Auto lease glossary

Before you shop for an auto lease, familiarize yourself with these terms so that you understand what’s being negotiated.

Allowable mileage: How many miles you can drive the vehicle over the life of the lease. There’s often a substantial penalty for exceeding the mileage.

Capitalized cost: The negotiated price of the car if you were to purchase it outright. Negotiating this price down will lower your lease payments.

Capitalized cost reduction: Amount of an incentive or cash the automaker is willing to put into the deal to sell the car. The customer will also sometimes make a cash down payment, which is a form of cap cost reduction.


Close-ended lease: This protects you from a drop in the resale value of the vehicle during the term of the contract. You return the car and walk away without owing a penny, regardless of what has happened to the car’s value. You still will be liable for unusual wear and tear and any excess miles.

Depreciation: The amount of value the car loses during the course of the lease. This is directly related to your lease payment.

Drive-off fees: How much cash you will have to pay to drive the vehicle off the dealer’s lot.

Early termination: A penalty or fee that must be paid to get out of the lease before the term is up


Excess wear and tear: Wear and damage to the vehicle beyond what would be considered normal for its mileage and age.

Gap insurance: It covers the difference between the actual value of the vehicle and the contracted residual value. It is especially important if the car is in an accident and the amount your auto insurance pays out is less than the expected residual value of the auto.

Invoice: A number often inaccurately cited as a dealer’s cost for a vehicle. It typically represents what a dealer might pay the manufacturer for the car before subtracting volume credits, incentives and other discounts.

Lessee: The consumer, or individual who is leasing the auto.


Lessor: The party — typically a bank or finance company — that is leasing the car to you.

Money factor: This is the interest rate you are paying on the car. It is expressed in a fraction of a percentage point. You can convert a money factor to an interest rate by multiplying by 2,400 regardless of the length of the loan.

Monthly payment: What a consumer pays to a finance or lease company for the vehicle each month. In leasing, be sure to include monthly taxes in that payment calculation. Taxes are sometimes omitted when the dealer quotes you a price.

MSRP: Manufacturer’s Suggested Retail Price — the sticker price for the vehicle before any additional options or expenses a dealer might add on. .


Open-ended lease: A lease in which the vehicle operator holds the risk for what the auto will be worth at the end of the term.

Payoff amount: This is how much you would have to pay at the end of the lease to purchase the vehicle from the lessor.

Residual value: The estimated amount the vehicle will be worth at the end of the lease term. Vehicles with high residual, or resale values, typically have lower lease payments than other autos in a similar price range.

Sales tax: The state and local tax paid. In a sale transaction it is based on the entire purchase price. When you lease a vehicle in California, you pay sales tax only on the monthly payment amount. Often, advertisements quote lease payments before the sales tax is added, making the payment seem lower than it actually is.


Security deposit: This is usually equal to one monthly payment

Term: The length of the lease, typically expressed in months.