Capitalized Cost (Cap Cost) - Capitalized Cost Reduction (Cap Cost Reduction) - Car Lease Terms
The term, capitalized cost, or "cap cost", related to car leasing, means the amount that is being financed with a lease.
Cap cost includes the negotiated price of the vehicle plus any add-on fees or taxes that will be financed (not paid in cash). It might also include the balance of a previous loan on a trade-in vehicle. In a loan, it would be called "financed amount" but leasing has its own peculiar language.
An acquisition fee is one of the extra fees typically, but not always, included in a lease's capitalized cost. Sometimes this fee is paid in cash up front as part of the "cash due at lease signing."
In some states, sales tax is charged up-front, and is usually added to the lease cap cost (unless paid in cash). However, in most states sales tax is simply paid as part of each monthly payment.
In car lease contracts, the sum of everything included in the capitalized cost is called "gross capitalized cost." After "cap cost reductions" (see below) have been subtracted, it becomes "net capitalized cost."
The fact that leasing is a form of financing is often misunderstood. Many people think of leasing as renting. It is not. Car leasing is also sometimes confused with apartment leasing/renting when, in fact, they are two very different things. Apartment leasing is renting; car leasing is financing, similar to a loan.
The strange terminology of car leasing is a holdover from the days when leasing was used strictly for business equipment financing and commercial vehicle financing. Capitalized cost is one of those terms. Money factor, Term, and Residual Value are others.
In modern times, the language of consumer automobile leasing seems out of place and confusing. Some consumers believe the auto industry likes it that way. It doesn't look like it will change any time soon, so we need to understand it.
The term, capitalized cost reduction, or "cap cost reduction," refers to any cash down payment, trade-in credit, or rebate amount that decreases, or reduces, the amount being financed (capitalized cost). It's the same as a down payment when buying with a loan, just a different name.
Cap cost reduction is not a security deposit that you get back at the end of a lease. It's simply a form of prepayment of the amount owed on the lease, which serves to reduce the amount of the monthly payment.
A cap cost reduction (down payment) is sometimes required to get a specific promotional lease deal. It is also sometimes required if a customer has poor credit.
The difference between net capitalized cost (gross cap cost minus cap cost reduction) and lease-end residual value determines the depreciation value of a lease, which is a major component of the formula that calculates monthly payment amount.
Having a low net cap cost and a high lease-end residual value creates the smallest difference (depreciation value) and, therefore, the lowest monthly car lease payment.
The best way to achieve a low depreciation value is to look for discounts and rebates on vehicles that hold their resale values (residual values) well.
In this way, a relatively expensive vehicle can easily have a lower lease payment than a less expensive vehicle.
Some people like to pre-pay their car lease (single payment lease), to eliminate monthly payments altogether. Essentially, by increasing cap cost reduction by a large amount, depreciation value is reduced to zero. This has advantages and disadvantages. Read our article, Single Payment Leases for more details.
Cap cost reduction is often confused with security deposit. A security deposit is required in some leases and is returned at lease-end.
Cap cost reduction (down payment) is only part of the up-front amount due at lease signing, which is often misunderstood. In addition to a down payment, there are other fees that must be paid at the beginning of a lease. The total of all these costs, including down payment, is due at the time a lease is signed.
In summary, car lease capitalized cost is the amount financed, before capitalized cost reduction is subtracted. Capitalized cost reduction is an amount paid in cash, rebates, or trade-in credit. Cap cost reduction lowers monthly payment amount. It is not a deposit. It is not returned at lease-end.
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