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.


About the Author

Will Gish slipped into itinerancy and writing in 2005. His work can be found on various websites. He is the primary entertainment writer for "College Gentleman" magazine and contributes content to various other music and film websites. Gish has a Bachelor of Arts in art history from University of Massachusetts, Amherst.

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