Understanding Auto Leasing: Part 2 – The Contract

negotiating a dealTo get a favorable lease deal it is essential to know the meanings of the terms and vocabulary used in lease contracts. Since leasing and lease prices are based on factors such as depreciation, residual value, capitalized cost, cap cost reduction, and lease rate, it is in your best interest to become familiar with these terms so you are comfortable when negotiating a lease.

Leasing Contract Terms and Concepts

  • Depreciation is the reduction in the value of a vehicle with the passage of time, due to mileage and wear and tear. Vehicle leasing is centered completely on the idea that you pay for the amount a car’s value depreciates over the time of the lease period. Depreciation amounts are the primary factor in determining the cost of leasing. In short, cars with low depreciation rates should provide for the most affordable lease deals.
  • Residual Value is the estimated wholesale value of a vehicle at the end of the leasing period, after it has gone through depreciation. This is sometimes referred to as the ‘resale value’. A car with lower depreciation has a higher residual value, so it is predicted at the beginning of the lease that it will be worth more at the end of the lease, resulting in lower monthly payments.
  • Capitalized Cost is also referred to as ‘cap cost’ or ‘lease cost,’ and it is the actual price you will pay for the lease. In a desirable lease deal, the cap cost will be quite a bit lower than the MSRP. When negotiating a lease deal, this is the price that you want to try to lower.
  • Capitalized Cost Reduction is when the lease price (cap cost) is lowered by rebates, credits for trading in another car, a down payment, or factory incentives. The more you can reduce your cap cost, the lower your monthly payment will be. When you subtract the reductions from the capitalized cost, you are left with the ‘net cap cost’, which is a figure you’ll need for calculating your payments with a formula. More about this in the next installment about calculating costs.
  • Lease Rate is sometimes called the ‘money factor’ or the ‘lease factor’. This is the interest rate you will pay on the money the leasing company paid to the dealer to lease the car to you. This rate is indicated by a decimal number, like .00397.

Now What?

What are you supposed to do with this information? Remembering what each of these terms means will help you to understand your lease deal, make you sound like an expert when negotiating your lease, and will allow you to plug in the right numbers to calculate your monthly payments. How do you calculate your monthly payments? We will go over that in detail in the next installment, “Understanding Auto Leasing: Part 3 – Calculating Costs.”

February 20, 2013 by Jamie Rettig