Car Lease: Jargon Explained and Made Simple for You

Classic car

Leasing a car is hard. But it doesn’t have to be. Before you decide to visit your nearest dealership, it’s a good idea to do a bit of homework first so you won’t get taken advantage of before you commit and sign your name on the dotted line.

There’s nothing salespeople love more than for you to walk into those doors without any clue as to what that car leasing jargon even means. To avoid getting more than you have bargained for, do yourself a favor and brush up on these terms.

You’ll be pleasantly surprised to know that they aren’t as confusing as you thought they would be. With a little effort and time, you can immediately educate yourself and understand what you’re getting into before you decide to go for a car lease.

To help you better understand the jargon related to car leasing, below are common terms along with their respective definitions.

Acquisition Fee

Also known as an initiation fee, this is what you will pay at the start of your lease. Some companies may charge this, and it’s typically non-negotiable. You can choose to pay it upfront, or it can be bundled with your monthly payments.

Capitalized Cost

This is the selling price of your vehicle. Do your best to negotiate it as best as you can because this may determine how much or how less you will pay every month.

Capitalized Cost Reduction

This is the amount you can put down to reduce the cost of your lease. In simple terms, your down payment. The more you decide to pay initially, the lower your monthly bills will become.

Gap Insurance

Guaranteed Asset Protection or GAP insurance means the difference between what you owe on the lease and what the car is worth is covered in the event your vehicle gets stolen, or you get in an accident.

Mileage Allowance

This lets you know how many miles you can drive your vehicle during the term of your lease. It helps to know how much driving you need to do each day, so you won’t have to pay the penalty for the extra miles you accumulate.

Money Factor

This is just a fancy term for interest rate the leasing company is using. It can confuse many people, and car salespeople love this because they can sneakily add profits. If you see a number like 1.35, which is your money factor, for example. Just multiply it by 2.4 to get the estimated annual percentage rate. So, 1.35 multiplied by 2.4 would be a 3.4% interest rate.

Residual Value

This is what your vehicle would be worth when your lease ends. It is also the price that you can buy your car at the end of the term. You will benefit in a vehicle that can hold its value because you buy it outright, keep it, then decide later to sell it for profit.

Security Deposit

This is not too different from renting an apartment. The landlord can ask you to make a security deposit so, in case you cause damage to the residence, it will be covered. The same goes for your car. Any damage it incurs will also be included when you return it.

Disposition Fee

This is the amount you pay at the end of your lease. It will cover the costs of preparing the vehicle when it is returned and put up for sale.

Purchase Option

At the end of the lease, you have the choice to buy the car for a stated amount.


It the value a new car loses the moment it is driven off the lot and becomes used. Usually, the value of a new vehicle falls 50 percent after the first three years.

Once you feel confident enough, you are ready to begin your lease. Don’t go to the dealership feeling confused or unprepared. If you have other car lease terms in mind that is not included here, feel free to share them by leaving a comment.



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