
Purchase Option
The right to buy your leased car at the end of the lease period.
Residual Value
The leased car’s anticipated value at the end of the lease period. The residual value is non-negotiable and is based on the value of the car and the projected depreciation over the life of the lease. If the actual value of the car at the end of the lease period differs from the residual value, it doesn’t matter. The residual value is binding.
Sales Tax
You will have to pay sales tax on your leased car, although states vary on when you will actually pay them. Most states add sales tax onto the monthly base payment.
Security Deposit
Money that you must pay upfront to cover either a default on the lease or to offset additional money you owe at the end of the lease.
Soft Inquiry
This allows lessors to review your credit score and part of your credit report without it counting as a hard inquiry. Also known as a soft pull, this is common when getting preapproved for a loan. Soft inquiries do not affect your credit score and your approval is not required for this.
Subvention
When the car manufacturer subsidizes the cost of a vehicle to encourage leasing. This typically happens if a car is not selling fast enough.
Those are the car leasing terms you should know before you set out to get a new car.
Leasing a new car can feel daunting, but a little research can help you feel confident in your car leasing journey.
If you already have a leased car and are interested in buying it, Auto Approve can help! We can help you secure a car lease buyout loan so you can finally own the car you love. So don’t wait to make your car yours!