Car lease terms explained, in plain English

Capitalized cost, or cap cost

Capitalized cost is the price the lease is written on: the agreed selling price of the car plus anything rolled into it, such as the acquisition fee or a balance from your last car.

Gross cap cost is the figure before anything you put down. A cap cost reduction is money applied to lower it, whether from cash, a trade or a manufacturer rebate. Adjusted cap cost is what is left, and that is the number your payment is actually built on.

This is the line you negotiate. Almost everything else on the worksheet is set by the lender or capped by state law.

Residual value

The residual is what the leasing company says the car will be worth at the end of the term, stated as a percentage of MSRP and as a dollar figure on the contract.

You pay for the gap between adjusted cap cost and residual, spread across the term. A high residual means less depreciation to cover, which is why two cars at the same price can lease very differently.

The residual is also your buyout at the end. That is what makes lease equity possible when the used market pays more than the leasing company predicted.

Money factor

The money factor is the lease version of an interest rate, written as a small decimal such as .00150.

Multiply the money factor by 2400 for the rough equivalent annual rate, so .00150 works out to about 3.6 percent.

The lender publishes a base money factor each month. A dealer may mark it up within limits, and that markup is profit you are allowed to ask about. Always ask for the lender's base rate next to the one you were quoted.

Drive offs, or due at signing

Drive offs are everything you hand over on day one: the first payment, the acquisition fee, the doc fee, registration, tax on what is due, and any cash cap cost reduction.

Ask for due at signing as a single number, then ask what is inside it. A low monthly payment sitting next to a large drive off is not a cheaper lease, it is a prepaid one.

Putting a lot of cash into a lease is usually a poor trade. If the car is stolen or totaled, that money is generally gone, while the insurance payout goes to the leasing company.

Acquisition fee

The acquisition fee is what the leasing company charges to write the lease, and it is either paid at signing or rolled into cap cost.

The lender sets it, not the store, though some stores mark it up. Ask what the lender's own fee is and compare.

Doc fee

The doc fee is what the dealer charges for preparing the contract and paperwork, and California caps it: for most dealers the cap is 85 dollars.

Stores enrolled in the state electronic registration program may also charge a separate electronic filing amount. Neither is usually negotiable, but neither should ever be a surprise at signing.

Mileage allowance

The mileage allowance is how many miles a year the lease includes, commonly 7,500, 10,000, 12,000 or 15,000, with a cents per mile charge in the contract for anything over.

Buying extra miles up front is cheaper per mile than paying the overage at turn in, but only buy what you will use. Unused miles are not refunded.

Be honest with yourself about your driving. If you are guessing, check the mileage on your last two service records.

Disposition fee

The disposition fee is what the leasing company charges when you return the car at the end, to cover getting it ready for resale.

Many brands waive it if you lease or buy another vehicle from them, and it does not apply at all if you buy the car out. The amount is in your contract, so look it up before the return appointment rather than after.

Other lines you will see on a lease worksheet

None of these are mysterious once they have names:

• MSRP and the window sticker, which should match the car actually in front of you
• Rebates and lease cash, each shown as its own line rather than blended into the price
• Registration, license and California tire fees, which are state charges and not dealer profit
• Tax, which in California is charged on each monthly payment rather than on the whole car
• Add ons such as paint protection, wheel and tire coverage or an alarm, each optional and each raising cap cost
• Gap coverage, which is usually already built into a lease, so you should not be sold it twice

The math, roughly

Depreciation per month is adjusted cap cost minus residual, divided by the number of months in the term.

Rent charge per month is adjusted cap cost plus residual, multiplied by the money factor.

Add those two together, add tax, and you have the payment. That is the whole formula.

This is general arithmetic, not a quote. The real numbers for a given month come from the lender and the selling dealer, and your credit tier decides which program you qualify for.

Green Light Auto Broker is an autobroker. All new cars arranged for sale are subject to price and availability from the selling franchised new car dealer.

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