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ABCs of car buying and leasing
by Canvas • October 23, 2018


When you’re looking to buy or lease a car, you’ll likely hear a lot of different terms used by the salesmen at the dealership. You may be familiar with some of them already, especially if you’ve already been through the process. But chances are you might not understand all of the car buying and leasing terms. Regardless of whether this is your first time or not, being familiar with all of the terms will help you to better navigate the landscape and confidently make a decision.

  • Acquisition fee — Essentially, the fee a dealership will charge for taking care of the lease. It is also referred to as a bank fee, and it is part of the drive-off fee (the fee you’ll pay for leasing a car before you can drive it off the lot).

  • Adjusted Capitalized Cost — The capitalized cost minus any capitalized cost reductions. Your monthly lease payments will be based on this figure.

  • Annual Percentage Rate (APR) — The interest rate you will pay on a car loan.

  • Buyout Price— It is possible to purchase a car that you have leased at the end of the lease term. The buyout price is the price you must pay to do so.

  • Capitalized cost — The price that you will need to pay to lease the car for a specific term. The larger your down payment, the less the capitalized cost. You may be able to negotiate the capitalized cost as well, and acquisition fees can also sometimes be included in the capitalized cost so that you don’t have to pay them all upfront.

  • Capitalized Cost Reduction — Different factors can affect the capitalized cost, such as a trade-in vehicle, manufacturer rebates, or a larger down payment. These are referred to capitalized cost reductions.

  • Closed-End Lease — A type of lease in which you can avoid any liability of paying for the reduction in value of a leased car when you turn it back in. It may also grant you the option of buying the car at the end of the lease. This is the most common type of lease offered.

  • Dealer Incentives — Car manufacturers often offer special deals to the dealers, which are subsequently passed on to consumers in order to make the idea of purchasing a car more attractive.

  • Dealer Prep Fees — These are fees that a dealer will add to the cost of a car, supposedly to cover the cost of preparing the car.

  • Depreciation — Just as the price of a new car drops over time, so does the price of a leased car. You’ll want to pay attention to depreciation values of certain cars, because some cars do not retain their value as well as others, and you may be required to pay for the loss of value when you return a leased car.

  • Disposition Charge— A fee that leasing companies will charge you when you return the car. It’s mainly a profit for the leasing company, but they will tell you it is what they charge to have the car cleaned and prepared for resale.

  • Down Payment — the initial payment you will make when buying or leasing a car.

  • Drive-off Fee— A fee you’ll pay for leasing a car before you can drive it off the lot, which includes the first month’s lease payment, various acquisition fees (cost of the registration and title, tags, any applicable taxes), and any additional fees charged by the dealer.

  • Gap Insurance — A type of insurance that protects you in the event the car is wrecked or stolen during your lease term. It’s normally provided for free as part of your leasing agreement, so be sure to double check your lease details.

  • Invoice Price — The price the dealer paid the manufacturer for the car. It’s helpful to know this because it will enable you to better negotiate a lower price for the car.

  • Lessee — Refers to the person who is leasing a car.

  • Lessor— Refers to the leasing company, which is typically not the dealership where you are actually leasing the car. It is more than likely an independent leasing company, a bank, or the car manufacturer’s finance division.

  • Manufacturer’s Suggested Retail Price (MSRP)— Also known as the sticker price, this is the price you’ll typically see listed on the paperwork attached to the car.

  • Market value — The market value of a car reflects the average price that others in the area have paid for the same type of car. Again, knowing this can sometimes help you to negotiate a better deal, as it reveals the more accurate worth of the car.

  • Money Factor— The interest rate given on a leased car. It is calculated somewhat differently than the APR on a car loan, but you can ask the dealer to show you the conversion so that you can get a better sense of the actual interest you’ll be paying each month.

  • Residual — This is what the car is worth after the lease term is completed. The residual also accounts for depreciation.

  • Security Deposit— While a security deposit isn’t always required, it can be used to pay towards any damages the vehicle suffered during the lease term that the leasing company must take care of when you return the car at the end of the lease.

  • Term — Refers to the number of months you are given to pay off the car loan or lease.

While the majority of the car buying and leasing terms detailed above actually have to do with leasing a car, you may still hear other terms not listed here—if you do, be sure to ask the salesperson to explain what they mean so you can make sure that you’re making an informed decision.