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Bay Area car leases resemble renting. It allows you to drive a new car without spending a lot of money ( at least in the short term).

Car dealers do not offer leases. They often act as an agent for the leasing company.

In order to understand leasing and make sure you do not end up making a costly mistake, you need to understand the following five key terms.

#1 Leasing Company

Before going for Bay Area car leases, you need to learn who you are going to deal with, i.e. the leasing company.

The leasing company is an organization that purchases the vehicles from the dealer and leases them back to you. They could be the finance division of a car manufacturer, such as Toyota or Ford Motor Credit. They could even be an independent leasing company. Some leasing companies are backed by banking institutions, such as Wells Fargo, Bank of America, Chase Manhattan, etc.

In all cases, the leasing company purchases the car from the dealership and leases it to you for a specific period of time.

#2 Capitalized Cost

Capitalized cost is mostly known as “cap cost” and should be separated into gross cap cost and adjusted cap cost.

Gross cap includes the mutually agreed-upon price of the vehicle, extended service plans, gap insurance premiums, any additional fees, or other add-ons that you may need to pay.

Adjusted cap cost is the amount financed over the term of the lease. Some dealerships may tell you that cap cost is the same as MSRP (Manufacturer’s Suggested Retail Price) but that’s not true.

Leasing a car with a cap cost of MSRP is similar to purchasing a vehicle for a full sticker price, which is much more than most customers should pay.

Below are some associated terms with the capitalized cost you should know:

2.1 Capitalized Cost Reduction

Cap reduction is basically anything that reduces the cap cost such as trade-in allowance, down payment, or rebates.

Let’s say, you negotiated the purchase price at $30,000 and you made $5000 as a down payment. Your cap cost is now $25,000 and your cap cost reduction is $5000.

2.2 Acquisition Fee

It is the fee a leasing company will charge you to arrange the lease and usually a direct profit for them. The fee varies between $400-$750 and often not negotiable. It can be bundled into the monthly lease payment by adding it to the capitalized cost.

However, not all Bay Area car leases come with an acquisition fee.

#3 Depreciation

You might have heard the saying that the value of a new vehicle drops 15% as soon as you drive it off the lot. That’s depreciation.

Typically, a new car’s price drops 50% after 3 years. Remember, the leasing company owns your vehicle, not you. They basically renting out the car to you.

When your return the vehicle, it will be worth a whole lot less than when you first took it for leasing and you need to pay for the loss in value.

So, depreciation makes up the largest part of your lease payment so you cannot afford to ignore this part. Budget vehicles depreciate more than others while luxury cars like Mercedes and BMW retain their values well. This is why many of their sales go to leasing.

#4 Money Factor

Money factor often confuses many people when it comes to Bay Area car leases but it is actually a simple concept. It is just the interest rate but calculated differently. A lower money factor means you need to make lower payments.

Money factor approximates the “annual percentage rate” (APR) of the lease when multiplied by 2400. For example, a money factor of 0.0036 is similar to an APR of 8.1%.

Money factors vary based on car models and lease terms. Different lease companies have different money factors.

#5 Residual Value

Residual value is the value that your vehicle will have at the end of the lease term. It could change with the term of the lease and the number of miles you have driven annually. It is calculated before you sign the lease.

So, when you do plan to go for Bay Area car leases?