Before you move on to the other chapters, be sure to read the following terms and definitions so you will be able to understand the unusual language of leasing.
Acquisition fee: Fee charged by the leasing company to buy a vehicle and set up the lease. Sometimes negotiable. Also called “initiation fee.” Typical charge: $450 Cap cost or Capitalized cost: The price of the car; what the leasing company is paying the dealer for the car. This is almost always negotiable. The lower this figure is, the lower your payments will be.
Cap reduction: Any down payment, trade-in, or rebate that reduces the cap cost (total amount leased). A larger cap reduction should reduce your monthly payment and cut your financing costs.
Closed-end lease: Leasing company assumes all risk for drop in value due to excess depreciation. Customer can just walk away at end of lease. (Preferred type)
Depreciation: The difference between the net cap cost and the residual. Represents loss of market value. Disposition fee: Fee charged at the end of a lease for turning in the vehicle. Negotiate this before signing the lease—only agree to pay an acquisition fee or a disposition fee, not both. Typical charge: $200-400 Early termination penalty: The price you’ll pay to end your lease early. Ask what this is in advance: it’s usually thousands of dollars.

Excess mileage charge: Additional charge at the end of a lease for exceeding the mileage limit. Usually 15 cents per mile. Watch out for low-mileage leases— this charge could end up costing over a thousand dollars.
Gap insurance: Policy to cover the difference between the balance owed on a lease and normal insurance coverage. Needed in case of theft or total loss due to accident. This should be included in the lease—insist on it.
Initiation fee: Same as “acquisition fee.
Lease rate: Monthly rate charged by leasing company, similar to interest rate. Includes both interest and profit. Lease rate = [net cap cost + residual] x money factor
Lessee: The one who is leasing a vehicle (the customer).
Lessor: The lender/leasing company.
Mileage allowance: The number of miles you can put on a leased car without incurring a penalty.
Money factor: Used to determine finance charges. This is usually negotiable—it should not be greater than the rate on loans. Money factor = [annual interest rate ÷ 24]
MSRP: Manufacturer’s Suggested Retail Price. This is almost always negotiable (except on Saturn vehicles).
Open-end lease: Customer assumes risk for excess depreciation, might have to buy vehicle for more than it’s worth, or sell at a loss and pay the leasing company the difference. (Very risky—avoid this type.)
Purchase option price: The amount that you can buy the vehicle for at the end of the lease. It’s usually the same as the residual and it is negotiable.
Residual value: The estimated wholesale value of the vehicle at the end of the lease; used to calculate lease payments. (A higher residual should result in lower payments.) It’s usually the same as the purchase option price, and it is negotiable.
Subsidized lease: An automaker’s lease with an inflated residual and/or reduced interest rate that results in lower monthly payments.
Term: Length of lease. Don’t lease longer than 3 years, or excess wear-and-tear charges could be expensive.