When you've decided on the car of your dreams, you may find it's beyond your budget. However, your profession may dictate a shiny new ride every two to three years. As a result, a lease may be your best option. A lease lets you drive a car for a lower monthly cost than financing a car loan. However, you should know what the capitalized cost is to make sure you're getting a good deal.
The capitalized cost is a key figure in your lease. It's the amount of the car's value you are actually financing during the term of the lease. As a result, it is one of the main drivers of your monthly lease payment, along with your interest rate. The capitalized cost is also called the cap cost. When modified by any rebates, incentives or discounts, it's called the net cap cost or adjusted capitalized cost.
Dealers adjust the cap cost of the vehicle based on incentives and rebates available, often offered from their captive leasing firm, which provides incentives for the dealer to negotiate a lease rather than a purchase. Any down payment or trade-in also lowers your cap cost. However, if you make a down payment, the lease payment often includes gap insurance for the first few months of leasing in case an accident damages the car. If an accident occurs, you're responsible for any gap — the difference between the value of the car and the amount your insurance covers.
A vehicle that retains value has a lower cap cost than a vehicle that depreciates significantly during the time of the lease. This explains why a high-priced vehicle is often cheaper to lease: a vehicle that retains its value is cheaper to lease since you're financing less of the vehicle's value over the life of the lease. For example, a $40,000 car that depreciates by 50 percent in three years has a residual value of $20,000 at the end of a typical lease of three years. A $40,000 car that depreciates by only 35 percent has a residual value of $26,000 at the end of a three-year lease. In the first case, your gross cap cost is $20,000; in the second example, the gross cap cost is $14,000. As a result, the car with the higher residual value at the end of the lease is less expensive on a monthly basis.
Why Cap Cost Counts
Even when leasing, negotiate the final value of the car as if you're planning to own it. Your gross capitalized cost is a factor of the retail value of the car plus sales tax. The lower the retail price, the lower the gross capitalized cost. Your adjusted cap cost takes into account any rebates, trade-ins or down payment. However, the stronger you negotiate on the retail price of the car, the lower your monthly payment regardless of factors such as residual value and value of your trade-in.
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