Let’s have a look at what an auto lease capitalized cost reduction does and how it could help you when pursuing auto financing.
First, you have to understand that when you sign up for a lease, you will have to pay the difference between the residual value and the capitalized cost.
What’s the difference between the two? The capitalized cost looks at the value of the vehicle when the lease begins.
On the other hand, residual value talks about what the leasing company believes the car will be worth towards the end of the lease.
What Does Capitalized Cost Reduction Mean?
At the beginning of the lease, you could have a capitalized cost reduction. Some leasing companies will ask for this, and it basically means that you will have to put a down payment on the car.
The big difference here is that when you do capitalized cost reduction with a lease, it has zero impact on helping you to build equity.
Equity means that you will own more and more of the vehicle over time.
Why Would Someone Do Capitalized Cost Reduction?
One of the biggest reasons that people have chosen to do capitalized cost reduction is because it allows them to lower their monthly payments on the vehicle.
Getting lower monthly payments, you may have an easier time affording the new vehicle.
The one thing that you should keep in mind is that you will pay less difference for it over the course of the lease, which gives you a great benefit.
At the beginning of the deal for financing, you will negotiate this with the leasing company and reach an understanding of what you will have to pay in the future.
Requires Careful Consideration
You have to carefully consider your options when thinking of if you want to lease or purchase. Leasing was more intended for those on a tight budget.
For example, you have predictable monthly payments, and you don’t have to worry as much about your credit score when you use this method.
Ultimately, leasing comes down to renting a car for the long term, and it depends on what type of term that you have signed.
The longer your term, the lower your monthly payments, but you also tend to pay more for the vehicle with a longer lease.
Recommended Reading: Buying vs. Leasing A Car and 10 Eligibility Requirements for an Auto Loan
What does an Auto Lease Capitalized Cost Reduction do?
Ultimately, this will be the amount that you pay beyond the first month, the taxes, the fees, and the title. People choose this option because they can lower the monthly payments over the long term.
Let’s take the example of someone leasing a $20,000 vehicle over the course of 36 months. You’d have to pay $425 every month with 10 percent interest.
You’d have to lay down $10,200 for purchasing the vehicle.
If you put down $2,500 in capitalized cost reduction, the payments drop from $425 a month to $372 a month. When the 36 months come to a close, you would pay $8,900 if you wanted to own the vehicle, which is $1,300 less than without the down payment.
What Shows a Good Deal?
Let’s say that you want to have a good lease deal. The capitalized cost reduction will be quite a bit less than what you would pay for the MSRP.
In some cases, they have referred to this price as the leasing price. You may even have to pay this as a way of getting the vehicle, but it depends on the leasing company.
Because many of the dealerships will make their money outright on the lease through this method, they will often say that the price is not negotiable in a lease.
Sometimes they will be more subtle about it, but you have other times where they will state this outright.
No matter what, you should understand that you always have the power to negotiate the lease terms. In fact, your best interests will be better served if you negotiate the terms of your lease.
Think about it—you’d do this when buying a car, so why not do it when you lease as well?
What Does the Capitalized Cost Involve?
The capitalized cost could also include some of the more specific fees.
For example, you could be paying an acquisition fee. Unfortunately, in many cases, they don’t even mention an acquisition fee in a leasing contract, but that fee can range anywhere from $395 up to $895.
It depends on the leasing company. Many times, they may not even specify, and you will simply see it as part of your payments for the vehicle.
Let’s say that you haven’t paid off the vehicle that you’re trading. The capitalized cost will include anything that remains on the loan balance.
How Can You Lower the Capitalized Cost?
Believe it or not, you have a couple of ways that you can lower the capitalized cost reduction and still manage to get better payments on your lease.
Some of the ways that you can lower the capitalized cost include:
- Trade-in Credit
- Factory-to-Dealer Incentives
- Cash-Down Payment
You will enjoy increasingly smaller monthly leasing payments when you choose to take this route. This especially works well with lower monthly payments.
How Much You Pay Depends on Your Credit Score
Like with buying a car, you will still have to deal with your credit score. If you have a flawed credit history, even if it were a mistake, you will still have to pay higher monthly leasing payments than if you have a better credit score.
This is one of the reasons that you should take care of your credit score.
You may have thought that this will only have an impact on it if you went to buy a car and applied for a loan. However, while leasing tends to be a little more relaxed, you can still get denied for a loan.
Before you ever visit a dealership, we would advise that you first take a look at your credit score. If anything doesn’t look right about it, you may want to fix it as soon as possible.
The problems found on your credit score can haunt you for as many as 10 years. This means that you could have a long journey ahead of you.
The capitalized cost should never cost more than the MSRP, and if you see this on a lease, you should exercise caution immediately.
You basically should look at capitalized cost reduction as a down payment. This lowers your monthly payments through the lowering of the net capitalized lease.
Consider this one of the ways that you can make your leasing payments look more attractive.
Understanding the Associated Fees
Along with the acquisition fee, you should also understand the other fees that you will be subjected to so that you can do something about it. Signing on that line will lock you into monthly payments.
Another one of the fees that you have to look out for is the disposition fee. This gets charged after you have returned the vehicle. It can amount into the hundreds of dollars, so you have to exercise caution.
If you plan to buy the car at the end of the lease, you should understand that you may have to pay a purchase-option fee.
That’s what you pay for the car at the end of your leasing term. In addition, you should never assume that the amount you have been quoted will be what you pay because this may not include the license, the sales tax or the other charges that can crop up.
Trade-in Value: What to Know
If you do decide at the end of your lease that you want to trade the car in as part of your leasing deal, you should first check to make sure that you get a fair value on it.
In some cases, dealerships will mark up the cost of the lease as a way of making an extra profit. If you feel that the cost of the lease looks too much, don’t even hesitate to start negotiating.
For those who feel like they might be getting overcharged, there’s a chance that they actually could be getting overcharged. This is why you have to stay alert to the actual cost.
When Will You Have to Do a Capitalized Cost Reduction?
Many times, you will be required to do a capitalized cost reduction if the dealership currently offers a promotional deal on the lease.
In general, we’d have to say that you should keep this payment amount to the lowest because you don’t normally get this back from insurance if you were in a car accident.
That’s the biggest downside of going with capitalized cost reduction.
Granted, it lowers your monthly payments by a little, but you also open yourself up to other problems. You have to decide for yourself if this will be worth it for you.
You should also understand that the capitalized cost reduction won’t become a deposit that you will get back near the end of the leasing term.
As stated before, it’s a form of a down payment on getting your next vehicle, and for some people, it might be good because it lowers their monthly payments.
If you can get by without it, however, there’s nothing wrong with not getting it.
Here at Valley Auto Loan, we can describe the process to you so that you can get more informed and make your own decisions on your next leased vehicle, refinance or used vehicle purchase.