Despite how common they are, car leases are actually very complex legal agreements. Lease documents are long and full of complicated language that can be difficult to navigate and understand. We’ve put together this short glossary of common terms used in leases to help you better understand how they work, what you pay for, and whether or not you’re ready to sign on the dotted line. www.kiboo.com

1. A Guide to Lease Agreements
How leases work and whether or not you’re
ready to sign on the dotted line
Despite how common they are, car leases are actually very complex legal
agreements. Lease documents are long and full of complicated language
that can be difficult to navigate and understand. We’ve put together this
short glossary of common terms used in leases to help you better
understand how they work, what you pay for, and whether or not you’re
ready to sign on the dotted line.
Acquisition Fee
An added fee you pay covers the cost of drawing up the lease & all other
paperwork.
Allowable Mileage
The number of miles you’re allowed to put on the car during the term of the lease. Most companies allow about
12,000 miles per year. If you go over your total allowed mileage, you’ll have to pay between 12-15 cents per mile.
Watch out; it adds up fast.
Bank Fee
A fee added by the leasing company to cover their costs.
Base Monthly Payment
This is the portion of your monthly payment that covers the car’s depreciation or, in other words, how much of the car’s
value you’re “using up” by driving it. The Base Monthly Payment plus interest plus tax is your total monthly cost for
leasing the car.
Capitalized Cost
The selling price of the car at the beginning of your lease including everything from the base price of the car to all the
extras that go along with it. This number is used a lot in leases to calculate all kinds of values and costs.
Closed End Lease
The most popular kind of lease in the US and the only kind you should enter into. It allows you to return the car after
the term is over and gives you the option to purchase it if you wish to. These kinds of leases require lots of insurance -
- usually more than you'd need to get if you bought.
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2. Depreciation
The loss of value of the car over time. Cars depreciate quickly: as soon as you drive it off the lot, its value drops
sharply because it’s no longer “new.”
Disposition Fee
A fee added by the dealership to prepare the car for resale after it’s returned. You may be able to negotiate this fee
out of your lease. If you go into your lease negotiation well prepared and confident, you can often get fees like this
one knocked off.
Drive-off Fee
This is the amount you pay in cash to drive off with the car. It includes fees from the DMV, all your leasing fees, plus a
security deposit. If you want to reduce your monthly payments and have extra cash on hand, you can also pay a cap-
reduction fee, which is just a lease version of a downpayment.
Early Termination
If you decide you no longer want the car or can’t afford your payments anymore, you can get out of the lease. But the
penalties for doing so make it very difficult for most people. If you can’t afford it, there are new companies online that
help people sell their leases to others.
Excess Wear and Tear
When you return your car at the end of your lease, you’ll be required to pay for any “excess wear and tear” that has
damaged the car outside of what’s normally expected after using it for a few years. The definition of excess wear and
tear is fuzzy on purpose; make sure you understand what they mean by it and that it’s spelled out clearly. Always have
a car washed & detailed before you return it: it can save you big.
Finance Fee
This is also called a Lease Charge or Rent Charge. It’s the additional money you pay on top of the value of the car
during the lease. The car loan equivalent is interest. This is how car leasing companies make their money.
Gap insurance
An essential and sometimes included kind of insurance that covers the difference between what the car is worth and
how much you owe on your lease in case it gets totaled. Gap insurance is a must. Check out our article about it here.
Lessee
The person who’s leasing the car. That’s you.
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3. Lessor
The company who’s leasing the car to you. Not necessarily the dealer or the car company, it’s whomever you make
your check out to each month.
Money Factor
This is the lease version of an interest rate and it’s used to calculate your monthly payments. To figure out how much
interest your money factor costs you, multiply it by 2,400. For example, a money factor of .0027 is equal to an interest
rate of 6.5%
MSRP
MSRP stands for Manufacturer’s Suggested Retail Price. It’s also called “sticker price.” This is the number dealers
will try to base your lease on. It’s also the number you should try to negotiate down. Dealers anticipate having to
bring this number down, so don’t be shy about asking for a better price.
Payoff or Buyout Amount
If you choose to buy the car after your lease, this is the amount you’ll have to pay.
Purchase Option
This is the option you’re given to buy your car after your lease is over. Ideally, you would have gotten a car loan and
bought the car from the get-go, because buying after leasing costs more in the long run.
Residual Value
This is what the lease company predicts the car will be worth after your lease is up. The higher the residual value of
the car relative to its price new, the lower your monthly payments will be.
Sales Tax
One of the great parts about leasing is the way you pay sales tax on your car. Instead of having to pay sales tax on
the value of the entire vehicle, you only pay tax on the part of the car’s value you use up during the lease. So if you
lease a car that costs $20,000 new in a state that has 7% sales tax and your lease costs a total of $8,000, you pay
only $560 in sales tax, instead of $1400.
Security Deposit
Just like a security deposit on an apartment you rent, you’re usually required to write a check for one month’s payment
upfront. The company will use this money in case they need to repair damage to the car when you return it. If they
don’t, you’ll get the money back.
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4. Subsidized or Subvented Leases
To get more customers to lease, companies have come up with two ways to lower monthly payments: they’ll either
lower the interest rate on the lease or they’ll artificially inflate the residual value of the car after the lease ends. These
are subsidized and subvented leases, respectively.
Term
The length of your lease. Most leases are 36 months long (three years). But shorter and longer-term leases are also
common.
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