What Is a Capitalized Cost in a Car Lease?

What Is a Capitalized Cost in a Car Lease?
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Capitalization cost constitutes one of the most important elements of a car lease. Comprised of a handful of elements, this cost goes a long way to determining how much you actually pay for a car during the lifetime of a lease. Understanding the full impact of capitalization cost, commonly known as cap cost, on your lease requires a look at the cap cost basics, reduction and adjusted capitalization cost.

Cap Cost Basics

Capitalization cost in a car lease constitutes the value of the automobile in question. The amount of each payment made on a leased vehicle derives from cap cost, since you make lease payments against the vehicle's value. Some dealers negotiate the cap cost of a car before leasing, while others offer a set cap cost. Mark J. Green, author of “The Consumer Bible: 1001 Ways to Shop Smart,” recommend never leasing without knowing the cap cost — it’s impossible to know whether lease payments reflect the actual value of a vehicle without knowing that value.

Gross Cap Cost

Gross cap cost constitutes the capitalization cost and add-ons. Sales tax constitutes the most common add-on, though various other costs may arise. For instance, assume a dealer suggests a cap cost of $25,000 and you talk the dealer down to a cap cost of $23,000. If sales tax in your area stands at seven percent, you pay $1,610 ($23,000 x 0.07) in tax on the car. In this case, gross cap cost on the vehicle comes to $24,610. Always ask about add-ons before agreeing to a lease.

Cap Cost Reduction

Cap cost reduction in a car lease occurs when you lower the cap cost of the vehicle. A cap cost reduction results in lower monthly lease payments. Both buyers and dealers contribute to the reduction of cap cost. For instance, assume you make a $5,000 down payment on a car and the dealer offers you a $1,000 rebate. These two actions reduce the cap cost of the vehicle by a total of $6,000.

Adjusted Cap Cost

Adjusted cap cost constitutes the final cost against which you make lease payments. You can calculate the cap cost on a car by subtracting all cap cost reductions from the gross cap cost. For instance, assume you negotiate a $23,000 cap cost in an area with a seven percent sales tax, for a gross cap cost of $24,610. You make a $5,000 down payment on the car and receive a $1,000 rebate, for a total cap cost reduction of $6,000. Your adjusted capitalization is $24,610 - $6000 = $18,610.