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Lease Glossary

Acquisition Fee
A fee charged by some leasing companies for originating the loan, just as mortgage lenders charge points as an origination fee. This fee is often not specified in a contract, but rolled into the capitalized cost when calculating monthly payments.
Add-Ons
Also known as options. These are features added on to the car often by the dealer such as a CD stereo, anti-theft system, detailing and undercoating. Some items are purely decorative, and do not add any value to the car.
Adjusted Capitalized Cost
The basis used to calculate lease payments, including the vehicle price, any associated fees, optional services, and then subtracting any cap cost reduction (down payment). Also known as Net Capitalized Cost; see definition for Capitalized Cost.
Amortization
The method of retiring a standard auto loan. In it, a steady stream of constant payments pays down the loan principal and interest. The first payments are comprised almost entirely of interest; the last almost entirely of principal.
Amount Due at Lease Signing
The total amount due before the consumer can take delivery of a leased vehicle. It can include any security deposit, title fee, capitalized cost reduction, monthly payments paid at signing and registration fees.
Amount Financed
The principal that is financed. It could include the cost of the car, the cost of an extended warranty, the cost of credit life insurance and other items rolled into the payments.
Annual Percentage Rate (APR)
A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans. There is no APR in a lease; instead, the cost of money is expressed as the money factor.
Balloon Payment Loan
A type of loan in which a consumer agrees to pay a large, pre-determined amount at the end of the term.
Base Monthly Payment
The monthly lease payment before any applicable taxes or fees have been added to it. It is computed using two factors; the total lease term Depreciation and total lease term Rent Charge. Each factor is converted to a monthly figure and both components are added together.
Base Price
The cost of a car without options. This price includes standard equipment and the manufacturer's warranty and is printed on the Monroney sticker.
Blue Book
Formally, it refers to the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. In common parlance, "the blue book price" can actually refer to a price looked up in one of the many guides to pricing. The books now come in a variety of hues, are issued by many organizations, and are commonly available online or in the reference sections of public libraries.
Capitalized (Cap) Cost
A leasing term that refers to the price of the car. The lower the capitalized cost, the lower the monthly lease payment. The cap cost is negotiable and can be reduced by a cash down payment, trade-in or a manufacturer's rebate; it can be increased by the loan acquisition fee or costs left over from a previous lease.
Capitalized Cost Reduction
A reduction in the capitalized cost resulting from cash own, trade-in allowance, factory rebate, or dealer discount. Simply referred to as a down payment. Typically shortened to Cap Cost Reduction or Cap Reduction.
Closed-End Lease
The most common type of car lease. The lessee may return the car at the end of the lease term, pay any end-of-lease costs, such as the disposition fee, and the lease agreement is over. In a closed end lease, the lender assumes the risk of predicting the value of the vehicle (its residual value) at the end of the lease's term. Closed-end lease payments are somewhat higher than open-end lease payments.
Co-Lessee
An individual who signs the lease with another individual or company and is responsible for compliance with the lease terms in the event the lessee does not fulfill his or her obligations. A colessee may be utilized to help obtain credit approval or simply to put two people such as a husband and wife on a lease together. See also Lessee.
Consumer Leasing Act
A federal law passed in 1976 and amended in 1996 that spells out the requirements for disclosure of leasing costs and terms. Generally, the law covers vehicles leased for personal or family use; for periods in excess of four months; and for a total contractual obligation of less than $25,000. The Federal Reserve Board publishes a consumer guide to leasing that covers the leasing plans covered by the act.
Credit Life Insurance
A type of life insurance that helps repay the loan if the consumer becomes disabled. It is optional coverage. When taken out, the cost of the policy is sometimes rolled into the loan principal amount.
Current Lease Buyout
This is the figure that one may purchase a leased vehicle for prior to scheduled lease termination. Typically, this fee is calculated by adding the residual value, the total of the remaining monthly payments, and any early termination or purchase option fees, which may apply. In some instances this fee is negotiable with the Lessor.
Dealer Charges
Charges for extra services or products sold by the dealer, including rust-proofing, undercoating and extended warranties. Dealer Holdback An allowance, usually between 2 percent and 3 percent of MSRP, provided by manufacturers to dealers. A holdback allowance may allow the dealer to pay the manufacturer less than the invoice price. A buyer could obtain a car below invoice price and the dealer would still make a profit.
Dealer Incentives
Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.
Dealer Invoice
The amount that a dealer is invoiced by the manufacturer for a vehicle and any options. Dealer Preparation or Dealer Prep An additional charge to consumers that dealers try to impose on buyers. It represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.
Dealer Sticker Price
This is the Monroney sticker price plus the suggested retail price of dealer-installed options, dealer preparation and undercoating. It usually appears on a separate sticker.
Default
The condition that occurs when a consumer fails to fulfill the obligations set out in the loan or lease.
Deposit
An amount of money held by the dealer to hold adeal for a period of time until the paperwork is complete; usually applied toward the down payment. Also see security deposit.
Depreciation
An asset's decline in value over the course of its useful life. Autos depreciate steeply in their first few years, beginning at the moment they are driven off the lot. In an auto lease, a charge for depreciation is the chief part of a consumer's monthly payment.
Destination Charge
The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.
Direct Financing
A smart buyer's practice. A buyer who lines up financing through an outside financial institution rather than through the dealer is said to have direct financing. This doesn't mean dealer financing is a worse deal -- on the contrary, some dealers offer deeply discounted financing. But arranging the financing separately allows the buyer to focus on one thing -- getting the best price on a car, rather than mixing pricing and financing. Consumer advocates urge buyers to keep the deals separate: Get the best price on a vehicle, and then see if the dealer can beat the pre-arranged financing.
Disposition Fee
A fee charged by some lessors at the end of a lease. The sum, spelled out in the lease, charges consumers for the privilege of giving back the vehicles they had leased.
Down Payment
A payment in cash or trade-in value that reduces the amount of a car's purchase price that is financed.
Early Termination
The termination of a lease before its maturity date. Early Termination Charge Charges that the lessee must pay if the car is turned in early before the term of the lease is over.
Equal Credit Opportunity Act
A federal law that prohibits discrimination in credit transactions on the basis of race, color, religion, national origin, sex, marital status, age, source of income or the exercise of any right under the Consumer Credit Protection Act.
Excess Mileage Charge
A charge per mile for miles driven over the amount contracted in the lease. This charge may vary not only by lessor, but also by the amount of miles contracted per lessee.
Excess Wear and Tear
Potential additional charges if the vehicle is damaged or has wear beyond what is normally expected for the lease term. Examples of Excess Wear include cracked windshields, body damage, broken equipment, defaced interiors, etc.
Excess Wear Charge
Most leases set limits for wear and tear on the car during the lease term. The lessee must pay charges for exceeding the limits when turning in the car at the end of the lease.
Extended Service Contract (ESC)
An agreement purchased to supplement the factory warranty of a vehicle used to cover against breakdown and mechanical failures. These agreements can prove valuable, however they vary widely in coverage, and cost. The terms and conditions of a particular contract should be reviewed carefully.
Extended Warranty
Also known as service contract. A contract that covers certain car repairs or problems after the manufacturer's or dealer's warranty expires. Extended warranties are sold by car manufacturers, dealers and independent companies. With a new car, the extended warranty usually must be purchased by the end of the first year of ownership.
Fair Market Value
The amount that a willing buyer would pay at ascertain point in time for the vehicle in an arms length transaction.
Federal Consumer Leasing Act Disclosures
These disclosures outline the fundamental aspects utilized to calculate the lease and include any warnings of fees or penalties, which may be assessed by the lessor at lease termination. Federal Consumer Leasing Act Disclosures will be found on all lease contracts written in the last several years.
Finance lease
See open-end lease.
Gap Insurance
A type of insurance offered to auto lease customers. It pays the difference between what you own and what the vehicle is worth in the event the car is stolen or destroyed.
Gross Capitalized Cost
Refers to the agreed upon value of the vehicle and any other items the lessee pays over the lease term such as an Extended Service Contact, Acquisition Fee, Gap Insurance, Luxury Tax, and any outstanding prior credit or lease balance.
Holdback
See dealer holdback.
Insurance
In auto terms, a contract in which one party agrees to pay for another party's financial loss resulting from a collision, theft, or other damage. Leases and loans generally require consumers to maintain a certain level of insurance.
Interest
The cost of borrowing money, expressed as a percentage. For the best current interest rates on auto loans, use the bankrate.com (sm) auto loan search engine.
Invoice Price
The manufacturer's initial charge to the dealer. The price may not be the dealer's final cost because dealers receive rebates and other incentives from the manufacturer. The invoice price always includes freight, also known as the destination charge.
Kelley Blue Book
The best-known of the car pricing guides. The company was founded by Les Kelley, a California used-car dealer. The first edition, in 1926, included values for such cars as a 1926 Packard sedan limousine with balloon tires ($3,825), and a 1921 Nash touring car with clock ($50). Today's editions have listings for more than 10,000 cars, vans and trucks.
Late Charge
A penalty assessed by the lessor to the lessee for failing to pay his or her payment in full by the contractual due date or within a specified grace period after that due date.
Lease
An agreement, usually for two to five years, that allows the lessee to drive a car for the term of the lease, but the lessee does not own the car. A monthly lease payment is usually lower than a car loan because the lessee is paying only for depreciation on the car plus charges. The lessee is usually responsible for repairs, maintenance and insurance on the vehicle.
Lease Assumption
Refers to an outside party taking over a lease from the original lessee under the terms and conditions outlined in the original contract. Typically, a lease assumption means the original lessee walks away from the lease without any future liability and the new lessee assumes all liability for the lease contract.
Lease-End Buyout
This is the originally contracted amount that the lessee can purchase the leased vehicle for at scheduled lease termination. This figure consists of the Residual Value plus the Purchase Option Fee if applicable. In some cases this figure may be viewed as a worst-case scenario because many leasing companies will negotiate this amount with the lessee in order to hedge potential losses associated with the sale of the vehicle through other channels.
Lease Charge
See Rent Charge.
Lease Extension
The continuation of an existing lease, at the original monthly payment, usually on a month-bymonth basis.
Lease-Like Loan
Also known as payment saver loan. It combines features of a lease and a conventional auto loan and is most often offered by credit unions. Payments can be as much as 30 percent less than a conventional amortized loan, because a lease-like loan has a big balloon payment at the end. (See amortization.) It requires no down payment or security deposit. Mileage allowance is usually higher at 18,000 miles per year. At the end of the loan, the borrower can sell or trade in the car and pay off the loan balance, or keep the car and refinance the amount owed, or return the car to the lender as payment for the balance.
Lessee
The primary driver of the vehicle who signs the lease and is responsible for compliance with the contracts terms and conditions set forth. The lessee can be an individual or company.
Lessor
The owner of the leased vehicle and the entity who sets forth the lease terms and conditions. Typically the lessor is a bank or vehicle manufacturer's financial subsidiary.
Market Value
See fair market value.
Mileage Allowance or Mileage Limitation
The number of miles, specified in a lease, that a car may be driven over the life of the lease. Mileage Charge Extra charges the lessee must pay if the car is driven over the lease's mileage allowance, usually 12,000 to 15,000 miles per year.
Money Factor
A leasing term that expresses the cost of borrowing. It is similar to the interest rate paid on a conventional car loan, but it is expressed as a difficult-to-understand fraction. To convert the money factor to a recognizable interest rate, multiply it by 24. For example, a money factor of .00345 x 24 = 9 percent interest. The money factor is negotiable, and consumers who lease a new car should look for a money factor close to the current interest rate charged for new-car loans.
Monroney Sticker
The sticker on the car window that shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price (MSRP), the manufacturer's destination charge, and the car's fuel economy (mileage). This label is required by federal law and it is only removed when the car is sold by the purchaser. Named after A.S. "Mike" Monroney, a longtime Oklahoma congressman who wrote the Automobile Information Disclosure Act.
Monthly Sales/Use Tax
Unlike purchasing a vehicle the customer does not pay a lump sum sales tax amount upfront in a lease. Instead the lessee will pay tax on a monthly basis for the duration of the lease period. This tax amount is typically determined by where the vehicle will primarily be garaged. For instance, if a vehicle is leased and will be garaged in a county or locale where sales tax is figured at six percent the lessee will pay an additional six percent on top of the Base Monthly Payment.
MSRP
Stands for Manufacturer's Suggested Retail Price. It represents the manufacturer's recommended selling price for a vehicle and each of its options.
National Automobile Dealers Association
A trade organization that publishes the NADA Official Used Car Guide, which provides retail prices for most used cars to consumers, and provides trade-in values in a confidential list to dealers.
National Vehicle Leasing Association
A trade group for automotive leasing companies that can provide direction on understanding leasing contracts and terms.
Negative-Equity Financing
Financing for new car buyers who owe more on their trade-in than the car is worth. Financial advisors say at least 30 percent of cars traded in have a negative equity balance. For example, if the outstanding balance on a car loan is $14,000, but the trade-in allowance is only $12,000, the loan is "upside-down" by $2,000. New federal regulations that went into effect Oct. 1 make it clearer to consumers through the lease paperwork when they have negative equity. Under the new rules, a space for negative equity appears on the new finance contract and $2,000 would be added to the finance amount of the new auto loan. See also upside-down.
Odometer Statement
A federal form used to disclose a vehicle's mileage in connection with a transfer of vehicle ownership. A specific lease odometer statement is utilized in various lease transactions including terminations as well as Lease Assumptions and Transfers of Equity. Individuals should be aware that failure to complete a disclosure or false statements might result in fines or imprisonment.
Open-End Lease
Sometimes called a finance lease. It usually offers lower payments, but carries a risk for the consumer. Under an open-end lease, the lessee must pay any difference between the residual value of the car as stated in the lease and the fair market value of the car, if lower, at the end of the lease. The lessor pays for the appraisal that sets the value. If the consumer doesn't agree with it, the consumer may pay for a binding, independent appraisal by someone agreed to by both parties. Because the lessee is taking on the risk of having to come up with this extra payment, the payments are lower than for a closed-end lease.
Options
Also known as add-ons. These are features added to the car often by the dealer such as a CD stereo, anti-theft system, detailing and undercoating. Some items are purely decorative, known as "mop and glow," and do not add any value to the car.
Preparation Charges
See dealer preparation.
Principal
In a standard auto loan, the amount financed which is due on a certain date and usually paid off through an amortized loan. Also see amortization.
Purchase Option
The terms of a lease under which amount that the lessee may pay the lessor at the end of the lease to purchase the vehicle. The price the lessee will pay is usually the residual value.
Purchase Option Fee
A fee that may or may not be charged by the lessor to cover costs associated with the selling of a leased vehicle to the original lessee at lease termination. The Purchase Option Fee typically ranges from $300.00 to $500.00.
Rebate
A manufacturer's reduction on the price of the car as an incentive to buyers. Rebates appeal to people with no credit or less-than-perfect credit who cannot qualify for the lowest-rate loan. A rebate may also appeal to first-time buyers who don't have a lot of cash for a down payment or another car to trade in.
Reconditioning Reserve
Another name for the security deposit paid when leasing a vehicle.
Rent Charge
The interest paid on a lease. It can be thought of as the equivalent of interest on a conventional installment loan. It is one of the factors used in establishing Base Monthly Payment. Also known as the Lease Charge.
Required Vehicle Insurance
Refers to the liability and physical damage policy requirements set forth by the lessor. Not only will specific dollar amounts be set, but also limits on deductibles will be included. Most contracts contain provisions for the lessor to be provided proof of insurance on request and the ability to collect for minimum insurance requirements if necessary.
Residual Value
The original estimate of the wholesale value of the leased vehicle at scheduled lease maturity. This value will vary depended on miles contracted in lease. You may or may not be able to purchase the vehicle at lease end for residual value because some leasing companies charge an additional Purchase Option Fee.
Rule of 78
A type of financing where the loan is weighted so all of the interest is paid off in the first year.
Security Deposit
Sometimes called reconditioning reserve. An amount, often the same as one month's payment, the dealer holds to be sure that the car will be returned in good condition. It is to be returned, less fees and damage charges, at the end of the lease.
Service Contract
See extended warranty.
Simple Interest Loan
A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments will reduce the loan's principal and cut the total interest paid over the life of the loan.
Sticker Price
This shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price (MSRP), the manufacturer's destination charge and the fuel economy (mileage). It is the Monroney label affixed to the car window and is required by federal law. The label may not be removed by anyone other than the purchaser.
Term
The length of the loan or lease, usually 24, 36, 48 or 60 months.
Termination Fee
See Disposition Fee.
Title
The written evidence that proves the right of ownership of a specific vehicle.
Total Monthly Payment
This is made up of the following three factors broken down to a monthly basis and added together: Depreciation, Rent Charge, and Monthly Sales/Use Tax.
Trade-In Value
The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the wholesale value of the vehicle.
Transfer of Equity
Similar to a Lease Assumption; however, the original lessee usually remains responsible or liable in some way shape or form for the original lease contract.
Up-Front Costs
The costs that must be paid at the time of signing a car lease agreement. These can include the first month's payment, a refundable security deposit, a capitalized cost reduction or down payment, taxes, registration and other fees.
Upside-Down
A position that consumers find themselves in when the outstanding balance of an auto loan is higher than the current fair market value of the car. It is most common in the early years of a lease or loan, when car is depreciating rapidly but the balance owed remains very high. Also see depreciation or negative equity.
Vehicle Identification Number (VIN)
A number assigned to the vehicle by the manufacturer. Each number is unique and appears on the vehicle's registration and title.
Warranty
A guarantee, from a dealer or a manufacturer, that a vehicle will perform as expected or specified. A warranty usually covers specified mechanical problems for a set number of miles or amount of time.

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