If you are anything like me, you are just as confused about the leasing process, as you are about the appeal of professional wrestling. It’s easier to understand buying a house than it is to comprehend all the leasing jargon. So let’s simplify the process by defining some of the more imperative terms of leasing.
- Closed-end Lease – The lessee may return the vehicle at the end of the lease period with no further financial obligations. That is, of course, if the lessee has complied with all the terms of the lease.
- Open-end Lease – The lessee is responsible for the difference between the residual value and the realized value at the end of the lease period. The lessee may obtain a refund if the realized value is greater than the residual balance.
- Subvented Lease – This is a subsidized lease by the manufacturer or other lessor. These usually come with lower monthly payments, by utilizing a higher residual value than other lessors.
- Realized Value – This represents the value of the vehicle at the end of the lease. Check the lease agreement for individual definitions.
- Residual Value – This value is given to the vehicle at the beginning of the lease. It also is used to determine the depreciation and other amortized amounts that go into determining the monthly lease payment.
- Capitalized Cost – This is the negotiated price of the vehicle, including any amounts you agree to include, such as fees, insurance premiums, service contract premiums, or prior vehicle loan or a lease payoff. This term also may be referred to as the Gross Capitalized Cost. The capitalized cost also may be reduced through any cash payments, trade-ins or rebates, giving you the term Capitalized-Cost Reduction.
- Adjusted Capitalized Cost – This term is used to define the outcome of the capitalized cost and/or capitalized-cost reduction.
- Gap Coverage – This insurance covers the difference between the payoff of the lease and the amount covered by other insurance coverage, if the vehicle is stolen or damaged during the lease period.
- Disposition Fee – This fee is charged by the lessor, if the lessee doesn’t purchase the vehicle at the end of the lease. This is defined in the agreement.
- Acquisition Fee – This fee is charged by the lessor to cover administrative costs. It can be paid for up front or included in the gross capitalized cost.
- Mileage Allowance or Mileage Limit – This represents the total amount of mileage the vehicle may be driven, without being nabbed for additional miles.
- Early Termination – End the lease early and receive an Early Termination Charge, an added fee. Lessor and lessee should agree upon this charge or fee at the beginning of the lease. An Early Termination Payoff is the total amount the lessee owes if an early termination is executed, prior to subtracting any credit for the value of the vehicle.
- Purchase Option – This defines the lessee’s right to purchase the vehicle, during or at the end of the lease period, as indicated in the lease agreement. If you make the purchase, you also will be charged a Purchase Option Fee, which is added to the purchase price.
These are the terms you need to understand and get used to hearing before attempting to dive into a leasing agreement. Once you have these terms broken down and explained, they aren’t as intimidating, and it can mean the difference between sinking or swimming in the pool of the leasing language.