Car Leasing Terminology Explained

Acquisition or Inception Fee: This is a fee charged by the leasing company for filling out and processing your lease paperwork. Many leasing companies will insist that this fee be collected, however sometimes it is negotiable.

Cap Cost Reduction: Equivalent to a down payment, this is the amount that you pay when signing the lease, in addition to any separate fees that are assessed. If you pay a larger sum, monthly payments will be lower.

Closed-End Lease: A lease where the vehicle’s residual value is fixed, stating it in the contract. Most vehicle leases are closed-end, which means the customer won’t owe an additional sum at the end of the term if the car turns out to be worth less than anticipated.

Depreciation: The amount by which a vehicle loses its value over a period of time.

Default Charge: A penalty fee for making a late lease payment.

Destination Charge: The fee charged to the dealership by the manufacturer for transporting the vehicle from the factory to the dealer lot. This is a fixed fee that is not usually negotiable.

Disposition Fee: An amount to be paid at the end of the lease term, to cover costs of preparing the vehicle for sale.

Early Termination Fee: If you end up needing to terminate the lease early, you may be charged a termination fee. Depending on the wording of the lease agreement, this fee could be substantial.

End of Lease Payments: Any payment due at the end of the lease. These payments may include disposition fees, excess mileage fees, or excess wear and tear charges.

End of Lease Purchase Price: An agreed-upon price that you will pay when the lease is up, if you choose to purchase the vehicle.

Excess Mileage: Leases are mileage-limited, meaning that you are allowed a certain number of miles over the term of the lease. Today’s leases usually allow 10,000 to 15,000 miles per year. If you go over, you have to pay for the extra miles.

Excessive Wear Charge: An end of lease charge for excess wear and tear inflicted upon the vehicle. This can include damage, dings, scratches, dents, or cracked glass.

Lease Charge: The fee that provides profit to the leasing company. The lease charge is similar to interest on a conventional auto loan, but not calculated the same way. It’s sometimes called a finance fee or rent charge.

Lease Term: The number of months during which you have use of the vehicle and will pay an agreed-upon monthly lease payment.

Lessee: The person who leases a vehicle from a dealer or other organization.

Lessor: The dealer or other organization that leases a vehicle to a customer.

Margin:The amount over dealer’s cost that the dealer receives when the car is sold to the leasing company. By definition, margin is inclusive of dealer profit and cost of doing business such as advertising, rent, utilities, salaries, etc.

MSRP: An acronym for manufacturer’s suggested retail price. This is the retail price as determined by the manufacturer and seen on the vehicle information sticker as required to be found in the window of every new vehicle. This is also called the sticker price.

Open-ended Lease: The customer pays the difference between the anticipated residual value and the actual value of the vehicle at the end of the lease term. The primary difference between a close-ended lease and an open-ended lease is that with a close-ended lease the consumer and the dealer have an agreed-on residual value at the onset of the lease while in an open-ended lease the residual value is determined when the car is returned.

Purchase Option: The right to buy the vehicle that you’ve leased, at the end of the lease term, for a stated price.

Residual Value: A prediction of what a vehicle is likely to be worth as it ages, usually expressed as a percentage of its original price.

Sales Tax: Leases are taxed monthly, rather than in a lump sum. Advertised lease payments often do not include the monthly sales tax.

Security Deposit: A deposit, usually refundable, required before the lease contract takes effect.

Subvented or Subsidized Lease: A lease with favorable terms, due to a manufacturer’s decision to absorb a portion of the cost. The manufacturer subsidizes part of the total price through incentives.