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Understand Car Purchase/Lease Terminology & What They Mean

Table of Contents

Are you confused about car lease terminology? You’re not alone. The truth is, there are tons of unfamiliar words you’ll encounter when leasing a car.

Chances are, you have already encountered some of them. With that said, they might have caused more confusion. So, to help you out, we’ve compiled a list of car buying and lease terms and their definitions.

Lease

A lease means that you are essentially renting the car from the dealership for a set amount of time. The terms can range anywhere from 24 to 48 months.

At the end of your lease agreement, you will have the option to purchase the vehicle or return it to the dealer.

If you decide to purchase the vehicle, you will be responsible for any repairs that need to be made.

If you decide to return it, you will only be responsible for any damage that is above and beyond normal wear and tear.

Lease Term

A leasing term is the amount of time that you agree to lease the vehicle. As we mentioned before, this can be anywhere from 24 to 48 months.

Lease Company

A leasing company is an organization that provides the funds for the dealer to lease the vehicle to you.

This is usually a bank or finance company. In some cases, the manufacturer’s financing arm may act as the lease company.

Lease Transfer

A lease transfer is when you take over someone else’s lease agreement. This can be a great way to get into a vehicle that you might not be able to afford otherwise.

It is important to note that you will be responsible for the remainder of the lease agreement.

MSRP

MSRP stands for Manufacturer’s Suggested Retail Price. This is the starting point for negotiating the price of a vehicle.

It is important to note that the MSRP does not include destination charges, taxes, or fees.

Capitalized Cost

The capitalized cost is the negotiated price of the vehicle that you have agreed upon with the dealer.

This is the starting point for determining your monthly lease payment.

Capitalized Cost Reduction

A capitalized cost reduction is any money that you put towards the vehicle at the start of your lease agreement.

This can be in the form of a down payment, trade-in equity, or a manufacturer’s rebate.

The capitalized cost reduction is applied to the capitalized cost to determine your monthly lease payment.

Money Factor

The money factor is used to calculate your interest rate when leasing a vehicle. It is expressed as a decimal, and it is multiplied by 24 to get your effective interest rate. For example, a money factor of .0030 would equal an effective interest rate of 7.2%.

Residual Value

The residual value is the estimated value of the vehicle at the end of your lease agreement. This is used to determine your monthly lease payment.

If the vehicle is worth more than the residual value at the end of the lease, you will have the option to purchase the vehicle or return it to the dealer.

Security Deposit

A security deposit is a refundable deposit that is usually equal to one month’s lease payment. This deposit is held by the leasing company to ensure that you make your monthly payments on time.

Acquisition Fee

An acquisition fee is a charge that is assessed by the lease company. It is usually around $500 and it is used to cover the cost of acquiring the vehicle.

Disposition Fee

A disposition fee is a charge that is assessed by the lease company when you return the vehicle at the end of your lease agreement.

The fee is used to cover the cost of disposing of the vehicle.

Invoice Price / Dealer Cost

The invoice price is the amount that the dealer paid for the vehicle. This is different than the MSRP, as it does not include destination fees, taxes, or other charges.

The dealer cost is usually very close to the invoice price.

Rebates

A rebate is a discount that is offered by the manufacturer. These rebates can be in the form of cashback or a reduced interest rate.

Down Payment

A down payment is any money that you put towards the vehicle at the start of your lease agreement. This can be in the form of cash, a trade-in, or a manufacturer’s rebate.

The down payment is applied to the capitalized cost to determine your monthly lease payment.

Trade-In

A trade-in is a vehicle that you are trading into the dealer as part of your lease agreement. The trade-in value is applied to the capitalized cost to determine your monthly lease payment.

Insurance

Lease agreements require that you have full coverage insurance on the vehicle. This is to protect the leasing company in case of an accident.

Gap Insurance

Gap insurance is insurance that covers the difference between the balance of your lease and the actual cash value of the vehicle if it is totaled in an accident.

This insurance is not required, but it is recommended if you are leasing a vehicle.

Term

The term of a lease agreement is the length of time that you will be leasing the vehicle. Most leases are for 36 months, but terms can range from 24 to 60 months.

Advertising Association Fees

Advertising association fees are charges that are assessed by the dealer. These fees are used to cover the cost of advertising the vehicle.

License & Registration Fees

License and registration fees are government-mandated charges that are assessed by the dealer. These fees are used to cover the cost of registering the vehicle.

Documentation Fees

Documentation fees are charges that are assessed by the dealer. These fees are used to cover the cost of processing the paperwork for your lease agreement.

Total Due at Lease Signing

The total due at lease signing is the amount of money that you will need to pay when you sign your lease agreement. This includes the first month’s payment, the security deposit, the acquisition fee, and any other charges.

Monthly Payment

Your monthly payment is the amount of money that you will need to pay each month to lease the vehicle. This payment is determined by the capitalized cost, the residual value, the money factor, and the term of the lease.

Option Discount Adjustment

The option discount adjustment is a charge that is assessed by the dealer if you choose to purchase the vehicle at the end of your lease agreement.

This charge is used to cover the cost of selling the vehicle.

Mileage Allowance

The mileage allowance is the number of miles that you are allowed to drive during your lease agreement. Most leases have a mileage allowance of 12,000 miles per year.

If you exceed the mileage allowance, you will be charged a fee for each mile that you drive over the allowance.

First Month’s Payment

The first month’s payment is the amount of money that you will need to pay when you sign your lease agreement. This payment includes the monthly payment, the security deposit, the acquisition fee, and any other charges.

Excess Wear and Tear Charges

Excess wear and tear charges are fees that you will be charged if the vehicle is returned with excessive wear and tear.

These charges can include fees for repairs, cleaning, or replacement of parts.

Early Termination Penalty

The early termination penalty is a fee that you will be charged if you terminate your lease agreement before the end of the term.

This fee is used to cover the cost of selling the vehicle.

In Conclusion

When you are considering leasing a car, it is important to understand all of the terminologies that are associated with leases. By understanding the terms, you will be able to make an informed decision about whether or not leasing is the right choice for you.

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