Leasing Vocabulary and Their Definitions
Acquisition fee: Charged by the leasing company to establish the lease and is itemized on the contract. It is usually used to pay for the residual insurance they carry on the "estimate". The leasing companies lose millions a year at auction by using these estimates and have insurance to pay a portion of these losses.It will also go towards the Gap policy they carry on the vehicle.
Disposition fee: Charged at the end if the customer returns the vehicle (early or on time). This is used to pay for things like inspectors for end of term damage, transportation to auction, recon and detail at auction, someone to stand at the auction when it sells, title fees to transfer the title out of the leasing companies name, etc.
Purchase option fee: Usually a few hundred dollars and is to do title work and overnight fees, to get the vehicle out of their name.
Early termination fee: If the customer has a few remaining payments and wants to make them and return the vehicle, it can have an effect on what the car is worth. Say a spring market v/s a fall market for a convertible or 4x4.
Security Deposit: Usually waived for upper tier customers but collected for lower tier customers.It is the monthly payment rounded up to the nearest $25 or $50, depending on the bank. It is used to pay for excess wear at lease termination.They will be refunded this fee if they buy it out or trade it in. Or if there is no damage upon return to the leasing company.
Money Factors: A leasing term for interest rate. You can calculate the money factor into an interest rate by multiplying it by 2400. Ex. Money factor = .0014 x 2400 = 3.36%. Interest rates are usually low on leases.
Cap cost reduction: Cash used to reduce the monthly payment. Can also be called "cash down".
Up-front fees: AKA inception fees. First payment, security deposit and tag fees are all due the day they sign. Lease payments are paid ahead, unlike a loan that are paid in arrears.They can be added into the sale price so $0 is due at signing but this will increase the monthly payment.
Total due at signing: This is a total of cash down + up-front fees. When you say $2000 to a customer, this will work out to be about $1200 Cap cost reduction and about $600 for up-front fees. This is different from "cash down".
Cap (capitalized) cost: Sale price you negotiated with the customer
Gap insurance: Included with all of our leasing companies.They pay for this because the vehicle is titled in their name. This will pay off any balance owed them if the car is totaled.
Auto insurance requirements: Usually, the leasing requirements are higher than retail requirements. 100,000 - 300,000 - 50,000 are the required limits. These are property damage and bodily injury limits.Also called 100/300/50 when you call the insurance agent. Again, since it is titled to the leasing company, this is to protect them from liability if the leased vehicle is in an accident.
Taxation: Leasing taxation is different than a buy.
PA- the base payment including interest is taxed at 9% and added monthly. Any cap cost reduction is also taxed at 9%.
MD- uses 6% of the sale price minus the trade. Just like a buy. The trade tax credit will use different rules though.
DE- taxed both the price and the payment. 4.25% of the price plus 1.99% of the payment.
Single payment lease: All payments made up-front. Usually a shorter term, 12 or 24 months. Can be made with trade equity or cash. A good way to sell a new car to a customer looking for a $10,000 used car.
Lease wear and tear policy: An additional cost, but will waive excess wear and tear expenses. Some of our policies will even waive a few hundred dollars of excess mileage charges. Dents, dings, windshield damage, tires, alloy wheel damage, scratches and stains are some examples of what this coverage will pay for. An effective way to overcome an objection from a customer who has never leased before. Eliminates the fear of a large bill when they turn it in.