18 Car Lease Terms to Understand Your Lease Agreement

A car lease agreement is a legal contract between the lessor and the lessee. The lessor, otherwise known as a leasing company or dealership, leases a car to the lessee (i.e., you). It’s similar to a rental agreement you would sign for an apartment, though the rental property is a car instead of a physical dwelling. 

Within the agreement, the terms and conditions of the lease are spelled out for each party. Car lease deals incorporate several features, including the following: 

• Monthly payments
• Fees and penalties 
• Restrictions
• Lease terms  

The best car lease deals have favorable terms like a competitive money factor, high residual values, or low monthly payments. You can lease a car with bad credit, but most advertised lease deals are for those with superior credit scores. You can negotiate the price of a leased car (even if you don’t buy it), but you can’t typically negotiate various fees or the residual value. 

The majority of the car leases you see advertised are considered closed-end leases. Compare this to an open-end lease, which assigns more risk to the lessee. Open-end leases are standard among businesses and commercial enterprises, mainly due to the high or unlimited mileage this type of lease offers. 

Closed-end lease

A closed-end lease defines a short-term car lease where the lessee is not responsible for the difference between the residual value and the actual market value of the leased car. The leasing company sets the residual value at the beginning of the lease, but the market value tends to fluctuate over the lease term. Closed-end leases are often called “walk-away” leases because you can literally walk away from a car after your lease ends with no further legal obligations.  

Single-pay lease 

You may not have heard about single-pay leases, which are a type of closed-end lease. You agree to pay the entire lease amount in this lease agreement. Most people can’t afford such a balloon payment, but it can be an excellent way to reduce your money factor and minimize your interest payments. If you can afford to pay upfront for your lease, some leasing companies may also overlook a lower credit score. 

High-mileage or unlimited-mileage lease

Most people ask, “How long is a lease on a car?” because they want to calculate how many miles they can drive. For example, three-year car leases tend to come with 36,000 miles or about 12,000 miles driven yearly. Staying within those limits can help you avoid excessive mileage fees.  

You can also find high-mileage and unlimited-mileage leases. Open-end leases are a type of high-mileage lease. This type of lease can be more expensive than a closed-end lease with limited mileage, but it is more cost-effective to prepay for miles instead of steep excessive mileage penalties. Learn how to get a high-mileage lease and determine if it's right for you. 

When you ask a salesperson how much it costs to lease a car, they often mention several terms that can sound more like foreign vocabulary words than English. Read on to find out which words you’ll encounter and how you can use your newfound knowledge to get a better lease deal.  

Basic lease structure

Lease agreements include several terms that outline the specifics between a lessor and a lessee, including: 

• Amount due at signing: This is the amount you owe when you take possession of the car. Your first month’s payment, security deposit, fees, and any credits or rebates you get will show up here. 

• Buyout price: If you want to purchase the vehicle at the end of the lease (if the leasing company allows it), this is the asking price. 

• Capitalized cost: Unlike the Manufacturer’s Suggested Retail Price (MSRP), the capitalized cost is the vehicle's selling price. 

• Gap insurance: Some leasing companies contract gap insurance on their entire fleet, while others provide a gap insurance waiver that absolves you of owing anything if the leased car is totaled in an accident. 

• Invoice price: While this number may not accurately represent what the dealership paid for the car, it can be a good reference point if you’re comparing offers. 

• Money factor: Lessors use a money factor to determine the interest you pay over the life of your lease. Multiply the money factor by 2,400, and you’ll get a corresponding interest rate. 

• Monthly payments: This number is how much you pay to lease the vehicle in question. Most monthly payments are a mix of several costs, including depreciation, taxes, and other fees. 

• Security deposit: Similar to the deposit you give to a landlord, this deposit is due at signing and covers any damage assessed at the lease end. If you don’t owe anything, you get this deposit back at the end of a lease.  

• Taxes: These include sales tax, personal property taxes, and any state, city, or county taxes owed. Depending on the agreement, taxes are calculated based on your monthly payments or the vehicle purchase price. 

Monthly payment reductions

The terms below can help reduce your monthly payment. Keep reading to learn how they affect how much you owe for your lease. 

• Capitalized cost reduction: These amounts reduce your capitalized cost to lower your monthly payments. If you trade in a vehicle or take advantage of dealer rebates, those will appear under this term. Your down payment can also reduce your capitalized costs. 
• Option discount adjustment: As part of an accounting practice, dealerships and leasing companies must incorporate the discounts they offer on option packages back into the MSRP to calculate the residual value of your leased vehicle. In plainer terms, this option discount works in your favor to increase the residual value, which lowers your monthly payments. 
• Residual value: If one factor significantly impacts your monthly payments, it’s the residual value. The leasing company will determine this value based on the capitalized costs, how many miles the car will likely have at the lease end, and what they forecast market trends will do over that time. The less a vehicle depreciates, the higher the residual value.

Additional Fees

Under the right circumstances, fees can skyrocket your monthly payments. However, most fees are just part of the average leasing deal.  

• Acquisition fee: This fee covers the time and resources necessary to get the car ready to lease. Most acquisition fees range from $395 to $895, depending on what type of vehicle you lease. More expensive cars have higher acquisition fees. 
• Advertising association fees: Dealerships often belong to an advertising group and split the fees among themselves. They then pass those fees onto you within the lease under this term. Not all dealerships will assess advertising association fees. 
• Disposition fee: Once you drop your lease off, the dealership must clean up the car and inspect it before it gets leased or sold again. This fee, typically between $300-$500, covers the detail and any service labor incurred. 
• Early termination fee: If you end the lease early, you’ll pay an early termination fee. The earlier you get out of the lease, the higher the early termination fee. 
• Excessive use: If you drive more miles than you say you will, you’ll be charged a fee per mile for the excess. Most fees are around $0.15 to $0.20 per mile, but they can sometimes go up to $0.30 per mile.
• Mileage: This number is how many miles you can drive within the lease terms. Most leasing companies offer between 10,000 and 15,000 annual miles. The more miles you want on the lease, the higher your monthly payments.

These numbers can feel overwhelming at first glance. However, once you understand the relationship between them, you can better understand how they affect you and the terms of your lease. 

It’s a popular option to trade in a leased vehicle once you’re ready to move on. You can use that trade-in to purchase a car or enter into a new lease. Or, you can walk away from your lease entirely for long-term car rentals or car sharing if and when you need a vehicle. 

However, you can also end your car lease early by: 

• Paying the termination fees
• Buying out the lease and selling the car
• Entering into a new lease and transferring payments
• Finding someone else to take over the lease

A car subscription can also help you save money and still get the car you want. FINN offers several car subscriptions that allow you to pick the vehicle you want and have it delivered to your door. Maintenance, registration, insurance, and depreciation are all included in your monthly payment, so all you have to do is budget for fuel. 

If you want to get out of a lease and into a more flexible car subscription, FINN has the cars you want to drive instead.