Cap Cost Reduction

Perhaps one of the most thrilling aspects of leasing a new car is the funny jargon the salesman still uses to negotiate your deal.  Nothing makes you feel more confident than having no idea what the guys down at the dealership are talking about.  And so that brings us to the so-called “cap cost reduction” term they throw around.

Cap cost reduction is short for capitalized cost reduction, and is essentially any value that reduces the agreed upon price of the vehicle being financed, otherwise known as the capitalized cost.  So any down payment, rebate, or trade-in credit, for example, would reduce capitalized costs because they lessen the amount of money financed via the lease.

Keep in mind that you don’t get the cap cost reduction back at the end of the lease.  To put it simply, it’s a kind of down payment that reduces the monthly payment associated with the lease, so the more you reduce the capitalized cost, the lower your payments will be.  Also note that you can lower the capitalized cost simply by negotiating.  All that said, you may prefer paying $30 extra a month as opposed to coming in with an additional $1,000 upfront, especially when it doesn’t really save you much if anything over the life of the lease.

Let’s look at an example:

Cash Due at Signing

$3,000 – monthly payment = $484
$4,000 – monthly payment = $450
$5,000 – monthly payment = $423

So the more money you bring in early on, the lower the net capitalized cost of the lease and the lower the monthly payment.  Having a low net capitalized cost is important because the difference between it and the residual value at the end of the lease determines what should be charged in the way of monthly payments.

For this reason, it’s also important to seek out a vehicle that holds a solid residual value, so you’re covered on both ends.  If you lease a car with a poor residual value, any cap cost reductions will mean a lot less, because the gap will still be wide, driving up the monthly lease payment.  That’s why it should be cheaper to lease a BMW as opposed to a Ford on a relative basis, just because the residual value is so much stronger with the BMW.