Tuesday 25 October 2016
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Leasing 101: Terms to Know

Leasing 101: Terms to Know

I get a lot of leasing questions on my radio show.  Generally, I like leasing for people who do not drive more than 15,000 miles per year, and for those who like to get a new car every few years.  One of the problems with the car business is that it has its own language, and often people in the car business use their internal terms when talking to consumers.  Most people today know that “upside down” means they owe more on their car than its value, but not too many years ago, it was a bit of a mystery term.

Leasing has a language all its own too.  I am going to give you some of the most common leasing terms and translate them into the simplest explanation.

Mileage Allowance:  This is the amount of miles you can drive during the lease period without penalty.  It is stated in terms of monthly allowance, or the total cumulative mileage.  Typical penalties if you go over the allowance are 15-20 cents per mile.

Acquisition Fee:  This is a fee charged by leasing companies and banks to cover various costs of administering the lease terms.  They average about $400 and are very seldom negotiable.

Adjusted Capitalized Cost:  Simply put, this is the amount you are financing in the lease, or the bottom line.  This is the cost of the car you are leasing, including the tax, title, and license, minus any down payment, trade allowance, or rebates.

Capitalized Cost Reduction:  A down payment or other credit that lowers the capitalized cost of a lease. The down payment may come in the form of cash and/or a rebate, trade-in allowance or other credit.

Closed-end lease:  A lease that doesn’t require the consumer to buy the vehicle at the end of the lease for the predetermined residual value. Closed-end leases, which are by far the most common type, usually allow lessees to buy the car if they want, as opposed to walking away from it, or trading it in.

Money factor (or interest rate):  A fractional number, such as .0075, used to calculate a lease fee or charge. The money factor is not an interest rate; it is based on a formula that lessors devise to determine their profit. Consumers should look for a lower number. While lessors are not required to disclose the money factor, you still can insist on knowing it before entering a lease. You can get a rough equivalent of an annual percentage rate if you multiply the money factor by 2.4 to get really close to the actual APR equivalent.  When automakers are running lease specials, the money factor can be as low as .00001.

Residual value: The car’s wholesale value at the end of the lease as projected at the beginning by the lease company.  Higher residual values translate to lower monthly payments, but increase the cost to buy the car at the end of the lease.  This number is set in stone and you will know how much the residual value is when you enter into the lease.

Single-payment lease:  A lease in which you can pay all of the lease fees and payments at the beginning. A likely user is an buyer who could pay cash to buy a car, but wants to have a new vehicle every three years or so and doesn’t want to bother with selling or trading the old one, or with making monthly payments.  There is often a lower interest rate on the lease since the lease company gets all its money up front.  This is what I did almost two years ago and have enjoyed this type lease.

There are other lease terms, but these are the most common and understanding the leasing language will make you feel less intimidated.

-Jerry Reynolds, the Car Pro