Understanding Lease Terminology

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Assignment Fee
A fee charged by many lease companies, which is basically a processing fee at the beginning of the lease. The amount varies from leasing company to leasing company.

Base Interest Rate
The interest rate used to calculate lease payments. It can be converted to a money factor by dividing by 2400. It shows the cost to lease before other factors are put into the equation such as discounts, fees and penalties. See "Money Factor."

Capitalized Cost (Cap Cost)
The sales price of the vehicle. Used as: Gross capitalized cost — the agreed sales price of the vehicle, plus any fees, extended service plans and other add-ons you may have to pay and Adjusted capitalized cost — the gross cap cost less reductions for a trade-in, cash down payment or rebates. Adjusted cap cost is the amount actually financed, from which your lease payment is calculated.

Capitalized Cost Reduction
Your down payment, which may be cash, the value of your trade-in or rebate you assign to the dealer.

Cash Option Lease
Designed for people who traditionally pay cash to buy a car. You pay the entire cost of the lease at the beginning of the term and avoid monthly payments.

Closed-end Lease
Also called a "net," "fixed cost" or "walkaway" lease. The most common type offered to consumers. Guaranteed residual value at the end of the lease term. You return the car and walk away or have option to buy the car at the residual value. You are responsible for damage exceeding normal wear and tear and for more miles than specified in your lease. Leasing company assumes all the risk for market fluctuations in the value of the car.

Default Penalties
The penalties incurred if you fail to make payments as stated in the lease. If you default, you may lose your security deposit and immediately have to pay all remaining payments. You could also have to pay the leasing company’s legal fees and costs to collect and reclaim the car. These penalties are similar to those for defaulting on an auto loan.

Disposition Fee
A fee required by most lease companies to cover the costs of getting the car ready to sell. Usually about $250, this fee includes cleaning, tune-up, final maintenance and transporting the vehicle to auction.

Drop-off Charge
A fee assessed at the end of the lease if you are unable to return the car where you leased it. Most major lease funding sources have a nationwide network of franchised new car dealers to which you may return the vehicle without a drop-off charge.

End-of-lease Payment
The difference you pay, with an open-end lease, if the selling or appraisal price of the car is less than the residual value projected at the start of the lease. The Consumer Leasing Act of 1976 limits your payment to a maximum of three monthly lease payments.

Early Termination Penalties
Fees you must pay if you terminate the lease early. Assessed because you will have used up more of the car’s value than you’ve paid for, since the car depreciates fastest in the early part of the lease. The lease must show an estimate of penalty fees you owe if you terminate the lease early. This can be costly.

Excessive Wear and Tear
Damages to the car for which you’ll be charged at lease end that are beyond normal wear, such as missing equipment or unrepaired damage. Leases may be vague in defining "excessive" wear and tear. Generally, it includes broken or missing components, large dents or scratches, peeling or bubbling paint, rust holes and large rust spots, cracked or missing glass, frame damage, heavy interior soil, holes and tears in upholstery or interior surfaces or insufficient tread on tires. You will usually save money by having such items repaired at your expense before you turn the car in. As with depreciation, these are costs you assume when buying; with leasing, they’re just more visible since they’re expressed as a dollar figure. Some leasing companies use a Condition Report that is completed and signed by the dealer when you return the car. This report releases you of obligation for any damage to the vehicle which may occur after you return it. Obtain a copy of this report for your records.

Final Costs
Evaluate all the costs involved before deciding on leasing versus buying, or in comparing various leases. Final costs terminology includes:

• Excessive Wear Charge
  Defined in lease; covers missing or damaged equipment, and excessive wear.
• Excess Mileage Charge
  Fee for miles above limit specified in lease; does not apply if you buy the car at lease end.
• Disposition Fee
  Can vary, from $0 on up. Usually about $250; covers cost of getting car ready to sell.
• Purchase Option Fee
  Paid instead of disposition fee if you decide to buy the car.
• Default Penalties
  Defined in lease. If you default, you may lose the security deposit and have to pay all remaining payments immediately. All you may be responsible for is the leasing company’s legal fees and costs to reclaim car.
• Drop-off Charge
  May apply if you can’t return the car where you leased it.
• End-of Lease Payment
  Open-end leases only. You pay difference if appraised value of car is less than projected residual value. Limited to maximum of 3 monthly payments.

GAP (Guaranteed Auto Protection) Insurance
Insurance coverage in case your leased car is stolen or totaled in an accident, which most leases consider an early termination. Because of the car’s depreciation, the insurance settlement may be significantly less than what you actually owe. This "total loss protection’’ makes up the difference between the insurance settlement and what you still owe, less any deductible. There may be an extra fee for this coverage, although many leases now include it at no extra charge.

Inital Costs
Evaluate all the costs involved before deciding on leasing versus buying, or in comparing various leases. Inital costs terminology includes:

• Security Deposit
  Equal to 1 or 2 monthly payments; usually refundable.
• First & Last Lease Payments
  Required by some leases.
• Multiple Security Deposits
  May be available in lieu of capitalized cost reduction. You pay additional security deposits up front; lease company lowers interest and monthly payment. Deposits returned at lease end if you meet all lease conditions.
• Capitalized Cost Reduction
  Optional; cash or trade-in used to lower monthly payments.
• Insurance
  Lease may require higher than minimum limits. Add car to existing policy; lease company listed as additional insured.

Lease Term
The length of the lease agreement. Leases typically run three to five years but are available from two to six years. Generally, the longer the term, the lower the payments will be, depending on the residual value and money factor.

Mileage Allowance
Non-chargeable miles you put on the vehicle, usually from 12,000 to 15,000 miles per year. If you drive more, you’ll pay up to 25 cents a mile for extra miles at the end of the lease. If you expect to drive more than the standard allowance, it’s better to buy additional mileage up-front for a flat rate, about 8 to 12 cents per mile.

Money Factor (Rate Factor)
The most common way to express the base interest rate of a lease. Multiply the factor by 2400 to get the base interest rate. The dealer can give you the money factor of any vehicle.

Ongoing Costs
Evaluate all the costs involved before deciding on leasing versus buying, or in comparing various leases. Ongoing costs terminology includes:

• Insurance
  Possible higher premiums.
• Monthly Lease Payment
  Use worksheet to determine how payment is calculated.
• Personal Property Tax
  Bill usually goes to lease company and is passed on to you.
• Repairs and Maintenance
• Manufacturer’s warranty applies to new leased cars. You pay for routine repairs and maintenance.
• Sales Tax, Title and Registration
  May be financed into monthly payment, not considered part of residual value.

Open-end Lease
Residual value is not guaranteed. You have the option to buy the car at a price agreed on in the lease. If you don’t purchase the car, the lease company has the car appraised and you owe the difference if it’s less than the estimated residual value. If the car is worth more than residual value, you owe nothing or may get a refund, depending on terms of the lease. Very few consumer leases are open-ended today.

Purchase Option
An option to purchase the car at the end of the lease, part of the standard lease agreement. However, some leases may indicate that the purchase price will be the fair market value of the car, to be determined at lease end. A purchase option fee may be added to the residual value of the car.

Residual Value
A car’s projected value at the end of the lease set by the leasing company at the beginning of the lease. It is usually based on a standard used car reference such as the Automotive Lease Guide, the Kelley Blue Book Residual Value Guide, the Black Book Residual Value Guide, or the National Automobile Dealers Association’s Official Used Car Guide. Cars that are known to maintain their value well have higher residual values and therefore lower lease payments.

Right To Extend Or Renew
An option to extend the lease on a month-to-month basis at the end of the original term, usually for a maximum of six months. Included in some leases.

Subsidized or Subvented Lease
The lease company guarantees residual value; at end of the lease you can refinance and buy the car (with no title transfer fees) or walk away at the end of the term. Sometimes the lease contains manufacturer incentives that can truly make leasing a better deal than purchasing with extremely low payments. These non-negotiable incentives may include a lower base interest rate and higher residual values. Mileage allowance may be low. May require large cap cost reduction.

"Walkaway" Balloon Note
A new hybrid in auto financing is called a balloon note with a "walkaway" feature, which combines some features of a regular auto loan with some features of leasing. In the past, balloon auto loans were often used as a ploy to offer extremely low monthly payments, with a large "balloon" amount due at the end of two or three years.

Today, balloon notes are a viable choice for auto financing. The car is titled in your name with the leasing company as lien holder. At the end of the term set in the note, you have the same options as with leasing: walk away from the car and owe nothing more or buy the car at the agreed-upon price. In this case, the price is the "balloon" amount of the loan, which should be the same as the residual value in a lease.

Choosing between a lease and a balloon note often hinges on tax laws in your state. Under a lease, if sales tax and personal property tax are levied on the car, the leasing company pays but passes the cost on to you as part of your monthly payment. If you buy the car at the end of the lease, you pay sales tax again on the residual value. With a balloon note, the car is titled in your name from the beginning. If you decide to pay off the balloon note and keep the car, you won’t pay duplicate taxes. Check with a tax advisor or your bank to learn which option is best for you.