Auto Finance Glossary

Plain-English definitions of the terms behind car leasing and financing. Each entry stands on its own and can be linked directly by its anchor. For how these numbers interact, see the methodology page — or run them yourself in the lease vs buy calculator.

A

Acquisition fee: An administrative fee the leasing company charges to originate a lease, due at signing or rolled into the capitalized cost. Our default assumption is $695, capitalized — a typical figure documented on the methodology page. There is no equivalent fee on a straightforward purchase loan.
Adjusted capitalized cost: The amount a lease actually finances: the capitalized cost minus any cap cost reduction. It plays the same role in a lease that the amount financed plays in a loan — both the depreciation fee and the rent charge (finance fee) are computed from it. The full formula chain is worked through on the methodology page.
Amortization: The schedule by which a loan is paid off: each fixed payment covers that month's interest first, and the remainder reduces the balance. Early payments are interest-heavy, so equity builds slowly at first and accelerates later. See the schedule for any loan with the auto loan calculator.
APR: Annual Percentage Rate — the yearly cost of borrowing, expressed as a percentage of the balance. It is the standard way to compare loan offers, and a lease's money factor can be converted to the same scale (APR % = money factor × 2400 (0.00250 ≈ 6% APR)) so both financing rates can be compared directly.

B

Break-even horizon: The holding period at which buying overtakes serial leasing in total net cost — before it, leasing is competitive; after it, buying wins and keeps winning. It is the single most decision-relevant number in the lease-vs-buy question. See why the break-even horizon dominates the decision or find yours with the lease vs buy calculator.

C

Cap cost reduction: Anything that lowers a lease's capitalized cost at signing: cash down, trade-in credit or rebates. It buys a lower monthly payment, but it is money you generally do not get back if the car is totaled or the lease ends early. It is the lease-world equivalent of a down payment.
Capitalized cost: The lease's starting price — the negotiated vehicle price plus any fees rolled into the lease, before subtracting any cap cost reduction. Everything about a lease payment flows from this number, which is why negotiating the price matters just as much when leasing as when buying.
Closed-end lease: The standard US consumer lease: the residual value is fixed in the contract, and the leasing company — not you — bears the risk that the car is worth less at turn-in. You return the car, pay any end-of-lease charges, and walk away. Federal disclosure requirements for these leases are set by Regulation M, the Consumer Leasing rule.

D

Debt-to-income ratio (DTI): Your total monthly debt payments divided by your gross monthly income. Lenders use it to judge how much car payment you can carry, and it is a better affordability guardrail than "what payment feels okay." Test yours with the car affordability calculator.
Depreciation curve: The path a vehicle's market value follows over time — steepest in the first year, then flattening as the car ages. This one curve quietly drives both sides of the lease-vs-buy comparison: it sets lease payments through the residual value and sets an owner's resale equity. Explore it with the car depreciation calculator or read car depreciation explained.
Depreciation fee: The core of a lease payment: (adjusted capitalized cost − residual value) ÷ months in the term. It spreads the value you are expected to use up evenly across the lease. The other component of the payment is the rent charge (finance fee); see how car lease math works.
Disposition fee: A flat fee charged when you return a leased car at the end of the term, covering inspection and resale preparation. Our default assumption is $395 — a typical figure, documented on the methodology page. Serial leasing pays it at the end of every lease, which is why it belongs in any honest comparison.
Down payment: Cash paid upfront on a purchase, reducing the amount you finance and therefore both the monthly payment and total interest. Unlike a lease's cap cost reduction, a down payment buys equity you keep — it comes back to you in resale value.
Due at signing: The total cash needed to start a lease: typically the first monthly payment plus any cap cost reduction, non-capitalized fees, and security deposit — plus upfront tax in states that tax the price rather than the payment. Advertised lease payments often hide a large amount due at signing, so always compare this number alongside the monthly.

E

Excess mileage charge: The per-mile fee for driving beyond a lease's mileage allowance, charged at turn-in. Our default assumption is $0.25 per mile — a typical contract figure (see the methodology page); your contract sets the real one. How allowances and charges work is covered in lease mileage limits and fees.

G

GAP coverage: Guaranteed Asset Protection: coverage that pays the difference between what insurance says a totaled or stolen car is worth and what you still owe on the loan or lease. It matters most early on, when a car has depreciated faster than the balance has fallen. Many leases include it; on loans it is optional and priced separately.

L

Loan principal: The amount you actually borrow — for a car, typically the taxed price plus fees minus your down payment and any trade-in credit. Interest is charged on the outstanding principal, so a smaller starting principal or extra principal payments reduce total interest. See the effect in the auto loan calculator.

M

Money factor: The lease's financing rate, written as a small decimal instead of a percentage — effectively the interest rate in disguise. Convert it to a familiar rate: APR % = money factor × 2400 (0.00250 ≈ 6% APR). Dealers rarely volunteer it, so ask directly and compare the converted rate against current loan offers; the mechanics are in how car lease math works.
MSRP: The Manufacturer's Suggested Retail Price — the sticker price the automaker recommends before any negotiation. On a lease it matters even after you negotiate a discount, because the residual value is set as a percentage of MSRP, not of the price you pay.

N

Negotiated price: The price you actually agree to pay for the vehicle, before taxes and fees. When buying, it sets the loan principal; when leasing, it becomes the starting capitalized cost — so a good negotiation lowers the payment either way. Compare both outcomes with the lease vs buy calculator.

R

Rent charge (finance fee): The financing component of a lease payment: (adjusted capitalized cost + residual value) × money factor. It is the lease's equivalent of loan interest — you pay it every month on top of the depreciation fee, and it never builds equity.
Residual value: The leasing company's contractual prediction of what the car will be worth at lease end, set as a percentage of MSRP. A higher residual means less projected depreciation to pay for, and therefore a lower monthly payment. In a closed-end lease, the lessor — not you — absorbs the miss if the prediction is wrong.

S

Security deposit: A refundable deposit some lessors collect at signing and return at lease end if the car comes back in good order with no unpaid charges. Many modern leases waive it entirely. It differs from a cap cost reduction, which is never returned.

T

Total cost of ownership (TCO): The all-in cost of running a vehicle over a period: depreciation, financing, fuel, insurance, maintenance, taxes and fees — not just the payment. Two cars with identical monthly payments can differ by thousands per year in TCO. Add it up with the total cost of ownership calculator.
Trade-in equity: Your current car's market value minus whatever you still owe on it. Positive equity works like extra down payment on the next vehicle; negative equity (being "upside down") gets rolled into the next loan or lease and quietly raises its cost.