The term, capitalized cost, or “cap cost“, related to car leasing, refers to the amount that is being financed with a lease. The lower the capitalized cost, the lower the monthly lease payment.
Price of vehicle
Cap cost includes the negotiated price of the vehicle plus any add-on fees or taxes that will be financed (not paid in cash). It might also include the balance of a previous loan on a trade-in vehicle. In a loan, it would be called “financed amount” but leasing has its own peculiar language.
An acquisition fee is one of the extra fees typically, but not always, included in a lease’s capitalized cost. Sometimes this fee is paid in cash up front as part of the “cash due at lease signing.” It depends on the practices of the particular lease finance company.
In some states, sales tax is charged up-front, and is usually added to the lease capitalized cost (unless paid in cash). However, in most states sales tax is simply paid as part of each monthly payment.
Gross cap cost
In car lease contracts, the sum of everything included in the capitalized cost is called “gross capitalized cost.” After “cap cost reductions” (see below) have been subtracted, it becomes “net capitalized cost.”
The strange terminology of car leasing is a holdover from the days when leasing was used strictly for business equipment financing and commercial vehicle financing. Capitalized cost is one of those terms. Money factor, Term, and Residual Value are others.
In modern times, the language of consumer automobile leasing seems out of place and confusing. Some consumers believe the auto industry likes it that way. It doesn’t look like it will change any time soon, so we need to understand it.
Cap cost reduction
The term, capitalized cost reduction, or “cap cost reduction,” refers to any cash down payment, trade-in credit, or rebate amount that decreases, or reduces, the amount being financed (capitalized cost). It’s the same as a down payment when buying with a loan, just a different name.
Cap cost reduction is not a security deposit that you get back at the end of a lease. It’s simply a form of prepayment of the amount owed on the lease, which serves to reduce the amount of the monthly payment.
A cap cost reduction (down payment) is sometimes required to get a specific promotional lease deal. It is also sometimes required if a customer has poor credit.
Net cap cost
Net capitalized cost is the gross cap cost less cap cost reduction. It’s the final cap cost amount used in calculation of lease monthly payment.
The difference between net capitalized cost (gross cap cost minus cap cost reduction) and lease-end residual value determines the depreciation value of a lease, which is a major component of the formula that calculates monthly payment amount.
Having a low net cap cost and a high lease-end residual value creates the smallest difference (depreciation value) and, therefore, the lowest monthly car lease payment.
In this way, a relatively expensive vehicle can easily have a lower lease payment than a less expensive vehicle.
Capitalized Cost = Cost of the vehicle
Gross Capitalized Cost = Cost of vehicle plus any other costs to be financed in the lease
Capitalized Cost Reduction = Down payment cash or credits — prepayment of part of Capitalized Cost
Net Capitalized Cost = Gross capitalized cost minus capitalized cost reduction
For a full discussion of how Capitalized Cost is used in calculating monthly car lease payments and costs, see Lease Payment Formula Explained.