Understanding Car Leasing Terms is not absolutely necessary to secure a good deal on a car lease. On the other hand, lease jargon is not too difficult to understand, either. Here are a few of the most popular Car Leasing Terms you should know and a quick overview of their meaning. For a more detailed definition of the components of a car lease calculation, you can click on each of the car leasing terms below: MSRP, Factory (Dealer) Invoice, Capitalized Cost, Capitalized Cost Reduction, Residual Value and Money Factor.
MSRP is the Manufactured Suggested Retail Price of the car. It is no different than the suggested list or retail prices by manufacturers of consumer items and household goods. It is simply the suggested list price of the car that Ford, Honda, Toyota, etc., recommends. Click the link to learn more about MSRP and how it figures into car lease calculations.
Dealer Invoice is what the car dealer paid for the car. The difference between MSRP and Invoice is the profit margin or available discount the dealer has to negotiate the sale.
So, if the MSRP of a new Honda Accord EX is $29,000 and the Invoice is $26,000, the dealer has $3,000 available to work with you on discounts. Don’t expect much discounting from an Accord, by the way. The dealer will let you know what the invoice price is – just ask. You can also look it up on the internet, of course.
The capitalized cost is your negotiated, agreed-upon price of the car. If the dealer knocks $1,000 off the MSRP of the Honda Accord, your Capitalized Cost is $28,000.
Capitalized Cost Reduction
Also known as Cap Reductions, a Capitalized Cost Reduction is anything that reduces your monthly payments. These can come in the form of down payments, dealer incentives or factory rebates. The purpose of a Cap Reduction is to lower your payment.
The Residual Value is the value of the car after the term of your lease has expired. The residual is the original MSRP less the depreciation over the lease term. Japanese and German Cars, generally hold their value better than American cars, and therefore have higher residual values which makes them better to lease. The higher the residual value, the less you pay to finance the car. A car with a good history for resale value like Honda or Toyota should have a residual value of about 60% after 2 years, 44% after 4 years and somewhere in between after three. Most of a car’s depreciation occurs in the first two years, then declines slowly after that. American cars are closer to 32% residual value after 4 years. The Residual value is based on historical sales data, and so there is a certain amount of guessing involved by the dealer, particularly with new models which haven’t been on the street long enough to have a track record. This is why sometimes, the very latest model of your favorite car doesn’t quite have the attractive lease offer you might expect. The residual value is probably the single most important factor in leasing cars.
Lease Factor or Money Factor
The lease factor, otherwise known as money factor is simply the interest rate of the loan in leasing terms. The money factor, oddly is 1/2400 of the interest rate. For instance, if the interest rate on your new car lease is 8%, your money factor is .0033. So, when you’re looking at the terms of your car lease deal, and the dealer tells you the money factor is .0033, get your calculator out and multiply that number by 2400 to see what your actual interest rate is.
You can expect to pay the same or less for a new car lease as you would purchasing a new car. Generally, the shorter the term, the better the money factor or interest rate. This is why sometimes, very short period leases like 24 or 30 month terms actually have more attractive offers than 48 or 60 month leases. In fact, interest rates on the longer periods today have made 60 month leasing rather rare. Money Factor and Residual are the two things that determine how well a car will lease.
Simply, the number of months you will make payments on the car, 24, 30, 36, 42 and 48 are popular lease terms. Personally, Generally, a 36 month lease term is the most popular because it provides the best interest rate combined with the number of months required to make the very lowest, possible payment. Also, virtually all cars come with a 3-year minimum manufacturer’s warranty, so keep that in mind when you are negotiating terms. Personally, I don’t care for the 24 month lease because the cost of registration and taxes on new cars are so high that I don’t want to be paying for it every two years. Plus, two years is simply too short of a time period to enjoy a new car, considering there is still a full year or more left on the warranty. 36-42 months seems about right to me.
Additional Car Leasing Terms
In addition to these lease components, Monthly Car Lease uses a couple of additional values for rating the quality of car leases from month to month:
Car Leasing Terms Full Details
For more information on all of the components of Car Leasing, click each of the lease component links or visit the user’s guide below:
Definitive guide on leasing a car
Wondering whether or not leasing is right for you? Why Lease a Car