Basic Car Leasing Jargon You Should Know

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - February 17, 2021

Leasing is quite different from vehicle financing. Whether you’re new to the world of leasing or you’re simply looking to compare your options, you should know some leasing jargon so you can better understand the process and what you’re paying for.

Car Leasing Jargon for Beginners

Leasing terms and lingo can be foreign to people who’ve never leased. The way the cost of a lease is calculated is pretty different from auto financing, too, and it can be overwhelming the first time you look over a leasing contract. Before you jump into a lease, here’s some leasing-specific jargon you should know:

  • Lessee – The person who leases the vehicle.
  • Lessor – The leasing company. They own the car and hold the title.
  • Depreciation – A vehicle’s loss of value over time. Influenced by things like mileage, age, and wear and tear. Makes up the majority of a lessee’s cost.
  • Residual value – The projected value of the vehicle at the end of the lease term. Depreciation and residual value go hand in hand.
  • Capitalized cap cost – Also called cap cost, it’s the negotiated selling price of the car with fees rolled into the monthly payment. This is what you pay down with your monthly lease payments.
  • Cap cost reduction – Anything that lowers the cap cost, such as a down payment, trade-in equity, or rebate. A cap cost reduction lowers your monthly payment.
  • Money factor – Leasing interest rate. Your credit score determines your money factor.
  • Security deposit – A deposit made by the lessee. If the vehicle is damaged or has excessive wear and tear when it’s returned, the security deposit covers what it can. A security deposit is typically around the same amount as your expected monthly lease payment.
  • Acquisition fee – Also called the inception fee, it’s what leasing companies charge to arrange the lease. Not all leasing companies have this fee, and it’s similar to a documentation fee for car buying. The fee could be around $400 to $700, and it’s typically non-negotiable.
  • Disposition charge – Also called the termination fee, it covers the expenses of cleaning and preparing the returned vehicle to be sold as a used or certified pre-owned (CPO) vehicle. This fee is usually around $250.

Because you don’t own the leased vehicle, leasing companies have mileage restrictions, charge extra for excessive wear and tear, and require that you carry full coverage auto insurance. If you’re rough on the vehicle, you can expect extra fees because most leasing companies prep off-lease cars to be sold as CPO vehicles once they're returned.

Car Leasing 101

Leasing a vehicle is similar to renting an apartment – you only pay for the time you use it. Consider leasing a way to rent a vehicle for a set amount of time, and usually the option to buy it at the end of the term.

Most leasing companies offer leasing only on brand new vehicles. Terms are typically around two to three years, and most lessees choose to lease because the monthly payments are typically more affordable than financing a brand new car.

The cost breakdown of leasing is quite different from financing since you’re not buying the vehicle. Leasing companies determine the cost of a lease by estimating residual value, or what the car is likely to be worth at the end of the lease. You’re paying for the depreciation of the vehicle, not its entire value, which is why leasing is usually more affordable month to month than financing.

Most lessees are looking to get the nicest vehicle they can for the lowest monthly payment. Many lessees also look forward to getting a new vehicle every couple of years too.

Once your lease is over, you can return the car to the dealership and lease again, buy it, or just walk away. Many lessees continue to enter lease agreements year after year because many leasing companies offer loyalty programs and discounts for repeat customers.

Does Leasing Make Sense for You?

Leasing can be a great deal for many borrowers – and for others, not so much. Take these points into consideration before you lease a vehicle:

  • Mileage – If you drive less than 12,000 miles a year, leasing could make a lot of sense to you. Most leasing companies have mileage allowances between 10,000 to 15,000 a year. The average driver tacks on around 13,500 annually, according to the U.S. Department of Transportation's Federal Highway Administration. If you clock a lot of miles on the road, financing might be more in your wheelhouse.
  • Wear and tear – Rough housers that are a little tough on their vehicles may not be a good fit for leasing. Excessive wear and tear on a leased car mean extra fees. If you accrue more damage than what your security deposit can cover, those fees typically need to be paid right away upon return. If you ride in your car with your pets, young kids, or keeping a clean vehicle is difficult for you, then leasing could be costly.
  • Credit score – Most leasing companies prefer borrowers with good credit scores. If your credit score is around 660 or below, you may have difficulty getting approved for a lease. Your money factor fees could cost you more as well if you have less than perfect credit.
  • Modifying – Drivers that like to modify their cars are out of luck if they're driving a leased vehicle. Leasing companies want their car returned in the same or similar condition as when you drove it off the lot. If you install a new sound system, different rims, or a lift kit, it could mean voiding the manufacturer’s warranty and possibly losing your security deposit.

If you have a short work commute, good credit, or no trouble keeping a car in good condition, then leasing could make a lot of sense. If not, getting an auto loan may make more sense for your situation.

Vehicle Financing

When you finance a car, you’re paying for the entire negotiated selling price, interest charges, taxes, and title and registration fees if you roll it into the loan. You get your name on the title, so you can modify and drive as much as you want. There’s no need to be concerned about excess mileage or excessive wear and tear fees because it’s your vehicle. Once you complete the loan, you can drop full coverage auto insurance for your state's basic coverage if you want, and you’re done with monthly payments.

If you continue to lease every few years, you’re always going to have a car payment and be required to maintain full coverage auto insurance. Paying off your vehicle means more freedom as far as insurance coverage and modifying your car to your liking. Additionally, auto loans are usually much easier for bad credit borrowers to get into because there are more resources available.

There are dealerships signed up with subprime lenders that issue bad credit auto loans. Subprime is another word for bad credit, and these lenders are equipped to work with borrowers in tough credit situations. If your credit is worse for wear and you need a vehicle, financing with a subprime lender could be your ticket back on the road.

We’ve Got Car Connections

Whether you’re ready to lease or buy, CarsDirect has got all of your automotive needs covered. We’re always updating our car leasing deals, and we’ve created a network of dealerships that help borrowers with less than stellar credit.

To check out the current leasing deals available, click here.

To get matched to a dealer in your local area that’s ready to assist bad credit borrowers, fill out our free auto loan request form.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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