Leasing Vocabulary

I don’t want to beat on a dead horse here, so if you want the in depth explanation about leasing, head over to leaseguide.com. They have a very thorough explanation of the terms used in the auto leasing world. You NEED to get acquainted with these terms before you go lease your vehicle, otherwise, you’ll be in trouble.

Now, if you want my summarized version, read on!

MSRP – Manufacturer’s Suggested Retail Price. In other words, the price you should never pay for your vehicle, whether you lease or buy. This price is also used in the calculation of your Residual Value.

Capitalized Cost – “Cap cost” for short, is the price you agree to pay for the vehicle. I refer it as the “sale price” of the vehicle. (Watch out for fees, have the dealer itemize them, if they won’t don’t, shop elsewhere) This is the number you want to get as close to Invoice Price as possible or below if you can swing it. More on that next.

Invoice Price – What the dealer claims they paid for the vehicle. Sometimes, you can go below this…specially during clearance. Ideally, this is where you want your Cap Cost to hover around. Negotiate Accordingly.

Cap Cost Reduction – Also known as the “Down Payment”. This is used to bring the Cap Cost down, so you get lower monthly payments. Do yourself a favor and try not to put much towards this. If your lease vehicle is stolen (unrecoverable) or “totalled” your car insurance will not reimburse you what you put down. When you lease, you can’t recoup any of the value of the car because you don’t have equity. Be aware of that.

Residual Value – This is the estimated value of your car at the end of the lease. This is a crucial part of determining your payment. Generally determined by a % of the MSRP. This varies depending on the Lease Term or Mileage Allowance you choose. For example, 61% residual after 24 months means the car is only worth 61% of its MSRP price after 2 yrs (car depreciated 39% during that time, which is what you’re paying for + interest + tax)

Money Factor – Or MF, is your interest rate. This is usually where people make their mistakes. Since MF is a very small decimal number, such as .00194, consumers tend to think that they are getting a sweet deal on the APR. APR is NOT MF. If you get a MF of .00194, it translates to about 4.66% APR. You can convert it back and forth by using the following formula.

MF * 2400 = APR
APR / 2400 = MF

This is a good way to check if you’re getting a good interest rate for your lease loan.

Lease Term – Your choices are 24-48 months typically. I’ve had 2 36-month and 2-48 month leases thus far. I prefer the 36 month since warranties tend to end around that time. Plus 48-month leases are a bit too long, which means more “wear and tear” costs.

Taxes and Fees – My personal experience with auto dealers is that they charge you for stuff they don’t really tell you about, so watch yourself out there. You should have all your fees itemized and explained. If something sounds fishy or redundant, speak up. Otherwise, you’ll end up paying up.

Mileage Allowance – How many miles you get to drive per year. The more miles you want to drive, the lower your residual value will be. Thus, your monthly payment goes up.

So what exactly are you paying for anyway?

The general breakdown of your lease payments works something like this:

  1. Cap Cost minus Residual Value = Your Loan (YL)
  2. Take YL add Interest (MF) then divide by Lease Term = Monthly Payment before taxes (MPBT)
  3. MPBT plus Local Sales Tax = What You Pay Per Month.

Simple enough? I think so. You can call or email dealers to give you the numbers you need for the car you want first. This is ideal since you want to have the tools necessary to calculate your own payment. To calculate your own lease payments head over to My Lease Calculator and plug in the numbers the dealer provides you. One thing to understand is that the math doesn’t lie. If the numbers don’t match with what the dealer quotes you, that means there are possible hidden costs. You will always be at a disadvantage when you try to negotiate a deal at the dealership without the right tools to crosscheck their work, so try cut your deals over the phone or via email. Only show up to the dealership to test drive and to sign papers.

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