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Car Lease Terminology: What Are the Typical Car Lease Terms?

Car Lease Terminology: What Are the Typical Car Lease Terms?

Understanding car lease terminology is very crucial and negotiating the car's price. This article lists some of the typical car lease terms in simple language. 

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Car leasing is a new innovative way of owning a vehicle through leasing instead of financing or directly purchasing a vehicle. Car leasing is very similar to renting, where you pay a certain amount of money to a third-party company that purchased the vehicle from the dealership.

It's very important to note that when you lease a car, you do not directly pay the money to the dealership. Instead, the leasing company or the bank buys the vehicle from the company and sells it to you and a form of leasing. 

Dealerships try their best to make as much profit as they can when selling any vehicle. Therefore, it's very important for you as a buyer to negotiate the price to get the best deal. One of the most important things you need to prepare to negotiate the prices is understanding the car lease terminology. Dealerships take advantage of some of the confusing terms in the car lease to their favor so they can make as much profit as they can. 

This article provides you with a simple explanation of some of the common car lease terminology. The intent here is to help you understand how to read the car lease and which terms to pay attention to. 


Car lease terminology: what are the typical car lease terms? 

Understanding the car lease terminology is not very complicated. However, once you become familiar with them, you should read much similar paperwork related to car buying and selling processes.

Let's take a closer look at some of the typical car lease terms that you should be aware of: 

  • Acquisition fee 

The acquisition fee refers to the initiation fee, which usually starts at $400. 

  • Adjusted capitalized cost 

The adjusted capitalized cost refers to the final cost you will be responsible for after subtracting the down payment or any upfront payments you decided to go with. For example, if the total cost of the vehicle, including taxes, is about $29,000 and decided to go with paying about $5000 upfront, the adjusted capitalized cost is $24,000. 

  • Capitalized cost reduction

Capitalized cost reduction refers to any reduction in the cost of the final vehicle. This reduction might involve any down payments or manufacturer rebates or probably negotiation reductions. For instance, if the manufacturer suggested retail price for a certain vehicle is about $20,000, and you could negotiate the price down to $18,000, then the $2000 is considered one of the capitalized cost reduction methods.

Similarly, if you were able to pay about $5000 upfront and you took advantage of some of the manufacturer rebates of $1000, then those two as well are considered capitalized cost reductions. 

  • Captive lease company

The captive lease company is a finance company or department within the automaker itself. So, for example, if Ford decided to move on with a certain model year, they can take advantage of their captive lease company or division to provide low money factors and help get rid of the vehicles faster. 

  • Closed-end lease

The closed-end lease is one of the most common types of leases available in the markets. It basically indicates that the buyer does not have to purchase the vehicle at the end of the day. In other words, the buyer can or cannot buy the vehicle, and they're not going to have to deal with any fees if they decided not to buy the car. 

  • Consumer leasing act

The consumer leasing act is some regulation that took effect back on January 1st, 1998, and it's referred to as the regulation M act. 

  • Dealer preparation fee

The dealer preparation fee involves any dealership's efforts in getting the vehicle ready and finalizing the deal. It does not necessarily mean only cleaning the car, washing it, or filling it with fuel; It might involve additional efforts.

As a buyer, you can always negotiate the dealership preparation fee if you think it's very high and it's beyond the effort the dealership spent to complete the deal. 

  • Default charge

The default charge is a very important term that you need to keep an eye for. It basically indicates how much fee you must pay if you missed one of the monthly payments. Thus, you want to make sure that the number makes sense to you and you're able to afford it in cases of emergencies where you can't make the monthly payment. 

  • Deficiency

Efficiency refers to the difference between the vehicle's current cash value and the amount you all on the list. This number is also very important because it has to do with certain car accidents or emergencies. In other words, the deficiency might be an amount of money you have to pay, or your insurance company has to pay off in cases of major car accidents resulting in damaging the vehicle in the early stages of the lease term. 

  • Depreciation fee

The depreciation fee is the portion of your monthly payments that have to do with the projected reduction in the vehicle's overall value. This fee accounts for how much the vehicle will lose from its value from now till the end of the lease date. Then, the owner of this vehicle divides this amount by the number of months in your term to generate the total depreciation fee. 

  • Early termination

Early termination indicates that you decided to end the lease before the end date. Usually, the early termination does not happen voluntarily, and it involves a certain out-of-hand situation like the vehicle being totaled or stolen. In most scenarios, early termination involves some very high penalties and fees; therefore, it's recommended that you have some insurance to cover such situations. This entrance is usually part of the gap entrance plan that we will cover in the next bullet point. 

  • GAP Insurance 

GAP Insurance is a special type of insurance that covers any fees related to some early termination. It also takes care of any penalties when the vehicle is stolen or totaled. 

  • Gross capitalized cost

The gross capitalized cost represents the total amount of money you'll have to pay at the end of the lease term. This number is what you will get down after negotiating the price of the vehicle, including taxes. 

  • Inception 

Inception refers to the start of the lease term. 

  • Inception fees 

Inception fees account for any money you must pay at the beginning of the lease. For example, it might involve the acquisition fee, the 1st monthly payments, the down payments, etc. 

  • Indemnity 

The indemnity is an important section because they shift the responsibility of any traffic tickets from the lessor to the lessee.

  • Lease fee

The lease fee refers to the final vehicle price without including any depreciation fees. 

  • Lessee

This refers to you or the person who’s leasing the car.

  • Lessor

This refers to the company that leases the vehicle to you like the bank, leasing company, others. 

  • Mileage allowance

The mileage allowance refers to the maximum number of miles you can drive per year. Usually, most lease documents indicate that 12,000 miles is the mileage allowance. It's important to read the mileage allowance carefully to prevent dealing with any penalties. 

  • Mileage charge

The mileage charge refers to the amount of money you have to pay if you exceeded the mileage allowance per year. Usually, the mileage charge is calculated per mile driven after the mileage allowance. 

  • Money factor 

The money factor is a fraction that will be applied to your vehicle's price to determine the total costs. This cost does not involve any depreciation fee, which means that the monthly payments will include the total agreed price multiplied by the manufacturer and then added the depreciation fee. 

  • Open-end lease

The open-end lease indicates that the customer will purchase the vehicle, which means that the customer is responsible for paying the difference between the actual vehicle value and the vehicle's residual value. 

  • Purchase option

This term indicates whether the lessee is going to buy the vehicle at the end of the term or not. 

  • Regulation

The regulation M section refers to the Federal Reserve board consumer leasing act, which is usually stated as part of disclosing any leasing documents involving any leasing costs. 

  • Rent charge

The rent charge refers to the lease fees or any other charges included in the lease term and is part of the federal consumer leasing act disclosure. 

  • Residual value

The residual value indicates how much you must pay at the end of the lease if you decided to purchase the vehicle. In other words, there is a default value is a function of your monthly payments, which means that if you pay a lot monthly, your residual value will be much lower than someone else who's not paying as much monthly. 

  • Security deposit

As the name suggests, the security deposit refers to the amount of money you have to pay upfront and right at the time of inception. Sometimes the security deposit might be a whole month's payment. At the end of the lease term, you should be able to get the security deposit back. 

  • Single payment lease

The single payment lease indicates that the lessee is willing to pay all fees right at the beginning of the lease. 

  • Subsidized lease

The subsidized lease is usually offered by the automaker's captive lease company, which includes certain attractions like lower monthly payments or lower residual value at the end of the lease. 

  • Termination fee

The termination fee refers to the amount of money you have to pay at the end of the lease term. Some people decide to purchase a vehicle, which means that the termination fee includes the vehicle's residual value, while others prefer not to. However, remember that even if you didn't decide to buy the vehicle, you still have to take care of some other fields, including the penalties, dealers’ costs, and administration charges. 

  • Wear and tear charges 

Finally, the wear and tear charges refer to the amount of money you have to pay when your vehicle got unreasonable damages. It's very important to read this section carefully and make sure that you can afford to deal with such charges whenever it occurs. 

Conclusion

Understanding the car lease terminology is very important to prevent getting confused and to help you negotiate the price comfortably. This article provided you with a simple explanation of some of the common car lease terminology to help you read the lease.  

Once you are familiar with some of the car lease terms, you should read much other documentation and paperwork regarding selling or buying a car.

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