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Acquisition Fees.
An acquisition fee is a charge for processing the lease and is probably not negotiable. On a shorter term lease, the acquisition fee can have a larger impact on the cost of the lease. Acquisition Fee Rate Penalty. This is the impact on the net interest rate of any acquisition fee. Bank Loan Rate. Based on published rates for new car loans with 20 percent down and 48 month terms, IntelliChoice calculates the average loan interest rate for the month. Rates available in any market may differ substantially from this average and this average is only intended as a guide. Base Interest Rate. Represents the interest paid on the usage of the vehicle in a lease. It is the 'cost' of a lease before factoring in discounts, fees, and penalties. Subsidized leases are often less costly because manufacturers lower the base interest rate. The phrase 'money factor' measures the same cost, but expresses it in a less understandable fashion. Buy at end-of-term interest rate. This is the effective 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 the vehicle. When a lease is made, the dealer sells that vehicle to the leasing company, which then leases the vehicle to you. The capitalized cost is the price the dealer actually receives for the vehicle. Capitalized (Cap) Cost Reduction. This is a fancy name for a cash down payment, money you pay up front that is applied to the final purchase price. A large cap cost reduction will, of course, reduce the 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. Another source of capital cost reduction may be dealer or manufacturer participation. Dealers and manufacturers will sometimes simply lower the cap cost or offer a rebate that reduces the cap cost. A dealer or manufacturer cap cost reduction does lower your total out-of-pocket dollars, unlike a cap cost reduction that you must pay. 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 stated residual value). 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. Credit Union Loan Rate. Based on published rates for new car loans with 20 percent down and 48 month terms, IntelliChoice calculates the average loan rate for the month. Rates available in any market may differ substantially from this average and this average is only intended as a guide. 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 or simply a discount. The dealer participation is reflected in the lease contract as a capital cost reduction . Deposit Rate Penalty. This measures the impact on the interest rate of any cash deposit that is usually made at lease inception. Even though you get the deposit back, you lose any interest that your deposit could earn for the duration of the lease. Depreciation. The amount by which property loses its value. In automobile leasing, depreciation is the difference between the new car cost and the value of the car at the end of the lease. Disposition Fee. This is a fee you pay at the end of the lease, to the lessor, that covers the lessor's cost of getting the vehicle ready for sale after you have returned the vehicle. It is often applied against any deposit you made at lease inception. Disposition Rate Penalty. This measures the impact on the net interest rate of any disposition fee that must be made at lease termination. "Down" Payment. See capital cost reduction . Early Termination. A vehicle's depreciation is highest in the first few months 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 before you sign the lease contract and consider your ability to fulfill the contract. End of Lease Purchase Price. If there is a purchase option in the lease contract or agreement, this will be the agreed upon price for the purchase of the vehicle at the end of the lease-the stated residual value. This price may also include additional fees. Final Purchase Price. This price is equivalent to the amount you would pay for the vehicle if you were buying or financing rather than leasing. The final purchase price does not include any 'down' payment by the lessee. Gap Insurance. Gap insurance covers you against additional losses not covered by your auto insurance in the case of an accident in which the vehicle is totaled. Most auto insurance will 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 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 what is owed are greatest. Some manufacturers now include Gap insurance in their leases. Lease Term. This is the duration of the lease. 24 and 36 month leases are the most common but you can lease a car for 12, 48, or even 60 months if you choose. Remember that your monthly payment will change depending on the length of the 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 owns the vehicle. 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 special mileage considerations. MSRP. Manufacturer suggested retail price. Manufacturer Discounts. In some leases, particularly subvented leases, the manufacturer reduces the MSRP which lowers 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 average miles per year that the car may be driven during the lease. This is often between 12,000 and 15,000 miles. The lease contract also establishes the amount you'll have to pay for every mile driven over the allowance. This mileage fee is usually 15 cents per mile. Miscellaneous Fees. There are usually an number of assorted fees associated with a lease. These fees may include an acquisition fee-a sort of processing fee and/or a disposition fee for getting the car ready for sale 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 24 (or 2400, depending on how the money factor is expressed), the result will be equivalent to the base interest rate. The money factor of most leases is known by a dealer's sales staff. The money factor is the cost of money, just as the interest rate. However, money factors are used almost exclusively in leases, whereas interest rates are used everywhere else. 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 any applicable taxes which will add to the amount 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 MSRP. Net Interest Rate. This is the total interest rate for the lease. It represents the true cost of the lease offer. Because it considers all factors that influence the cost of the lease, it is directly comparable to bank and credit union loan rates. The lower the net interest rate, the lower the cost of the lease. 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. 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 often referred to as the residual value. Check the lease contract before signing to ensure that there is a purchase option. The lessor must disclose the purchase option price prior to your signing the lease contract. Purchase Price. This is the price you would expect to pay for the vehicle if you were financing or buying the vehicle. To determine the purchase price, start with MSRP and subtract any manufacturer discount, and dealer discount that you negotiate. Purchase price is a key determinant of the true cost of a lease. Purchase price less your down payment is the net capitalized cost. Purchase Price Discount. If the final purchase price of the vehicle is less than the target purchase price, then there is a benefit to you as the lessee because you will have to pay for less of the vehicle's value over the lease term resulting in a reduction of the net interest rate. Purchase Price Penalty. If the final purchase price of the vehicle is more than the target purchase price, then the amount of the car you'll be paying for is increased which results in an increase to the net interest rate. Refundable Deposit. This is a refundable deposit required at lease inception. In some cases it may be used to satisfy the final monthly payment. It is sometimes called a security deposit. Residual Discount. If the end-of-lease purchase price is greater than the expected end-of-lease value (expected residual value) then 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 is less than the expected end-of-lease value (expected residual value) then the dollar difference represents the additional value of the vehicle you'll pay for during the lease. Residual Rate Discount. This measures the positive impact on the net interest rate of a residual value that is set too high. It is shown as a negative number to reflect the decrease in the net interest rate that results. Residual Rate Penalty. This measures the negative impact on the net interest rate of a residual value that is set too low. It is shown as a positive number to reflect the increase in the net interest rate that results. Residual Value, Expected. This is the projected expected value of the vehicle at the end of the lease. Residual value is a measure of the vehicle's expected depreciation. Residual Value Stated. The stated residual value is the same as the end-of-lease purchase price. The higher the stated residual value of the car, the lower your monthly payments. Stated residual value may be higher or lower than the expected residual value. Stated residual value also determines whether you should buy the vehicle at the end of the lease. If at the end of a lease, the vehicle's market value is less than the stated residual value, the lessee would be prudent not to purchase the car. On the other hand, if the actual market value were greater than the predetermined residual, then the lessee should buy the car, sell it, and pocket the difference. Subvented (Subsidized) Lease. A subvented lease is a special lease offered by manufacturers with special incentives to make it more attractive. These special incentives often take the form of a lower base interest rate, higher residual values, and manufacturer discounts. In many cases, a subvented lease will have a lower net interest rate than other leases. Subvented leases are usually available for a limited time and the terms are not negotiable. Any negotiated change in the terms will result in a different net interest rate. Target Purchase Price. This is the price that you can reasonably expect to negotiate for the vehicle as configured; however, it is not necessarily the lowest price. It includes an average acceptable markup for the dealer and reflects recent market conditions. Total Out of Pocket Cost. This is the total of all monthly payments, any lease fees and deposits, and any capital cost reduction (except tax, license, and registration) from lease inception to closure. Wear and Tear. It's your responsibility to keep the car in good condition. Return the car with a dented fender, bald tires, or a ruined engine because of lack of routine maintenance and you'll be charged for the repairs. Some wear and tear is allowed, of course. But if you aren't inclined to take reasonable car of your car, than a leased car may not be for you. |
