Car lease terms explained

A car lease uses its own words for the price, the payments and the end of the term.

The words for the price

The gross capitalized cost is the price of the car in the lease, plus any acquisition fee. The capitalized cost reduction is your cash down payment, any trade-in allowance and any rebate, added together. Subtract it from the gross figure and you get the adjusted capitalized cost. A larger reduction lowers the monthly payment.

The rent charge is part of each monthly payment. It works like the interest on a loan, and it's set at the start of the lease from the capitalized cost, the residual value and the length of the lease. Most leasing companies figure it using a money factor. The rest of the base payment is the car's expected loss in value over the lease.

The words for the miles

Most leases limit how many miles you can drive before you pay extra, usually 10,000 to 15,000 miles a year. The limit exists because the residual value, what the car is expected to be worth at the end of the lease, assumes a certain mileage.

The words for the end

When you return the car, you pay for any miles over the limit and any wear beyond normal, plus the disposition fee if your lease lists one. The leasing company usually decides what counts as excess wear, and the lease lists any standards it uses.

A purchase option lets you buy the car at the end instead of returning it, if your lease has one. Ending a lease early is different, and early termination charges can be large.

Gap coverage

Gap coverage pays some or all of what you still owe on the lease if the car is stolen or totaled. Some leases include it at no extra charge. Your lease papers say whether yours does.

An annotated example

What to do next

Find your lease and look for the mileage limit, the disposition fee, the purchase option and whether gap coverage is included. Write each one down with the date the lease ends. Most leases run two to four years. Set a reminder a few months before the end date.