Leasing has a language all its own - this guide from the Federal Reserve Board can help you understand "lease-speak."
Acquisition fee: A fee paid to the lessor when you initiate the lease transaction. Also called the documentation fee, processing fee or assignment fee. This usually covers administrative costs.Adjusted capitalized cost: The final lease cost after subtracting down payment, trade-in, rebates and other reduction payments plus any additions. This is the final capitalized cost.
Affiliated leasing company: A separate leasing corporation associated with an automobile dealership. An affiliated leasing company is different from a captive lease or finance company.
ALG: Automotive Leasing Guide, one of the industry standards for determining residual values.
Capitalized cost: The price of the car. This is the price you negotiate with the dealer. It can also include other service contracts and add-ons. Get an itemized list of what goes into the capitalized cost from your dealer.
Capitalized cost reduction: The sum of any down payment, trade-in allowance, rebate or dealer discount. This sum is subtracted from the capitalized cost to get the adjusted capitalized cost.
Closed-end lease: A "walk-away" lease in which you are not responsible for the difference between the estimated residual value and actual value of the car at the end of the lease. Any loss is borne by the lessor, and any profits are retained by the lessor.
Depreciation: Difference between the adjusted capitalized cost of the vehicle and its estimated residual value. This is an estimate of the decline in the car's value over the term of the least and a major part of your monthly payments.
Disposal or disposition fee: A fee charged by the lessor to cover the costs of preparing the car for resale or auction at the end of the lease. This fee is waived if you buy the car you were leasing.
Early termination fee: A fee charged by the lessor if you terminate the least before the full lease period. This fee covers administrative costs, the lost profit from your monthly payments and other direct losses. In addition to this fee, you may also be responsible for the remaining monthly payments.
Excess mileage charge: Fee levied by lessor for miles you drive over the permitted mileage during the lease. The mileage charge usually varies between 10 cents and 25 cents per mile.
Excess wear and tear charge: Money charged by the lessor to repair any damage and bring the car up to the standard expected from normal use and maintenance. The dollar amount of excess wear and tear becomes your responsibility.
Gap insurance: Insurance you buy in addition to your usual car insurance. In the case of a total loss, gap insurance covers the difference between the amount you still owe on the lease and the amount your car insurance will pay for the loss. Early in the lease, the car is depreciating faster than you are paying it off, so you really do need gap insurance.
Hard-adds: Dealer-installed options on the car that can be added to the MSRP for residual computation. Examples of hard-adds would be a sunroof or CD player.
Kelly Blue Book: A service that provides values for used vehicles.
Late charge: Amount charged on a past-due payment. Can be a percentage of lease payment or a fixed dollar amount.
Lease charge: A part of the monthly lease payment to cover the cost of borrowing for the leased car, overhead and other charges. This is similar to a finance charge on a loan.
Lease rate (or money factor): The factor or number used by the lessor to determine the lease charge portion of your monthly payment. This may be given as a percentage. If an ad has a lease rate in it, it must also say: "This percentage may not measure the overall cost of financing this lease."
Mileage allowance: The fixed mileage limit for the lease. If you drive over this limit, there will be an excess mileage charge.
MSRP: Manufacturer's suggested retail price, sometimes called sticker price. The federally mandated retail window sticker price.
Net lease: A lease in which the lessor provides only the financing and you are responsible for all insurance, service, maintenance and related operating expenses. Most car leases today are net leases.
Open-end lease: A basic lease agreement in which you assume financial responsibility for the difference between estimated residual value and the actual value of the car sale at lease end. The term of an open-end lease is usually variable. In the case of a consumer lessee, this risk is limited by the Consumer Leasing Act.
Purchase option: Allows you to buy the leased car according to certain terms spelled out in the lease.
Rent or rent charge: The same as the lease charge. This charge covers the cost of borrowing for a leased car, overhead and other charges. This is similar to a finance charge on a loan.
Residual value: Estimated value of the car at the end of the lease term. Also known as termination value or estimated end of lease wholesale value.
Security deposit: An amount collected by the lessor at the beginning of the lease term to help ensure your full compliance with the provisions of the lease agreement - usually refundable at lease end. This may e considered the last month's payment, in which case it is not returned to you.
Single payment lease: A lease where the sum of the monthly lease payments is paid in advance. Usually reduces lease charges on the lease.
Soft-adds: Dealer-installed additions and options to a car that cannot be utilized in establishing a residual value for the lease (for example, undercoating, fabric guard).
Straight-line accrual: The accrual of lease income such that the amount of unearned income and paid-in depreciation are constant each month, producing a low yield for the first half of the lease (when the balance is the largest) and a high yield for the second half (when the balance is smallest).
Subvention or subvented lease: A lease that is subsidized either by the manufacturer or the finance company; for example, when a car manufacturer pays a sum to its captive finance company to lower the rate of leases for that car. Subventing lowers the cost of the lease to you.
Use tax: A tax, analogous to a state or local sales tax, required to be paid on the use of an asset, usually by the lessee. This is usually shows on a lease contract as a sales/use tax.