Unfortunately, the details of leasing make new-vehicle shopping all the more complex, and the savvy lessee must learn a new vocabulary.

Acquisition Fee. An acquisition fee is a charge for processing a lease and is probably not negotiable. On a shorter-term lease, the acquisition fee can have a large impact on the cost of the lease.

Base Interest Rate. This represents the interest paid on the usage of the vehicle during a lease. It is the "cost" of a lease before factoring in discounts, fees and penalties and is comparable to the annualized percentage rate (APR) on a loan. Lowering the base interest rate is one of the methods manufacturers use to subsidize leases. The base interest rate can be derived from the money factor (see Money Factor below).

Buy at end-of-term interest rate. This is the effective net interest rate for the lease if, at the end of the lease, the car is purchased at the end-of-lease purchase price.

Capitalized (Cap) Cost. This is the total price of the vehicle - in effect, its purchase price. In theory, the cap cost should equal the amount you would pay for the vehicle if you were purchasing it. When a lease is made, the dealer sells that vehicle to the leasing company (for the cap cost), which then leases the vehicle to you. It is always in your best interest to negotiate the lowest possible capitalized cost from the dealer - as if you were buying the car with cash.

Capitalized (Cap) Cost Reduction. This is a fancy name for a cash down payment, money you pay upfront that is applied to the final purchase price. A large cap cost reduction will, of course, reduce your monthly payments, but it will also negate one of the big advantages of leasing. However, if you own your present car, you may be able to use it as a trade-in to satisfy the cap cost reduction to start the lease. Remember, you must pay sales tax on any cap cost reduction you make. Another source of cap cost reduction may be dealer or manufacturer cash rebates. A dealer or manufacturer cap cost reduction does lower your total out-of-pocket dollars, unlike a cap cost reduction that you must pay.

Captive Finance Company. In many cases the leasing company is actually the “captive,” i.e. owned, finance arm of the manufacturer (such as Ford Credit or Nissan Motor Acceptance Corp). This provides manufacturers with the flexibility to offer subsidized lease terms through this subsidiary to move new vehicle units through its dealers.

Closed- and Open-End Leases. Most leases offered today are closed-end leases, meaning that the residual value is fixed and stated in the lease contract. The lessee’s financial obligations are unaffected by what the vehicle is actually worth when the lease ends. In other words, the lessee assumes no risk for the depreciation of the vehicle. With an open-end lease, there is still a residual value set at the beginning of the lease. However, if the car is worth less than the residual value at the lease’s end, the lessee must pay the difference. In other words, the lessee assumes the risk for depreciation with an open-end lease, thus negating one of the biggest benefits of a closed end lease - the ability to turn in the car with no financial responsibility if the ending value is less than the originally predicted residual value.

Dealer Participation. This is the amount contributed by the dealer to reduce the final purchase price in the lease contract. Dealer participation can take the form of a rebate from the manufacturer or simply a discount. The dealer participation is usually reflected in the lease contract as a capitalized cost reduction.

Depreciation. The amount that property loses its value. In automobile leasing, depreciation is the difference between the purchase price (capitalized cost) and the value of the car at the end of the lease.

Disposition Fee. This is a fee you pay to the lessor at the end of the lease that covers the lessor’s cost of getting the vehicle ready for sale if you decide to return it. This amount is often applied against any deposit you made at lease inception.

Down Payment. See Capital Cost Reduction.

Early Termination. A vehicle’s depreciation is highest in the first couple of years after it leaves the dealer’s lot. Since a lessee pays for depreciation in equal monthly payments, lessees who end a lease early have almost always used up more of a car’s value than they’ve paid for. Therefore, lease contracts generally include penalties for early termination. Be aware of these penalties and consider your ability to fulfill the entire contract term before you sign.

End-of-Lease Purchase Price. If there is a purchase option in the lease contract, this will be the agreed-upon price for the purchase of the vehicle at the end of the lease. This is ordinarily the stated residual value at lease inception but it may also include additional end-of-lease fees.

Gap Insurance. This protects you against additional losses not covered by your auto insurance for an accident or theft in which the vehicle is declared a total loss. Most auto insurance policies only cover the actual cash value of the car at the time of its loss. Gap insurance covers the difference (gap) between the actual cash value of the vehicle and what is still owed on the lease contract, including early termination fees. Gap insurance is most important in the early years of a lease when the difference between the value of the car and the remaining lease commitment is the greatest. Some manufacturers include gap insurance in their leases, so it's wise to inquire prior to signing a lease. Most dealers offer independent gap insurance, but it pays to shop around as well.

Independent Leasing Company. Historically, dozens of independent finance companies and banks have offered vehicle leasing to consumers in addition to captive finance companies. With the tightening of credit in recent years many of these companies have exited the market, thus reducing the competition for captives. If you want to lease a vehicle that is in short supply/high demand, have specific leasing needs such as a small business owner seeking a low residual to maximize tax benefits, or want to shop the interest rate being offered from a captive finance arm, you may want to evaluate terms available from independent leasing companies.

Lease Term. This is the duration of the lease. The most common lease durations are 24 and 36 months, though 12, 39, 42, 48, and even 60-month leases are available. Remember that your monthly payment will change depending on the length of the lease - the longer the term the lower the payment. It is also a good idea to compare the manufacturer warranty period to the lease term if you want to ensure warranty coverage for the duration of your lease.

Lessee. The individual or party signing the lease contract and taking responsibility for the vehicle and lease payments.

Lessor. The individual, dealer, business, manufacturer or financial institution that actually owns the vehicle during the term of the lease.

Independent Lessor. Independent lessors are usually individual businesses that can provide for the lease of virtually any make or model of vehicle. Independent lessors, like dealers, can write custom leases including those with different conditions and residual values, and with special mileage considerations.

MSRP. Manufacturer Suggested Retail Price.

Manufacturer Discounts. In some leases, particularly subvented leases, the manufacturer reduces the MSRP to lower the purchase price of the vehicle, which the lease is based on. This is a form of capitalized cost reduction.

Mileage Allowance. Lease agreements usually establish the maximum miles per year that the car may be driven, based on your needs. Typically, this is between 10,000 and 15,000 miles. The lease contract also establishes the amount you’ll have to pay for every mile driven over the allowance, which can be anywhere from 15 to 25 cents per mile. You can often purchase additional miles at the start of the lease at a discounted rate. If you’re sure you’re going to drive more than the number of miles allowed, then your best option is to negotiate for a higher mileage allowance - unless you intend to buy the vehicle at the end of the lease.

Money Factor. The most common way to express the base interest rate of a lease is as a money factor. If you multiply a money factor by 2400, the result will be equivalent to the base interest rate. For example, converting a money factor of 0.00276 into a base interest rate results in 6.62%. The money factor measures the cost of money, just like an interest rate, and should generally be in line with prevailing interest rates for auto loans. Money factors are used almost exclusively in leases, whereas interest rates are used everywhere else. Using the money factor, an abstract and less-understood term, is often a way for dealers to avoid a conversation about the interest rate (a concept generally understood by buyers). See Base Interest Rate.

Monthly Payment. The amount that must be paid each month to satisfy the lease contract. It is common for the monthly payment shown in lease advertisements to exclude applicable taxes, which will need to be added to get the total amount that must be paid each month.

Net Capitalized Cost. This is the price of the vehicle after deducting any dealer participation, manufacturer discounts and cap cost reduction (down payment) from the MSRP.

Opportunity Cost. The cost of what you didn’t do. For instance, if you have the cash to buy a car, the opportunity cost of the purchase is the interest lost on the cash you used for the car. One of the often-cited advantages of leasing is that it frees up your money to invest elsewhere - possibly at a higher rate of return than the interest rate you would pay on a lease.

Purchase Option. Most closed-end leases grant the lessee an option to purchase the vehicle at the end of the lease. The end-of-lease purchase price is usually the same as the stated residual value. Check your lease contract before signing to ensure that there is a purchase option. The lessor must disclose the purchase option price prior to you signing the lease contract. This option has tangible financial value because you can benefit if the end-of-lease purchase price turns out to be less than the car’s market value at that point, yet you will not be obligated if the purchase price is more than the going market value.

Purchase Price. This is the price you would expect to pay if you were financing or buying the vehicle. To determine the purchase price, start with the MSRP and subtract any manufacturer discounts and dealer discounts you can negotiate. The purchase price is a key determinant of the true cost of a lease. Purchase price minus your down payment equals the net capitalized cost.

Residual Discount. If the end-of-lease purchase price (stated residual value) is greater than the expected end-of-lease value (expected residual value), the dollar difference represents the value of the vehicle that you will not pay for during the lease.

Residual Penalty. If the end-of-lease purchase price (stated residual value) is less than the expected end-of-lease value (expected residual value), the dollar difference represents the additional value of the vehicle you’ll pay for during the lease.

Residual Value, Expected. This is the projected value of the vehicle at the end of the lease. Residual value is a measure of the vehicle’s expected depreciation. Leasing companies generally use industry sources such as ALG to set their residual values, which are derived from a make and model’s previous residual history and are expressed as a percentage of the MSRP (e.g. 46% after 48 months). Automotive brands that have proven to retain their values well over time will be able to offer competitive lease payments because depreciation is less than that of competitors.

Residual Value, Stated. Stated residual values are often higher or lower than the expected residual value. Lessors may adjust the stated residual value for a car to raise or lower monthly payments and/or the net interest rate for the lease (see Subvented Lease). The stated residual value is usually used as the end-of-lease purchase price. The higher the stated residual value of the car, the lower your monthly payments - if the interest rates are equal. The stated residual value also determines whether you should buy the vehicle at the end of the lease. When the vehicle’s market value is less than the stated residual value at the end of the lease term, it would be prudent to not purchase the car. On the other hand, if the actual market value is greater than the stated residual value, you could buy the car, sell it, and pocket the difference.

Security Deposit. This is a deposit required at lease inception by some leasing companies. In most cases it is refundable, and in some cases it may be used to satisfy the final monthly payment or damage assessments at lease termination.

Subvented Lease. A subvented (aka subsidized) lease is a lease offered by manufacturers with special incentives to make it more attractive. These incentives often take the form of a lower base interest rate, higher residual values or manufacturer discounts. In many cases, a subvented lease will have a lower net interest rate than other leases. Subvented leases are usually available only for a limited time and with non-negotiable terms. Any negotiated change in the terms will result in a different net interest rate.

Total Out-of-Pocket Cost. This is the total of all monthly payments, any lease fees and deposits, and any capital cost reduction paid by the lessee (except tax, license, and registration) from lease inception to closure.

Wear and Tear. It’s your responsibility to keep a leased car in good condition. Return the car with a dented fender, bald tires or a ruined engine due to lack of routine maintenance and you’ll be charged for the repairs, often at a premium, unless you pay for the repairs yourself prior to lease termination. Some wear and tear is allowed, of course. But if you aren’t inclined to take reasonable care of your car, leasing may not be the best idea.