JavaScript must be turned on in order for this site to display properly.
What Can DCU Save You?

Auto Leasing Guide

Chapter 4: The Lingo of Leasing

Autobuying
  • Summary
  • Article

Chapter 4: The Lingo of Leasing

Learn these words before you begin discussing leasing with a dealer.

Chapter 4: The Lingo of Leasing

Learn these words before you begin discussing leasing with a dealer.

Lessee

That's you if you lease a vehicle.

Lessor

That's the leasing company, the company that legally owns the vehicle a person plans to drive.

Originator

The people who actually fill out the paperwork. They're also called Sales Outlets and Leasing representatives.

MSRP

The Manufacturer's Suggested Retail Price of the new vehicle a person is looking at. Used cars, which can also be leased, don't have MSRPs. Some new recreational vehicles and trucks don't have MSRP stickers from the factory either.

To refresh your memory, the MSRP sticker is placed on the window by the manufacturer, and contains an amount of profit that is exactly the same for identical vehicles. This sticker allows you to compare the actual price you will pay for a vehicle at one dealership versus the price at another. For instance, if the MSRP for a car with certain options is $15,000 at two dealerships, but one dealership offers to sell it to you for $14,000 rather than $14,500, which dealership would you buy from?

The MSRP is a fair price for that vehicle, according to the law, but any seller can charge more than that, if you allow them to. MSRP is not a legal "cap" on vehicle cost. But you also have a right to negotiate that price down as much as possible.

Dealerships use MSRP when they're talking to the leasing company itself to define how much profit the dealership is making on the sale of the vehicle itself. For instance, let's say a vehicle has an MSRP of $15,000. If the vehicle is sold for $15,000, that sale is referred to as "100% of MSRP." If the car is sold for $16,500, that is referred to as "110% of MSRP."

Acquisition Fee

The lump sum of money a person agrees to pay the leasing company for arranging financing on a vehicle. It's what they charge to acquire the lease. Not all leasing companies charge an acquisition fee.

Capitalized Cost

The total selling price of the vehicle to be leased, including these items: the total cost of the vehicle; taxes, title and license fees; any acquisition fee; any optional insurance and warranty items. Using the Capitalized Cost figure is one way to compare the costs one leasing sales outlet wants to charge you compared to similarly-priced and equipped models at another.

Interestingly enough, all leasing companies and their sales outlets refer to Capitalized Cost in their internal documents in a very easy-to-understand way. They just don't generally share that information with the consumer.

Cost of Money

You won't see this important phrase much on leases. The cost of money, when it's presented in an understandable way, really tells you the effective interest rate you are paying for the right to lease a vehicle.

On many leases, this cost is referred to as a monthly lease charge, service fee or service charge. Whatever it's called, most leases don't list this cost as an effective interest rate. They list it as a monthly amount. That makes it much harder for a person to compare cost of money from lease-to-lease or to compare the cost of money on a lease compared to a regular purchase contract.

Federal regulations don't require all leases to clearly list something equivalent to an interest rate.

The Federal Reserve, as a matter of fact, agreed with the leasing companies and outlets that leases didn't have interest charges since the consumer technically wasn't financing ownership of a particular vehicle – the consumer was just using someone else's vehicle.

That loophole allowed some leasing companies to take advantage of the uneducated consumer by charging very high usage fees.

Well, how much should a person pay for money? Since the service charge you pay each month for the right to lease a vehicle isn't technically interest, there generally is no limit to what a leasing company can charge you. And you can certainly pay as much as you want.

But you also have a right to pay as little interest as you can negotiate. Free enterprise rightfully drives the car buying-financing-leasing process. But you can't negotiate correctly unless a lease very clearly tells you what the use of money really will cost you.

Capitalized Cost Reduction

Sometimes called Cap reduction, it's generally any non-refundable down payment.

Residual Value

Residual value is the amount of money the leasing company says your leased vehicle will be worth when your lease ends. The figure is important for two reasons: the leasing company uses it to help determine your lease payment and also uses it in determining any penalties should you break your lease early.

The leasing company normally develops a residual value figure based on the projected wholesale resale value of the vehicle at the end of the lease. They're in essence making a long-term guess.

Many leases now clearly show you the residual value of a vehicle at the end of a lease. But very few make it possible for you to know a vehicle's residual value if you terminate your lease early. Most leases use complex formulas rather than simply list value at a particular month.

Since the residual value affects the lease payment, would it make sense to pick a car that has a high resale value? It would indeed. Leasing a car with a high resale value should lower your potential lease payments.

Chances are, a car that is popular now will be popular at the end of your lease, and have a good residual value.

Gap Insurance

Gap insurance makes sure you don't owe any money if your leased vehicle is wrecked, totaled, or stolen. This coverage is in addition to your normal collision insurance and is not automatically included on all leases.

Some leasing companies provide gap insurance for free and virtually all leasing companies offer it for a fee. But, paid or free, no one should lease a vehicle without it.

Early Termination

All leases have early termination clauses that define how much money you will have to pay the company if you terminate your lease early. Unfortunately, most leases make it virtually impossible for the average consumer to determine how much that penalty will be. The figure is determined by a complicated formula.

It's important for you to understand, therefore, that early terminations can be extremely expensive. If you should break your lease during the first year of a three-year lease, for instance, your penalty could easily be thousands of dollars. What's the moral here? Never enter into a lease unless you plan to keep the vehicle for the full term of the lease.

Excess Mileage

As we mentioned earlier, leases offer a certain number of free miles a person can drive over the course of a lease. Beyond that, you pay extra. The "excess mileage" portion of your lease will tell you how many cents per extra mile you must pay.

Most leasing companies allow you an average of 12,000-15,000 free miles per year for the length of the lease. On a three-year lease, for instance, you might have 45,000 free miles. Unfortunately, some leasing companies have been known to make a lease payment appear inexpensive by deliberately understating the miles used to determine the payment. The consumer then pays a heavy penalty for exceeding that number.

Insurance and Warranty items

Items such as credit life and disability insurance, extended warranties, and vehicle maintenance agreements are offered by virtually all leasing companies.

Excess Wear and tear

Virtually all leasing companies charge extra for any wear and tear they consider above and beyond normal wear and tear.

Security Deposits

These are generally refundable under certain conditions.

Purchase Option Fee

A few leasing companies still try to charge this fee, but most reputable companies don't. The so-called fee is simply additional profit.

Disposition Charge

Leasing companies say this fee covers their cost involved with selling your old lease vehicle after you have turned it in. Many consumer groups say it's simply extra profit.