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.