It is important that you understand a car lease before you sign up for one. A lease is another way of financing your vehicle.  Lease payments are determined by what the market value (estimated) of the vehicle will be at the end of the lease term.  The estimated, or "residual value", subtracted from the negotiated sales price is the amount that you pay through monthly payments plus interest on the declining balance and you also pay monthly interest on the residual value.

For example, let’s say that you are financing $15,000. You want to lease a vehicle for two years, and its residual value at the end of two years is estimated at $9,000. You would pay interest on the $9,000 for two years.  On the additional $6000, you pay interest and principal payments for two years.

This is similar to a balloon note.  On a balloon note, you pay a reduced monthly payment for the term of the loan with a final large payment, the balloon payment.  On a lease, you are not required to make the balloon payment.  You have an option to make the balloon payment and purchase the vehicle, or you can turn the vehicle back into the lessor at the end of your term.  The vehicle is used "in place" of the balloon payment.

Do you know how to negotiate a lease? Do you know the 8 hidden profit centers for a car lease that could save you up to $5,000?

The following is a list of leasing terms that will help you understand your lease contract:

Adjusted Capitalized Cost
This is the Capitalized Cost less the Capital Cost Reduction.  It is your negotiated price plus lessor's fees minus any cash down or  trade equity.

Capitalized Cost
This is the total of the negotiated price plus any fees to the lessor (May include sales tax in some states).

Capital Cost Reduction
Any down payment or trade equity that is subtracted from the Capitalized Cost.

Closed-end Lease
A lease contract in which the lessor assumes the risk for the vehicle depreciation.  If the cash value at the end of the lease is less than the depreciated value (or residual value), the lessor is responsible for the difference.  It is also called a "walkaway" lease, since at the end of a fixed term you can return the vehicle to the lessor or you may have the option to purchase the vehicle at a predetermined price.

Depreciation
The decline in value of a vehicle over the term of the lease. It is the difference between the Adjusted Capitalized cost and the residual value.

Excess Mileage
The amount of mileage on a lease vehicle in excess of the amount permitted on the lease.  You are usually charged a predetermined rate per mile over the mileage allowed by your lease contract.

Excess Wear and Tear
Vehicle damage that is beyond what is considered normal.  If the vehicle is returned to the lessor at the end of a lease term with more mechanical, body, paint, or interior damage than would be expected with normal car care, an excess charge usually will be charged to you (the lessee).  Terms are sometimes described in the lease contract.

Lease Term
The number of months that defines the life of the lease. It is usually more than twelve months, but not more than sixty months.

Lease Rate
The number used to determine the lease charge of the monthly payment of the lease.

Lessee
You (or) the individual or company that contracts for the use of a vehicle in a lease.

Lessor
The funding source that provides the use of a vehicle in exchange for monthly payments.  The source could be a bank, credit union, vehicle manufacturer, dealer, or a lease company.  They retain ownership of the vehicle during the term of the lease.

Maintenance Lease
A lease in which the lessor assumes some or all responsibility for the vehicle maintenance costs.

Open-end Lease
A lease contract in which you assume final responsibility for the depreciation of the vehicle over the term of the lease.  If the residual value of the vehicle is different than the actual selling price at the end of the term, then you are either assessed an extra charge or you will receive a refund.

Premature Termination
A provision in the lease that allows you to purchase the vehicle before the lease contract term is up.  There may be fees or penalties associated with an early termination.

Purchase Option
A provision in the lease that allows you to purchase the vehicle at the end of the lease term.

Residual Value
The actual wholesale value of the vehicle at the end of the lease.  This is       associated with the closed-end lease.  This is usually established by the lessor through a book that estimates future values.

Security Deposit
An initial sum held on deposit by the lessor to take care of any excess charges at the end of your lease term.

Yield
A lease is actually two loans combined; a loan on the declining value of the vehicle; and a loan on the residual value.  The combined interest on these two loans is the yield.