Car Leasing Terms You Must Know!

When it comes to leasing a car, every potential car leaser is obviously looking for the best deal possible. However, the problem is that most of these potential customers do not really understand the lingo and terminology associated with leasing a car. This makes it sound like they don't really know what they are talking about when they are trying to negotiate a good deal at the car dealership. There are many terms that dealers often use among their co-workers when discussing lease deals and understanding most of these terms can be work to your advantage. What follows are five leasing terms along with not only what they mean, but their significance as well.

1. Capitalized Cost

The capitalized cost is basically the reduced selling price that the dealer is using to calculate your monthly payment. If it's a good lease deal, the capitalized cost is significantly lower than the MSRP. A lower capitalized cost or cap cost gives you a lower monthly lease payment.


The MSRP stands for Manufacturer's Suggested Retail Price. It is basically a marked up version of the invoice price which is what the dealer pays the manufacturer to put the car on the lot. It is important to always compare the MSRP of a vehicle to its invoice price to see just how low of a selling price is possible. The selling price of the car is the negotiated price that the dealer is using to compute your monthly lease payment. You should aim for a selling price that is as close to or even below the invoice price.

3. Cap Reduction

The cap reduction is the sum of money you pay at the time of signing a new lease deal in order to reduce your selling price. For instance, if the dealer agrees to a lease deal where the capitalized cost (selling price) is $25,000 with a cap reduction of $1,000, this $1,000 would reduce your selling price to give you a net capitalized cost of $24,000. While it is true that you are putting this money "down", you shouldn't confuse the cap reduction with the down payment because the down payment is generally the sum of the cap reduction AND other fees such as tax, licensing, and registration fees. The cap reduction is the specific amount of your down payment that is being used to reduce your capitalized cost and therefore reduce your monthly payment.

4. Residual Value

The residual value is a dollar amount or percentage that represents the projected value of a car after a specific number of months or years. It is generally set by the finance company that provides your lease agreement and cannot be changed. When looking for a car to lease, you should always seek cars with high residual values. Cars with higher residual values have lower monthly payments. Compared to American cars, Japanese cars have much higher residual values which make them great cars to lease. You can use a car lease calculator to see how variations in residual values increase or decrease your monthly lease payments.

5. Money Factor

The money factor is basically the interest rate in leasing terms. The money factor should be a small numeric figure that should be comparable to the interest rates available for auto loans. You should know how to convert money factors into interest rates to give you an idea of how much the dealer is charging you in finance charges for your lease. To get the equivalent interest rate, take the money factor and multiply it by 2400. Compare this value to the interest rates available for customers interested in financing a car. Are the rates close to each other? They should be!

If you understand the 5 car leasing terms mentioned above, you can use this car lease calculator to calculate a hypothetical car lease payment. Doing so will give you a better understanding of what kind of payment you can expect for the car you are interested in leasing.

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