GLOSSARY

Acquisition Fee

Charged by leasing companies for arranging a lease to help cover any associated costs. These fees can be collected upfront or rolled into the overall cost of the lease. An Acquisition Fee is the lease contract equivalent of a standard loan’s Bank Fee or Origination Fee. 

Adjusted Capitalized Cost

This is the amount after any credits or reductions have been applied stemming from trade-in allowances, down payments, and/or rebates. It represents the actual amount a lessee will be financing over the term of the lease. Also known as Net Capitalized Cost; see definition for Capitalized Cost.

Amortization

The method of retiring a standard auto loan. In it, a steady stream of constant payments pays down the loan principal and interest. The first payments are comprised almost entirely of interest; the last almost entirely of principal.

Amount Due at Lease Signing

The total amount due before the consumer can take delivery of a leased vehicle. It can include any security deposit, title fee, capitalized cost reduction, monthly payments paid at signing and registration fees.

Amount Financed

The principal that is financed. It could include the cost of the vehicle, the cost of an extended warranty, the cost of credit life insurance and any other items rolled into the payments.

Annual Percentage Rate (commonly abbreviated as APR)

A yearly rate of interest that includes fees and costs paid to acquire the loan. Lenders are required by law to disclose the APR. The rate is calculated in a standard way, taking the average compound interest rate over the term of the loan, so borrowers can compare loans. 

Balloon Payment Loan

A type of loan in which a consumer agrees to pay a large, pre-determined amount at the end of the term. This type of financing mimics a lease contract in many ways, but the consumer owns the vehicle as opposed to the lessor.

Base Monthly Lease Payment

The monthly lease payment before any applicable taxes or fees have been added to it. It is computed using two factors: the total lease term Depreciation and total lease term Rent Charge. Each factor is converted to a monthly figure and both components are added together.

Base Price

The cost of a car without options or add-ons. This price includes standard equipment and the manufacturer's warranty and is printed on the Monroney Sticker (commonly known as the window sticker or Sticker Price).

Blue Book

Formally, it refers to the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. Commonly, "the blue book price" can refer to a price looked up in one of the many pricing guides that are issued by various organizations. Pricing guides are now found online in most cases as opposed to in a printed format. 

Capitalized Cost or Cap Cost

A leasing term that refers to the agreed-upon sales price of the vehicle, including any fees, taxes, or other negotiated items. The lower the Capitalized Cost, the lower the monthly lease payment. The Capitalized Cost is negotiable under most circumstances and can be lowered additionally using a Capitalized Cost Reduction or less formally known as a Down Payment.

Capitalized Cost Reduction

A reduction in the capitalized cost stemming from cash down, trade-in equity, factory rebate, or dealer discount. Often shortened to Cap Cost Reduction or Cap Reduction and in some cases more generically as a Down Payment.

Closed-End Lease

The most common type of car lease. The lessee may return the car at the end of the lease term, pay any end-of-lease costs, such as the disposition fee, and the lease agreement is over. In a closed end lease, the lender assumes the risk of predicting the value of the vehicle (its residual value) at the end of the lease's term. 

Co-Lessee

An individual who signs the lease with another individual or company and is responsible for compliance with the lease terms in the event the lessee does not fulfill his or her obligations. A co-lessee may be utilized to help obtain credit approval or simply to put two people such as a husband and wife on a lease together. See also Lessee. 

Consumer Leasing Act

A federal law passed in 1976 and amended in 1996 that spells out the requirements for disclosure of leasing costs and terms. Generally, the law covers vehicles leased for personal or family use; for periods more than four months; and for a total contractual obligation of less than $71,900 (cap adjusted annually).

Cosigner 

An individual who has equal legal responsibility for paying off the loan without having full ownership of the vehicle. A cosigner is utilized when the primary borrower’s credit history is insufficient for loan approval independently or for obtaining more favorable credit terms. 

Credit Life Insurance

A type of life insurance that helps repay the loan or makes outstanding lease payments if the consumer becomes disabled. It is optional coverage. When taken out, the cost of the policy is typically rolled into the amount financed.

Current Lease Buyout

This is the figure that one may purchase a leased vehicle for prior to scheduled lease termination. Typically, this fee is calculated by adding the residual value, the total of the remaining monthly payments, and any early termination or purchase option fees, which may apply. In some instances, this fee is negotiable with the Lessor.

Dealer Holdback 

A portion of the vehicle’s invoice price that the manufacturer pays back to the dealership post retail sale. Amounts vary by manufacturer and range from zero to three percent of MSRP. 

Dealer Incentives

Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.

Dealer Invoice

The amount that a dealer is invoiced by the manufacturer for a vehicle, any options, and transportation of the vehicle to the dealership. 

Dealer Preparation or Dealer Prep

An additional charge to consumers that dealers impose on buyers. There are exceptions, but it often represents pure profit for dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.

Dealer Sticker Price

The price the dealership is asking for the vehicle, which may include additional markups, preparation fees, dealer installed equipment and/or accessories, and potential market adjustments in addition to the Manufacturer’s Suggested Retail Price (MSRP) listed on the Monroney Sticker.  

Default

The condition that occurs when a consumer fails to fulfill the obligations set out in the loan or lease.

Deposit

An amount of money held by the dealer to hold a deal for a period of time until the paperwork can be completed and delivery can be taken of the vehicle. Deposits are usually applied toward the purchase or lease of the vehicle ultimately.

Depreciation

An asset's decline in value over the course of its useful life. In an automotive lease, a charge for depreciation is the primary part of a consumer's monthly payment.

Destination Charge

The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.

Direct Financing

Financing that involves securing a loan directly from a lender, such as a credit union or bank, as opposed to Indirect Financing through a dealership. 

Disposition Fee

A fee charged by some lessors at the end of a lease. If a leasing company charges a Disposition Fee, the amount will be included within the original lease documentation signed at delivery.  

Documentation Fee or Doc Fee

A charge to cover the dealership’s costs related to any clerical, paperwork, or processing expenses associated with the sale of a motor vehicle. These fees can vary greatly from state to state and typically not easily negotiable due to potential discrimination concerns.

Down Payment

A payment of cash or trade-in equity that reduces the amount of a vehicle's total purchase price that is financed.

Due At Signing - Lease

Refers to the total amount you are required to pay in advance of a Lease and is typically collected when you sign the lease agreement to take possession of the vehicle. This amount can include various fees and costs, such as Capitalized Cost Reduction, Sales Tax and/or Use Tax, Registration Fees, Acquisition Fee, the first month’s payment, and potentially a Security Deposit. Also known as Up-Front Costs - Lease. 

Early Lease Termination

The termination of a lease before its scheduled maturity date. 

Early Termination Charge 

Charges that the lessee must pay if the car is turned in early before the term of the lease is over.

Equal Credit Opportunity Act

A federal law that prohibits discrimination in credit transactions based on race, color, religion, national origin, sex, marital status, age, source of income or the exercise of any right under the Consumer Credit Protection Act.

Excess Mileage Charge

A charge per mile for miles driven over the amount contracted in the lease. This charge may vary not only by lessor, but also by the number of miles contracted per lessee.

Excess Wear and Tear

Potential additional charges if the vehicle is damaged or has wear beyond what is normally expected for the lease term. Examples of Excess Wear and Tear include cracked windshields, body panel issues, broken or missing equipment, damaged interiors, etc. 

Excess Wear Charge

Most leases set limits for wear and tear on the car during the lease term. The lessee must pay charges for exceeding the limits when turning in the car at the end of the lease.

Extended Service Contract (ESC)

An agreement purchased to supplement the factory warranty of a vehicle used to cover against breakdown and mechanical failures. These agreements can prove valuable; however, they vary widely in coverage, and cost. The terms and conditions of a particular contract should be reviewed carefully.

Extended Warranty

Also known as service contract. A contract that covers certain vehicle repairs or problems after the manufacturer's or dealer's warranty expires. Extended warranties are sold by car manufacturers, dealers, and independent companies.

Fair Market Value

The amount that a willing buyer would pay to a willing seller under normal circumstances. The number is dynamic, and changes based on various factors such as the vehicle’s age, mileage, and overall condition.  

Federal Consumer Leasing Act Disclosures

These disclosures outline the fundamental aspects utilized to calculate the lease and include any notifications of fees or penalties, which may be assessed by the leasing company at lease termination. Federal Consumer Leasing Act Disclosures will be found on all lease contracts.

Finance Lease

See Open-End Lease.

Gap Insurance

A type of insurance available to auto finance customers on both loans and leases. It pays the difference between what you owe and what the vehicle is worth in the event the vehicle declared a complete loss by the insurance company.

Gross Capitalized Cost

This is the initial price of the vehicle including required fees plus any optional products or services selected or negative trade balance prior to all credits or reductions such as trade-in equity, down payments, and/or rebates. It is essentially the total cost of the vehicle including any related expenses rolled into the lease.  

Holdback

See Dealer Holdback.

Indirect Financing

Refers to scenarios where the dealership arranges financing for a customer, typically through a third-party lender like a bank or credit union.  

Insurance

In automotive vehicle terms, a contract in which one party agrees to pay for another party's financial loss resulting from a collision, theft, or other damage. Leases and loans will require consumers to maintain a certain level of insurance.

Interest

The cost or expense of borrowing money, expressed as a percentage. 

Invoice Price

The manufacturer's initial charge to the dealer for purchasing a new vehicle. The price may not be the dealer's final cost because dealers receive rebates and other incentives from the manufacturer. The invoice price always includes freight, also known as the destination charge.

Late Charge

A penalty or fee assessed by an automotive lender to the borrower for failing to pay their payment in full by the contractual due date or within a specified grace period post due date.

Lease

An agreement, usually for two to five years, that allows the automotive consumer known as the lessee to drive a vehicle for the term of the contract in exchange for payment. The lessee does not own the vehicle, and taxes are typically assessed differently than they would be in a purchase scenario. Note that the lessee is generally responsible for insurance, maintenance, repairs, and registration for the vehicle throughout the term of the contract.  

Lease Assumption

Refers to an outside party taking over a lease from the original lessee under the terms and conditions outlined in the original contract by the lessor (leasing company). Typically, a lease assumption refers to a transfer where the original lessee walks away from the lease without any future liability and the new lessee assumes all liability for the lease contract.  

Lease-End Buyout

This is the originally contracted amount that the lessee can purchase the leased vehicle for at scheduled lease termination. This figure consists of the Residual Value plus the Purchase Option Fee if applicable. In some cases, this figure may be viewed as a worst-case scenario because many leasing companies will negotiate this amount with the lessee to hedge potential losses associated with the sale of the vehicle through other channels.

Lease Charge

See Rent Charge.

Lease Extension

The continuation of an existing lease, at the original monthly payment, usually on a month-by-month basis.  

Lessee

The primary driver of the vehicle who signs the lease and is responsible for compliance with the contracts terms and conditions set forth. The lessee can be an individual or company.

Lessor

Also known as the leasing company. The owner of the leased vehicle and the entity who sets forth the lease terms and conditions. Typically, the lessor is a bank or vehicle manufacturer's financial subsidiary.  

Manufacturer’s Suggested Retail Price (MSRP)

The price shown on the window sticker of a new vehicle and the price manufacturers recommend as a selling price for it. It includes all factory options and the Destination Charge. See Monroney Sticker and Sticker Price.

Market Value

See Fair Market Value.

Mileage Allowance or Mileage Limitation

The number of miles, specified in a lease, that a car may be driven over the life of the lease before an additional Mileage Charge or Mileage Penalty is incurred by the lessee.  

Mileage Charge or Mileage Penalty

A fee charged when a lessee drives more than the pre-determined annual mileage limitation specified in the lease contract. Generally, the penalty is charged per mile over the limit, and the amount varies per lease agreement. 

Money Factor

A leasing term that expresses the cost of borrowing. Like the interest rate paid on a conventional car loan, but it is expressed as a difficult-to-understand fraction. To convert the money factor to a recognizable interest rate, multiply it by 24. For example, a money factor of .00345 x 24 = 9 percent interest. The money factor can be negotiable, and consumers who lease a new car should look for a money factor close to the current interest rate charged for new-car loans.

Monroney Sticker

The sticker on the car window that shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price (MSRP), the manufacturer's destination charge, and the car's fuel economy (mileage). This label is required by federal law, and it is only removed when the car is sold by the dealer. Named after A.S. "Mike" Monroney, a longtime Oklahoma congressman who wrote the Automobile Information Disclosure Act.

Sales Tax

A tax levied on the sale or lease of a motor vehicle. State Sales Tax varies by rate, calculation, and the application methodology between types of financing. These variances can lead to significant differences in how much tax must be paid by residents of one state in relation to another. Generally, less taxes are due in a leasing scenario because the lessee does not own the vehicle, and they will only be using it for a relatively short period.

Use Tax - Lease

A tax on the use of a vehicle within a state regardless of where it was purchased. Often states that do not impose Sales Tax on leases charge a Use Tax instead. Use Tax is generally assessed periodically and can be collected directly or built into the lease payment upfront. 

Multiple Security Deposits - Lease

Sometimes leasing companies permit lessees to pay additional Security Deposit(s) to reduce the Money Factor utilized to calculate the lease by a predetermined amount ultimately reducing the monthly payment. See Security Deposit - Lease 

Negative Equity

Refers to situations where the amount owed on a loan or lease is greater than the Fair Market Value of the vehicle. This phenomenon is not uncommon amongst automotive borrowers and is typically more significant early term with various types of financing. Negative Equity can be offset by cash and trade equity or potentially rolled over to new financing.  

Net Capitalized Cost

See definition for Adjusted Captilized Cost.

Odometer Statement

A federal form used to disclose a vehicle's mileage in connection with a transfer of vehicle ownership. A specific lease odometer statement is utilized in various lease transactions including terminations as well as Lease Assumptions and Transfers of Equity. Individuals should be aware that failure to complete a disclosure or false statements could result in fines or imprisonment.

Open-End Lease

A type of lease agreement where the lessee assumes the risk of the vehicle’s Depreciation and Residual Value at the end of the lease term. This means the lessee is responsible for any difference between the vehicle’s Fair Market Value and the Residual Value when the lease ends. As a result of the lessee taking on the end of lease risk, the payments are generally lower than for a Closed-End Lease. Sometimes called a Finance Lease.

Preparation Charges

See dealer preparation.

Principal

In a standard auto loan, the amount financed which is due on a certain date and usually paid off through an amortized loan. Also see amortization.

Purchase Option

The contractual amount that the lessee may pay the lessor at the end of the lease to purchase the vehicle. The Purchase Option price consists of two components the Residual Value and a Purchase Option Fee when applicable.

Purchase Option Fee

A fee that may or may not be charged by the lessor to cover costs associated with the selling of a leased vehicle to the original lessee at lease termination. 

Rebate

A manufacturer's financial incentive, generally cash back and offered to encourage the purchase or lease of a specific model or trim. 

Registration Fees

Mandatory payments made to a state and local governments to legally register and operate a vehicle. Fees will vary by state and are typically collected when initially registering a vehicle and then periodically thereafter (generally annually). Properly registering a vehicle is essential for obtaining license plates. These fees are designed to help states track vehicle ownership as well as fund road maintenance and infrastructure projects.  

Rent Charge

The interest paid on a lease. It can be thought of as the equivalent of interest on a conventional installment loan. It is one of the factors used in establishing Base Monthly Payment. Also known as the Lease Charge.

Required Vehicle Insurance

Refers to the liability and physical damage policy requirements set forth by the lessor. Not only will specific dollar amounts be set but also limits on deductibles will be included. Most contracts contain provisions for the lessor to be provided proof of insurance on request and the ability to collect for minimum insurance requirements if necessary.

Residual Value

The original estimate of the wholesale value of the leased vehicle at scheduled lease maturity. This value will vary depended on miles contracted in lease. You may or may not be able to purchase the vehicle at lease end for residual value because some leasing companies charge an additional Purchase Option Fee.

Rule of 78 - Financing

This is a method used by lenders to calculate interest on loans, particularly in precomputed interest auto loans. It assigns a weight to each month of the loan, with earlier months having more weight, resulting in a higher interest charge upfront. While the total interest paid remains the same as with a Simple Interest Loan, paying off this type of financing early can be more expensive for the borrower. 

Security Deposit

An upfront payment held by the leasing company that helps ensure their financial interest is protected. Similar in amount to one month's payment typically and will often be refunded when the lease is over. Can be used to offset potential lease end costs stemming from over mileage, wear and tear issues, turn in fees, and/or outstanding payments.  

Service Contract

See Extended Service Contract (ESC) or Extended Warranty.

Simple Interest Loan

A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments will reduce the loan's principal and cut the total interest paid over the life of the loan.

Sticker Price

The price shown on the window sticker of a new vehicle and the price manufacturers recommend as a selling price for it. It includes all factory options and the Destination Charge. See Manufacturer’s Suggested Retail Price (MSRP) and Monroney Sticker.

Term

The duration or length of the loan, lease, or other type of financial arrangement utilized to obtain a vehicle usually expressed in months. 

Termination Fee

See Disposition Fee.

Title

A legal document that proves ownership of a motor vehicle and is used to transfer ownership when the vehicle is sold. Titles are generally issued by States, and their key aspects include pertinent vehicle, owner, and potential lienholder information.

Trade-In Value

The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle.

Transfer of Equity

Like a Lease Assumption, however, the original lessee usually remains responsible or liable in some way shape or form for the original lease contract.

Up-Front Costs – Lease

See Due At Signing - Lease.

Upside-Down

A position that consumers find themselves in when the outstanding balance of a loan or lease is higher than the current fair market value of the vehicle. It is most common in the early years of a loan or lease, when the vehicle is depreciating rapidly but the balance owed remains very high. Also see Depreciation and Negative Equity.

Vehicle Identification Number (VIN)

The code assigned to a specific vehicle by the manufacturer. Each is unique and appears on the vehicle's registration and title. Modern vehicles in the US use a 17-character alphanumeric code that acts as a combination of a model and serial number.  

Warranty

A guarantee, typically provided by the manufacturer or a third-party insurer, that covers the cost of repairs or replacements for certain vehicle components or issues within a specific timeframe and/or mileage limitation.