Although at first it may seem a bit confusing, a few laps around this handy guide and you’ll be all set.

Regardless of any product you may be in the market for, it will have its own stable of unique vernacular.

For example if you were venturing out to take a look at buying a new computer, you will run into all types of models and equipment and options and storage and RAM and on and on and on…. finding the right computer system for you starts with gaining an understanding of the terminology that is used surrounding the product.

With that in mind let’s venture forward and take a look at some of the more common leasing terminology that you will probably have bounced off of you.

So, grab a chair, have a look and let’s keep the confusion to a minimum.

Lessee -
You. is the person who agrees to pay for the use of vehicle for the term of the lease.

Lessor –
The person or business who arranges the car lease, offers the lease or leases the vehicle.

The retailer or dealer is usually the lessor, but usually do assign the lease to a financing source, in which case the financing source becomes the lessor. In plain English… the retailer, bank, or leasing company who leases you the car.

Open or Closed End Leases -
These are types of lease structures.

Most every lease today is a closed end lease. This simply means that the residual value of the car is determined up front going into the lease and remains fixed. This keeps the lessee risk free from a depreciation and ending market value of the car.

An open end lease – - if, at the end of the lease, the car is worth less than the residual value the lessee then assumes the responsibility for the difference. You shouldn’t run into this type of lease, but if you do…. don’t.

Money Factor –
We touched on this earlier.

The money factor on a lease is essentially the interest rate on the financing.

The money factor will be displayed in the form of a decimal number. This number can be somewhat difficult to get the dealer or the F&I person to cough up because this can be a source of tidy profit for the dealer.

You see, they have done such a good job at getting you to fall in love with those monthly payments that you overlook asking about the money factor…. and you may have just made the dealer’s day.

If this term or subject matter doesn’t seem to get broached during your conversations with the people at the dealership (don’t be surprised), make sure you do bring this up. It’s critical that you know what it costs you to buy this time and…. and…. and you should negotiate this just like any other interest rate… get the best money factor you can (lower is better).

Check the handy chart for the money factor conversions.

Capitalized Cost -
This is the price of the vehicle established by the dealer plus any acquisition fees or any other items included in the lease, such as any service contracts, taxes, or insurance that will be figured into your monthly payments.

Capitalized Cost Reduction (Cap Cost Reduction) –
When you hear this term, convert it in your mind to the more familiar vocabulary of down payment or trade equity.

Of course, just as in conventional financing, the larger the cap cost reduction (money down or trade equity) the lower your monthly payments will be.

Residual Value -
This is the projected value of your car at the end of the leasing period.

It is key to your monthly payments as well as the overall cost of the lease.

Remember during the lease, the lessee (You) pays for the depreciation on the car itself. A car that carries a higher residual value will retain its value better over time and cost you less for that time and will translate into lower monthly payments.

The residual value is also a key ingredient if you would be thinking about purchasing the car at the end of the lease.

Not many people do, but I wanted to mention this at this point.

If you are thinking of purchasing the car, compare the residual amount in your lease then shop around the actual market value of the car. If the market value of your car turns out to be somewhat less than the residual value then it wouldn’t be financially prudent to buy your car for lesser value than what is being offered you in the lease.

If you feel confident that the actual market value of your car is higher than the residual value in the lease, it may be worth a look at buying your leased car. Especially if you have worked up a buyer for the car and would want to turn it around for some profit.

Also, keep in mind that one company’s residual value on a car may not be the same as another….. so shop around.

Sorry, you should know this by now.

Reminder #2 …. Always negotiate the price of the car in the lease just as you would a conventional car buying process. The lease is based upon the MSRP just as if you were buying. Negotiate it.

Depreciation -
I know… you know what it is…. but this is my terminology page.

So technically speaking, this is the amount you’ll be charged for the car’s decline in value through normal use and for any other items paid for in the terms of the lease…. ok enough…. it’s the difference between the cap cost and the projected residual vale at the end of the end of the lease.

Acquisition Fee -
This is the fee the financing source charges to acquire the lease from the dealer. It can be included in the Cap Cost or be required to be paid up front at signing.

Gap Protection -
Is protection against the car being totaled either by fire theft or accident.

This protection insures the lessee (you) is not responsible for the gap between their insurance settlement and the financial obligation of the lease (not including the deductible).

Depending upon where you drive, how you drive, how much risk you don’t mind assuming, and how you feel about insurance in general determines whether people are comfortable with the gap insurance option.

Mileage Allowance –
Is the number of miles you are allowed to put on the vehicle without incurring penalties.

For most people mileage allowance is the biggest deterrent to leasing.

With the mileage penalties hanging over your head you should be quite precise in your mind as to how many miles you drive annually.

Typically 15,000 miles per year is most leases. But when you hear a dealer advertisement on T.V. or the radio touting how low your monthly payments will be with a particular car!!! …. first of all 99% of the time when you hear this type of an ad they will be talking about a lease not a purchase.

And furthermore they are probably touting a 12,000 per year mileage allowance….. which these days isn’t much at all.

And if you are able to listen real closely or get out your magnifying glass if it is a print ad, you’ll also hear (or see) that there are probably substantial up front fees and cap cost money to get you to that low monthly payment.

Be advised. Do the math and you’ll probably find this is no deal at all.

This Table will help you determine the approximate interest rate you will be assessed on a leas based on the money factor you’re give. If you are considering leasing your vehicle, insist that the dealership give you the money factor they are using to compute your monthly lease payments.

You Should Consider Leasing A Car If:

• You like the comfort and amenities of driving a new car every two to three years.
• You like to drive a higher end vehicle with the lowest possible monthly payments.
• You like the option of not having to put a great deal of money down on the car.
• You like having your car always under warranty.
• You dislike having to go through all the vehicle trade-in hassles.
• You don’t like tying up money in a depreciating asset.
• Because of all the above is important to you; you don’t mind always having a monthly car payment.

You Should Not Consider Leasing A Car If:

• You typically drive your cars for many years. At least a few past the final payment
• You drive more than 15,000 per year miles on average.
• You typically drive your cars for many years. At least a few past the final payment.
• You subject your cars to rough driving conditions or don’t like to keep them well maintained.
• You typically buy ‘fad’ cars or ‘disposable’ cars that don’t hold their resale value.
• You prefer to eventually own your car outright.
• You know in the big picture, purchasing is less expensive than leasing.

Remember when you’re contemplating a lease vs buying a car, either way the car has a selling price.

People always remember this little nugget when they are buying, but few remember when they are looking at leasing a car.

With all the different types of leases, terms, and incentives in the market place today, it is sometimes at best difficult to tell whether you are comparing apples to apples.

One of the problems is determining what all of the ‘up front fees’ and the down payment requirements of the leases. How can you compare one lease offer that requires no or very little down to those that have attractive monthly payments but require more cash down?

One way to clear the muddy waters would be to take the amount of money that a lease requires you to put down at signing and divide that amount by the total number of monthly payments.

For example, if a lease ad promises a $199 a month payment for 36 months with $1800 down (due at signing), you would simply divide the $1800 by 36 and you would get $50 per month.

So, take the $50 per month and add it to the $199 promised in the ad and you have an effective monthly payment of $249 per month. Then, what you need to do is multiply the $249 per month by the number of payments (36 in this example), and you’ll be coughing up $8964 plus fees for the privilege of leasing this car.

You can use either of these numbers to compare car leasing deals.

Be familiar with the most common leasing terminology. Scrutinize all of the end of lease charges, security deposits, and other extra charges. They can all be possibly negotiated.

It’s a good idea to make sure the manufacturer’s warranty covers the entire duration of the lease and the number of miles you are likely to drive. Usually this isn’t a problem since the normal car lease deal runs for 36 months which would easily fall within the manufacturer’s warranty and leasing longer than 36 months really doesn’t make good financial sense.

Generally speaking, in the long run leasing is more expensive than actually purchasing the car. Remember though it is a viable option and really a matter of personal preference and priorities.

Is getting the most car for your buck each month tops on your list? If so, and the mileage restrictions are workable, take a look at leasing.

Getting to all the facts, figures, and the bottom line overall cost of leasing a car will take a bit more work than if you are purchasing the car. You’ll have to do some serious prying to get some of the figures from the dealer….. but by all means pry!

Be wary of leasing companies that quote you widely different residual values in you favor to lower your monthly payments. This could be a tip-off that the company is baiting you into the lease and will try to hit you with high back end mileage or wear and tear penalties.

As with any contract, take the time to read it carefully before you sign it. In fact, a dealer should allow you to take a copy of the agreement home with you so you can peruse it in the comfort of your home. If the dealer is unwilling to let you do this, then you should be unwilling to sign it.

Should I buy or lease a car?

Bottom line… leasing is just a form of financing a vehicle in which you only pay for the part of the car you use. Simply put…. with car leasing you pay for the depreciation that is projected to occur on the car.

The operative thought here is method of financing. Remember, if you have to finance you will incur financing costs as part of your overall ownership experience. And with financing costs involved there is serious negotiating to be done.

Always know and be prepared to negotiate the capitalized cost. If the sales person tells you the cap cost is fixed and cannot be negotiated, find another sales person or dealership.

Here is a quick summary of the pro’s and con’s if you are looking leasing versus buying a car.

Also, I have included a quick conversion chart to help you determine what the effective interest rate is when looking a lease money factor.

A security deposit equal to one month’s payment which is refundable will probably be required.

Also, there will often times be an acquisition fee involved, which is a sort of administration and processing fee.

Also, a disposition fee may be charged, which is a fee for reconditioning the vehicle at the end of the lease to get it ready for resale. Most all fees included in car leasing can be negotiated. Stay firm and and you can save yourself yourself additional money on your car lease costs.

More often than not the primary reason people look at car leasing is they are monthly payment driven. If this indeed the primary factor you may be considering a lease, it is a must that you research various car’s residual values.

Remember the higher the residual value of a car the lower the monthly payments will be.

A very important note and factoid to keep in mind here as you look at your various car buying options; whether you lease, take out a loan, or pay cash, let’s not forget the dealer’s primary objective here is to sell you a car.

So, if you lease, the dealer is selling the car to a finance company. If you pay cash for your car, the dealer sells the car to you. If you finance the car (take out a loan), the dealer sells the car to you with the financing institution holding the lien and the title.

Regardless of which option you choose, the dealer is still selling the car. O.K…… I didn’t see the light bulb go off yet… I’ll give it another go….

• The dealer is selling the car, therefore the car has a selling price.
• The selling price affects your monthly payments and the overall cost of ownership.
• Car selling prices can and should be negotiated upon.

Make absolutely certain you know exactly what the selling price of the car is when considering leasing the car.

Do not accept the terms of the lease based solely on monthly payments. The dealer may be including items in the selling price of the car that you don’t have to pay for, or worse yet may never receive!

Check for add-on’s such as fabric guard, paint sealant, pin striping, rust proofing, etc.

If you lease just because you got real happy about those monthly payment figures that were presented to you, you may have just leased (paid for) much more than you should have. And to top it off, these dealer ad-on’s do nothing to increase the car’s future value.

Remember just about any of the pieces of leasing an automobile are negotiable. If it’s a number….. it’s probably negotiable.

But you gotta stay firm and don’t take no it isn’t for an answer. If the dealer wants to sell you that car, and you hold tough…. you’ll see.

Scrutinize and negotiate every number in the costs associated with the lease.

Next Lease vs Buy Car

I feel it’s best to contain the length of your lease to no further in order to get the best car lease price and terms for you.

Making a sale is making a sale, and remember sales personnel are not their for your best interest.

They are trying to get you into a car.

Trying to get you to a monthly payment where you’ll say yes. If the approach during the discussion of a lease goes beyond 36 months….. your pushing the value at that point; and generally a 48 month lease is as far as the envelop will go.

Remember, in leasing retaining as much residual value as you can is the key to keeping your leasing option advantageous. When you start getting out past 36 months your turning the car’s residual value from a friend to a foe.

When it comes to leasing terminology, wear and tear is a little vague to be sure. Defined as ‘normal’ wear and tear….. doesn’t help either.

Bottom line. If you’re in a lease, keep the car in good condition. If you’re the type of person that doesn’t you could wind up owing more at the end because you’ve exceeded the normal wear and tear. Be sure to check how the contract defines ‘normal’ and ‘excessive’ wear and tear.

Getting out of the lease early is, I guess, a more comfortable way of asking how to break a car lease.

Here’s why the leasing company frowns upon early termination of an automobile lease.

Any vehicle’s depreciation is the heaviest in the first two years of driving. Meaning this is when the greatest market value loss occurs. During a lease, however, the projected depreciation of the vehicle (the amount you’ve signed up to use) is spread out equally over the life of the lease.

Because of this, if you wish to get out of the lease early, you will have, from a market value of the car perspective, used up more of the car than you have paid for.

So, it only stands to reason that car leases will carry penalties for early termination. If you decide to lease, resign yourself to carrying the lease to full term.

Next Car Lease Costs

At first glance, leasing a car may be a tempting proposition. Little money down, lower monthly payments, and getting more car for the money.

Certainly all good reasons to take a closer look at leasing a car.

Leasing popularity comes and goes. Manufacturers really drive the popularity of leasing with the incentives they offer. Generally speaking you’ll find that leasing is the antithesis of high interest rates. When the interest rate market is up thus making the longer term financing of buying a car more costly then leasing will become more attractive.

The opposite is true when interest rates are at a lower level.

If your not familiar with automobile leasing, I usually attempt to explain it this way. It’s like paying for only the slices of pizza you eat instead of buying the whole pie.

What is left of the pizza that you don’t eat in leasing terminology is known as the residual value of the pizza…… er …. car.

So…. in a lease you are charged for the amount of car you actually use.

The residual value of the car is the projection of the car’s worth at the end of the leasing period.

There is no question that leasing has some advantages. Leasing is basically for the type of person that has come to the realization that they like the all the amenities and advantages of driving a newer car and that a monthly car payment is just a natural part of their budget for the foreseeable future.

For this person, with a monthly car payment as a given, they simply want to get as much car as they can for their monthly payment.

Car Leases:

• You usually don’t have to come up with a large down payment to get to a reasonable monthly car lease payment.
• Your monthly payments will be lower with leasing a car. For example, when you lease your $20,000 car and at the end of the lease the car is still worth say….. $8,000…. and buy the way it’s not yours.
• But, it does mean that you didn’t have to pay for the whole car. Only $12,000 of it.
• Which means your payments for the term of the lease would be based on $12,000 instead of the $20,000. In this example the $8,000 that the car is worth at the end of the lease is known as the residual value (or having a residual value of 40%).
• So, vehicles with higher residual values will probably net you lower monthly payments.
• At the end of the lease you can walk away and let the leasing company worry about reselling the car.

At this point you may be wondering why, with all these advantages to leasing why would anyone purchase a car? Very little money down, lower monthly payments, no reselling hassles, all are nice advantages, but they aren’t exactly free.

All leases come with a mileage restriction, so you don’t have the ability to enjoy unlimited travel in your car without some serious mileage fees tacked on at the end of the lease.

Be sure you know the mileage restriction and the per mile charges for any mileage over the allowance.

Also, be sure to make a call to your insurance agent before you lease to make sure you know exactly what lease type insurance coverage is going to cost you. It could be quite higher than what you are used to.

As a rule, leasing a car is more expensive than buying a car from a pure cost perspective, and at the end of the lease, you have nothing to show for all those monthly payments you have been making.

Next Car Lease Price And Terms