Auto Leasing Glossary

Acquisition Fee: This is a fee that most lessors charge to cover costs of setting up the lease. It can include GAP Insurance, Residual Value Insurance and Contingent Liability Insurance.

Capitalized Cost (Cap Cost): This is the financed amount of the lease and is comprised of the vehicle selling price, lease fees, sales tax or other added items.

Captive: This term is used to describe the auto manufacturer’s finance arm.

Captive Lease Programs: These are the leases offered by the manufacturer’s finance arm. They typically provide a cut rate money factor or an artificially inflated residual value to help lower your lease payment. This can limit your options during or at the end of the lease.

Cap Reduction: This is the same as “cash down” on a finance agreement. It helps lower the lease payment but it is not recommended.

Closed-end Lease: These are the most popular leases being offered today. They limit the liability of the consumer for the residual value at the end of the lease and are also covered under Regulation M.

Credit Score: This is part of your credit report and is used by most lessors to determine your rate. It is not necessarily used to determine if you would be approved for a lease. The higher the score the better and most lessors consider 700+ to be top tier or “A” credit.

Depreciation: Is the decrease in the value of the vehicle over a specific time period.

Excess Mileage Penalty: This is the amount you will pay for each mile you drive over your allotted amount specified on your lease agreement.

Extended Warranty: Also called a Vehicle Service Contract, picks up where the new car warranty leaves off.

Gap Insurance: In the event the vehicle is totaled or stolen, this insurance covers the difference between the lease payoff and the amount the lessee’s insurance pays. This is important when you are dealing with a no-money down lease.

Independent Leasing Company: These companies are an alternative to leasing through the dealer. They can usually assist you with any make or model, new or used, and provide better lease offers through various finance sources.

Lease Payoff: This is the amount required to get out of your lease early. It may include additional fees for breaking your lease early.

Lessor: Is the party who is leasing the car to you. Even though a dealership or broker may arrange the lease, the lessor is often a bank or the financial arm of a car manufacturer.

MSRP (Manufacturers Suggested Retail Price): This is the retail price of the vehicle that is displayed on the window of the vehicle. It’s also used to calculate the residual value.

Market Value: Is the amount an individual or dealer is willing to purchase your vehicle in a retail environment. See our Internet Resources for sites that will help you obtain this value.

Money Factor: This is used to calculate the interest on the lease. For a comparable interest rate multiply this number by 2400.

Monthly Depreciation: This is the amount the vehicle loses value each month and is part of the base monthly payment.

Monthly Interest: This is the monthly finance charge and is part of the base monthly payment.

Negative Equity: Is the difference between the market value of your vehicle and the current loan payoff, when the latter exceeds the former. Negative equity results when your vehicle declines in market value by more than your paid principle. Simply, you owe more than your car is worth.

Open Ended Lease: This type of lease is primarily used for businesses purposes as the lessee is responsible for the value of the vehicle at the end of the lease.

Purchase Option: This is the amount the vehicle can be purchased for at the end of the lease.

Purchase Price: This is the agreed to selling price of the vehicle

Regulation M: Is the Federal regulation implementing the Consumer Leasing Act of 1976 and requires lessors to provide more detailed pricing information in their lease contracts.

Remarketing Company: This is a third party company that handles the disposition of the leased vehicle.

Residual Value: Is the estimated value the vehicle will be worth at the end of the lease.

Term: Is the length of the lease.

Totaled: This is the term used to describe a vehicle that has been in an accident and the cost of repairs is more than the value of the vehicle.

Wear and Tear Insurance: An insurance policy that covers a certain amount of damage to a vehicle that the lessee would normally be charged for at the end of the lease.

Lease Insider FAQs

Do I need an extended warranty?
If your lease term extends past the manufacturer’s warranty period then yes, you need an extended warranty. For a new car lease it is usually better to lease for no longer than the term of the original manufacturer warranty.

What is GAP insurance and do I need it?
GAP insurance is needed when the potential balance of your lease is greater than what your insurance company is willing to pay. This is usually the case with a lease as you normally do not put money down to lower the purchase price. Most leases include GAP insurance—but check to be sure.

What am I required to pay to start my lease?
The minimum is usually your first month’s payment and license fees. Sales tax is either on the monthly payment or can be included in the lease if it’s to be paid up front on the purchase price. You never want to put money down on a lease unless your credit requires it.

What is the acquisition fee?
A lot has changed over the last 10 years in regards to leasing from the lender (lessor) side. Artificially inflated residual values have cost many lenders millions of dollars. Most lenders now carry residual value insurance and contingent liability insurance.

The costs of these fees are real and, in part, make up the acquisition fee. It is charged by the bank and not the dealer.

For accounting purposes these additional fees are usually not added into the rate. GAP insurance has only recently been included. In the late 90's it was the responsibility of the lessee to obtain this insurance. Most lessors now include it and fund it from the acquisition fee.

Is my end of lease purchase option negotiable?
The answer to this question changes every so often for each lessor. Sometimes it is and sometimes it’s not. The best thing to do is NEVER show any interest in buying the car. As soon as you do you will lose all negotiating power.

Who carries the insurance for my leased vehicle?
This is a question that is often asked and the answer is you, the lessee. Even though the vehicle is owned by the lessor, you as the driver must provide car insurance at your cost during the lease term. Most lessors require a minimum amount of full coverage.

How do I handle negative equity on a new lease?
40% of people are faced with this problem when they try to end their finance agreement early. The goal is to get as close to payoff as possible. The negative balance can usually be included into the new lease as long as the final purchase price + negative equity does not exceed the vehicle’s MSRP. The lower the purchase price, the more negative equity you can absorb.

When is the best time to lease a vehicle?
The best time to lease a new car is early in the model year when residual values are naturally at their highest levels. The higher the residual value the lower your lease payment. Although, vehicle discounts or rebates later in the year can help offset the decline in the residual value.

Are those low lease specials I see advertised really that good?
Some captive lease programs offer special low lease payments by artificially raising the residual value. While this can provide a lower payment, it will be very costly if you need to terminate your lease early. Also, the purchase option at the end of the lease will be far above market value, meaning you will probably have to turn the vehicle in and be subject to any fees and/or penalties.

My lease is over. Now what?

Congratulations! You’ve made it to the end of your lease term. The big question you need to answer is do you want to keep the car or turn it in? Here’s what you can expect and what your options are:

If you’re within the last 90 days of your lease you’ve probably received communication from the lessor about what your options are.

There are a couple of things you should do BEFORE you turn your car in:

The first thing you will want to do is compare the Purchase Option amount that is listed on your lease agreement to the vehicle’s current Market Value. If the purchase option is lower than the market value, consider buying the vehicle to keep or to re-sell for a profit.
More on this in a moment.

If the purchase option amount is higher than the Market Value, your best option is to turn the vehicle in at lease-end. To do this, it is not necessary to go back to the original dealer. This is a benefit of an Independent Leasing Company. A leasing company can assist you with your turn-in and help arrange a new lease for any make or model. They may be able to offer you better lease options through alternative finance sources like a bank.

A word of caution: if the Market Value is lower than the Purchase Option, the lessor may try to persuade you to buy it. The Lessor stands to incur losses when they try to sell your vehicle at auction after you turn it in. Many lessors contract with a remarketing company to put the “hard sell” on you to buy it. Unless you can negotiate a purchase price at or near the Market Value, you are better off turning the vehicle back to the Lessor at lease-end.

Second, make sure the vehicle is inspected PRIOR to you turning it in. You should receive a written inspection report along with any wear and tear fees. If you are going to be charged for wear and tear, then you want to know about it before you turn it in.
You can save money by having the items fixed instead of paying the wear and tear fee.

Depending on market conditions, it may be possible to obtain a lower Purchase Option with the lessor. To gain an edge in the negotiating process, do not show interest in buying the vehicle. If they want you to buy it but think you just want to turn it in, you’ll have more bargaining power. Have your vehicle’s Market Value handy as you work with the remarketing company in establishing a price.

The Decision
If you think you want to buy your leased vehicle you’ll want to compare the purchase option to the market value. You can get this from or by looking at similar vehicles for sale in the classifieds (online or newspaper) to see if this option really makes financial sense.

If the purchase option is higher than the market value, then you probably want to turn it in. If the purchase option is lower than the market value, then you may want to consider buying it because you will immediately be in an equity situation.

Also consider how much you like the vehicle and whether it’s given you any serious mechanical problems.

If the market value is higher than your purchase price, consider selling the vehicle to a friend or a retail buyer for an amount slightly over the purchase price. A word of caution: there could be double taxation depending on the state you live in. This happens because the lessor has to sell the vehicle directly to you and charge you sales tax. You then turn around and sell it to your buyer and they have to pay sales tax. This can be avoided by having a dealer buy the vehicle from the lessor and then sell it to your buyer. Dealers are tax exempt when purchasing a vehicle for re-sale. If a dealer is willing to do this they usually charge a fee. This service can also be performed by

Terminating a lease early

You may want to terminate your lease early due to a life changing event or the desire for a different car. It can be difficult and it can be expensive. Here’s my advice on how to handle the situation.

The first thing you need to do is determine your lease payoff. Call the lender and ask them what it is. They will probably give you a number that includes sales tax. Ask them if they can also give it to you without sales tax.

Next, determine your vehicle’s market value. Visit one of the websites in our Internet
Resources section or look at the current asking price of similar vehicles in the classifieds, online or offline.

Your Options
1) The most popular option is to pay off the lease and sell the vehicle to someone else. This is the reason you need the market value. In most cases you will find that the payoff is higher than what you can sell it for. This puts you in a negative equity situation where you will have to make up the difference out of your own pocket. I’ve listed some websites in the Internet Resource section that may help you sell your car.

When working with a dealer to get you out of your lease and into another car, know all the numbers and where they come from before signing anything.

2) Another option is to try and find someone to assume your lease. Another person can make your payments and assume the responsibility of the lease agreement. This option is relatively new and not all lenders allow it.

This option works well if your vehicle is under the allotted miles of the lease agreement. You may also have to provide some monetary incentive for someone to consider assuming your lease. Only consider this option if the assumption alleviates you from all liability of the original lease.

There are some websites that assist with this service and I’ve listed them in the Resources Links of this Blog.

3) If you decide to continue the lease you may be able to lower your payment by refinancing it with more favorable terms using a service like

Something you should absolutely NOT do is drop off your car at the bank or dealer and stop making your payments. It will go against your credit as repossession and it will be years before most good lessors will consider you for another lease or loan.
Again, do NOT do this!

Making sense of the numbers

Knowledge is power. If you arm yourself with understanding of the terms below, you will be able to negotiate a better deal.

The secret leasing formula
This is the formula used by most industry financial institutions and captive finance sources to calculate a closed-end lease.

(Capitalized Cost – Residual Value) / Total Months of Lease = Monthly Depreciation
(Capitalized Cost + Residual Value) X Money Factor = Monthly Interest Charged
Monthly Depreciation + Monthly Interest Charged = Base Monthly Payment

Factor 1: Capitalized Cost (Cap Cost)
As you can see, there are only a few variables that make up a lease payment. The capitalized cost can affect both the monthly depreciation and the monthly interest. It is important that this be as low as possible. As mentioned previously, this is basically what you are paying for the vehicle, plus any fees like the acquisition fee, wear and tear insurance and/or sales tax.

Negotiating a lower purchase price, as discussed previously, will lower your cap cost and your monthly payment.

Factor 2: Residual Value
A high Residual Value can help lower your monthly depreciation, but can also increase the interest you pay. This number should be a realistic value to give you the most options during and at the end of the lease.

If for some reason you need to get out of a lease early, the more realistic your residual value, the closer to market value your vehicle will be during the lease. This will make it easier to sell or trade your vehicle without getting into a negative equity situation.

Having a realistic residual value at the end of your lease gives you the option of purchasing it at a price very close to market value. This is good if you or someone else wants to buy it.
On new cars, the residual value is based on a percentage of the vehicle’s MSRP. These percentages are published by Automotive Lease Guide (ALG). Most lenders use a derivative of these to set their own residual values. For used cars the residual is based on an estimated cash value and adjustments for the vehicle’s current mileage.

DEALER LEASE ADVISORY: Some captive lease programs offer special low lease payments by artificially raising the residual value. While this can provide a lower payment, it will be very costly if you need to terminate your lease early. Also, the purchase option at the end of the lease will be far above market value, meaning you will probably have to turn the vehicle in and be subject to any fees and/or penalties.

Factor 3: The Money Factor
There is a new term that we haven’t covered yet – the money factor. It is similar to an interest rate for a conventional loan because it is used to calculate the interest charged.

Dealers usually do not disclose the money factor, making it difficult for you to determine if you are getting a good deal. It probably won’t be stated on the lease contract, even though it is as important as any other part of a lease. A lower money factor equals a lower payment. In order to accurately compare lease programs from different financial sources you must know all the variables of the leasing formula — including the money factor.

Because of the way it’s used in the calculation, there is no direct correlation between the money factor and a conventional interest rate. To get a close comparison, multiply the money factor (usually expressed as a percentage, like .00245) by 2400.

Your credit score can also affect the money factor. More and more lenders are going to a tiered scoring model: the higher your credit score, the lower your rate and the lower your monthly payment.

The money factor is similar to a conventional finance rate, the lower the rate the lower your payment.

Factor 4: Sales Tax
There is not much you can do to change this portion of your payment, as your sales tax is determined by where you live or register the vehicle.

In most states the sales tax is calculated by one of the following three ways:

Paid monthly: In this scenario your sales tax is calculated by taking your tax rate times the monthly payment. The tax is collected by the lessor along with your base payment and they submit the tax monthly to the state.

Paid upfront: The tax is calculated as stated above, but is paid in a lump sum upfront. This amount can be included in the cap cost and financed in the lease.

On the Purchase Price, paid upfront: Tax is collected on the purchase price and is paid up front by the lessor. This amount can also be included into the cap cost. Unfortunately, if you live in a state where the tax is calculated in this manner, you will pay more than the other scenarios.
In most states you will pay less sales tax by leasing vs. purchasing your vehicle.

Sample Lease Calculation
To calculate your own lease payment you will need to have all of the information below. If you are not able to get the required information to calculate your own lease payment, do NOT lease the car, period.

$37,740 - Vehicle MSRP (Manufacturer’s Suggested Retail Price)
$35,306 - Negotiated Purchase Price
$1,100 - Bank acquisition fee & dealer documentation fee
$36,406 - Capitalized Cost (sum of purchase price and fees)
$21,512 - Residual Value (57% of MSRP)
.00230 - Money Factor (multiply by 2400 for a ballpark interest rate)
36 mo - Term of lease

Next, plug the numbers into the formula:
(36,406 – 21,512) / 36 = $414
(36,406 + 21,512) X .00230 = $133
$414 + $133 = $547

$547 = Final Monthly Payment

Use a service like to compare what the dealer is offering to an independent leasing source and select the best program. Remember, you do not have to use the dealer’s lease programs, just as you don’t have to use their traditional financing programs.

I want to lease! Now what?

Now that you’ve decided that leasing is for you, I will tell you exactly how to get the best lease deal. Several factors determine what is best overall, you cannot choose based on lowest monthly payment alone.

Step 1: Select a vehicle
Choosing a vehicle that you know you’ll be able to keep for the duration of the lease is important. Terminating a lease early can be costly, so choose your new car carefully. When considering models, look at the market value or residual value. Later in the publication, I will tell you how the residual value will impact your monthly lease payment. In general, choose a vehicle that will retain its value.

There is a misconception that you should only lease new vehicles. But used cars tend to have a slower rate of depreciation and leasing them can be a smarter choice if you have to terminate your lease early. It would be wise to make sure an extended warranty is purchased to cover you through the term of the lease.

Before making a final decision on a vehicle, consider taking iton an extensive test drive or rent it for a weekend.

Step 2: Negotiate the selling price
What does the selling price have to do with a lease? A lot! Negotiating the purchase price of a vehicle is one of the best ways to dramatically lower your lease payment. The selling price is used in the calculation of a lease payment, as I will explain later. Simply, the lower the purchase price, the lower your payment. This may also be referred to as theCapitalized Cost of a lease, but is only one part of it.

There are many resources on the Internet to assist with negotiating a competitive purchase price. See the section on Internet Resources for some of the best.

When leasing a new car, negotiate the selling price with the dealer before letting them know you are considering leasing it. You will likely get a better deal.

Step 3: Choose the length of your lease
This question is easily answered by looking at how long you’ve kept your last few vehicles. Don’t justify reasons for selecting a longer term just to get a lower payment.The idea is to make the process of getting each new car hassle free and cost effective.Terminating a lease early can be difficult and costly, so choose the term that you know is right for you.

Step 4: Decide how many miles per year you will drive
There are two ways to look at the mileage option. The first is to choose the mileage that is closest to what you have driven over the past several years. This is the safest option.

The second option is to select the lowest mileage option and expect to pay the excess mileage penalty at the end of the lease term. It may seem unreasonable to choose this option, but paying the excess mileage penalty, if there is one, at the end of the lease can save sales tax. Additionally, selecting a lower mileage option provides a naturally higher residual value which results in a lower monthly payment. This will be explained further in the publication.

If you think you drive too many miles each year to lease a car, you are incorrect. You may have to pay more than someone who drives less miles each year, but leasing is still a viable option.

Know what the mileage penalty is and budget for that payment at the end of your lease if you know you will be over the maximum mileage.

Step 5: Decide how much money to put down
The answer is none! Never put money down on a lease. Here’s a true story to explain why.

A customer once leased a Toyota 4Runner and put $3,000 down as a cap reduction. Five months later the vehicle was totaled in an accident. The owner of the car paid his deductible and his insurance company paid its portion of the lease payoff and Gap Insurance paid the remaining balance. The owner did not recover his $3,000 down payment. That money can never be returned.

If you want to lower your payment and have some cash for a down payment, I recommend you put the money into a simple savings account. Use a portion of it each month to help make your lease payment. If something happens to your car, you will be able to walk away from the lease and still have the leftover funds in your savings account.

Finally, any down payment on a lease is taxable.

Why should I lease?

Before we even attempt to answer this question, you need to decide why you are purchasing a new or used car and what driving habits you have. Choose which of the three leasing types below applies to you:

Type 1: I need a vehicle for my business.
This is probably the most popular reason people choose to lease. For a business or commercial lease, the payment can be listed as a monthly expense that can be deducted for tax purposes. It also doesn’t show up on your balance sheet as a liability.

Type 2: I always seem to have a car payment.
Most people that drive a car fall under this category and it’s one of the best reasons to lease. See if this sounds familiar:

You finance a car for a given term and, for whatever reason, you want or need to get out of it before you’ve made all of your finance payments. You consider selling the car, but realize you owe more than it's worth. Trying to trade your car into the dealership and come out even is difficult. That is called negative equity and this cycle can repeat itself indefinitely.

To break the cycle, you can lease that same vehicle for a shorter term than necessary to purchase the car. Likely, your monthly payments would be less and you would simply return the car back to the lessor at the end of the term and get another one.

You may be thinking: “But I want to own my car.” If that were true, then you should get a traditional loan, make all your finance payments and keep the car until the wheels fall off. But, if you buy another car immediately after paying off your original car, you still would have been better off leasing as stated above.

Type 3: I like to drive the latest new model.
If you want to change your car when new models and body styles hit the market, then leasing is perfect for you. It eliminates concerns that first-year cars will face recalls, you’ll tire of a certain type of car or that its market value will drop if its sales are less than expected.

Leasing gives you the opportunity to try a car out for a shorter period of time without exposing yourself to the negatives. When leasing, if the actual value does drop below market value then you are not stuck with the negative equity. Leasing gives you a guaranteed value for the vehicle at lease end (residual value).

In addition to the types above, there are other reasons leasing may be right for you:

Get more car for the money
Because leasing usually has a lower monthly payment than traditional financing, some people can choose to lease a more expensive car.

No down payment
Depending on your credit, leasing usually does not require a down payment. In fact, you will learn later on in this publication why you should NEVER put money down on a lease.

Lower sales tax
In most states you will only pay sales tax on the monthly payment and not on the whole purchase price. The higher the price of the car the more you will save.

Insider Introduction

Hello, I’m Tarry Shebesta, President of Automobile Consumer Services, Inc.

What you are about to read in this online publication is different from other leasing articles and guides. The information posted here is based on many years of real experience in dealing with consumer’s transportation needs.

As a certified lease consultant, I am often asked “why should I lease my car?” Well, my answer varies depending on each person’s situation, but there are many reasons why leasing may be right for you.

Many people have misconceptions about leasing because of a bad experience at a dealership or by reading a misleading article. Most dealership personnel are not trained on how to explain leasing. It’s commonly used as a tool for selling cars for a higher profit. This is unfortunate, as leasing can be an excellent alternative to financing or paying cash.

I will properly explain the ins and outs of leasing within the context of real-life situations. Once you have read through this publication you will have a real understanding of auto leasing and can apply what you’ve learned to your particular situation and take full advantage of the benefits of leasing.

In addition to this publication, you can rely on the certified leasing specialists at to help with your particular situation. To get free, one-on-one assistance, please call 1-800-223-4882.