Frequently Ask Questions: Leasing

Let’s talk about all things vehicle leasing! Find out if a lease is right for you.

Q: Who is the lessor?

A: The lessor is the company who is granting the vehicle lease such as the dealer, bank, or financial institution. In the scenario you are leasing a new Toyota vehicle, TFS (Toyota Financial Services) is the most common lessor.

Q: Who is the lessee?

A: The lessee is the person who is leasing a new vehicle; otherwise known as the consumer; you.

Q: What is residual value?

A: Residual value is the projection of what your leased vehicle will be worth at the conclusion of your lease term, determined by the lessor. This is represented as a percentage of the MSRP of the vehicle. The residual value is the price you can buy your vehicle for at the end of your lease term.

Q:What is money factor?

A: Money factor (sometimes referred to as lease factor or lease fee), is the finance charge or interest rate that is paid on your new vehicle lease. This number is represented in a small decimal number rather than a percentage, such as an APR rate in relation to financing a vehicle.

Q: What is gross capitalized cost?

A: Also referred to as gross cap cost, gross capitalized cost is the negotiated price of the car including fees and taxes.

Q:What is capitalized cost reduction?

A: Also referred to as cap cost reduction, capitalized cost reduction is money put down upfront, similar to a down payment on a vehicle purchase. This can be in the form of cash, vehicle trade-in, or manufacturer incentives & rebates.

Q:What is adjusted capitalized cost?

A: The adjusted capitalized cost is the starting price of your leased vehicle. This total is found by subtracting any capitalized cost reduction from the gross capitalized cost.

Q:What is a depreciation fee?

A: A depreciation fee is the base of your monthly lease payment. This is calculated by taking the adjusted cap cost minus the residual value, spread across the number of months your lease contract is for.

Q: What lengths of lease terms are available?

A: Lease terms are most commonly available in 24 or 36 month agreements. For Toyota specifically, they frequently display Toyota incentive rates for 39 month leases!

Q: What is a mileage allowance?

A: A mileage allowance in a new vehicle lease is a yearly mileage cap on your leased vehicle that can be driven without enduring additional charges. Common lease mileage terms range from 10,000-15,000 miles, with the average sitting at 12,000 miles. In the case of the lessee exceeding that predetermined mileage, it can cost anywhere from 10-25* cents per mile over the predetermined limit. If you know you will exceed these mileage parameters, make sure you discuss high-milage allowance options to see if leasing is the right move for you. It is important to ensure your mileage allowance is realistic to your driving habits PRIOR to signing any agreements.

*For Toyota leases, you can pay up front 10 cents a mile for any term over 15,000 miles a year, OR 15 cents a mile over the agreed limit at the end of the lease term.*

Q: What is an acquisition fee?

A: An acquisition fee is a fee charged by the lessor to begin the lease on their new vehicle. This is also commonly referred to as an initiation fee.

Q: What is a disposition fee?

A: A disposition fee, sometimes referred to as a termination fee, is the amount the lessee must pay at the conclusion of a closed-end lease if they opt-out of purchasing the vehicle for its residual value. This fee can include admin charges, any applicable penalties, reconditioning costs, etc. When signing the contract for your lease, make sure this is clearly stated and agreed upon. This is not a negotiable fee at the time of lease end.

Q:What is a closed-end lease?

A: A closed-end lease is a vehicle lease that does not require the lessee to purchase the leased vehicle at the end of the lease term, or require the lessee to pay the difference between the residual value and market value of that vehicle. Closed-end leases are the most common lease type in the automotive industry today. This allows the lessee to either purchase their leased vehicle at the end of the term, or walk away from the vehicle. If the lessee chooses to purchase their leased vehicle, they must pay the remainder of the residual value that is left at the end of their leasing term.

Q: What is an open-end lease?

A: An open-end lease is a vehicle lease that requires the lessee to pay the difference between the vehicles residual value and its actual value at lease end. The open-end lease is no longer common practice and is a large contributor to the stigma around vehicle leasing. Only on rare occasions do these leases still exist in commercial leasing scenarios. If you are an average consumer looking to lease a new vehicle, you should NEVER agree to an open-end lease.

Q: What are wear-and-tear charges?

A: Wear-and-tear charges are applicable fees that the lessee is required to pay at the conclusion of their lease term in the case of damage to the vehicle that is considered beyond normal or acceptable. Some examples of beyond normal wear-and-tear could include: rips or damages to vehicle upholstery, serious dents and scratches, broken or missing parts, etc. Before signing your lease agreement, make sure these variables are defined in the paperwork and agreed upon. Additional coverage is available to add at the inception of your lease in most  scenarios to protect you from hefty repair charges at the end of your lease term.

Q: What is the lease inception?

A: The lease inception is the start of a new vehicle lease term.

Q: Do I need to get GAP insurance for my leased vehicle?

A: While having GAP insurance for your leased vehicle cannot be required, it is highly recommended. GAP insurance protects you from becoming financially liable for the remaining owed balance of your new vehicle in the case your vehicle is totaled. GAP insurance protects you in a vehicle lease agreement the same way it would in a vehicle financing agreement. If you were to get in an accident in your leased vehicle and the vehicle is determined a total loss, GAP insurance would cover the balance owed that may not be covered by your insurance carrier. For example, if your insurance company quoted your vehicle to be worth $20,000, but you still owe $25,000, you would be on the hook for the remaining $5,000 without GAP insurance coverage. While this is a product we highly recommend, we encourage you to watch out for any dealer who is deceptive and states this as a requirement. Dealers cannot legally require you to purchase additional products, including GAP insurance.

Q: What are some of the biggest benefits of leasing a vehicle versus financing?

A: There are several benefits of leasing a vehicle versus financing or purchasing outright. One of the biggest benefits is on the maintenance and repair side; because you are leasing a brand new vehicle, your lease term will not exceed the warranty coverage on your vehicle. Plus, if you are leasing a new Toyota vehicle, it is likely you will spend a minimal amount, if any, on regular vehicle maintenance thanks to ToyotaCare. Because most common lease terms do not exceed 39 months, it’s likely you will not have to purchase a new set of tires for your vehicle either. Depending on the vehicle model, a tire replacement expense can cost thousands.

Aside from maintenance benefits, it is also a great way to try out a new vehicle model, maybe even a new Toyota model! For example, if you have historically driven a sedan like a Toyota Camry and want to try out a compact SUV like the Toyota RAV4, this is a great way to test the waters on a new vehicle without a long-term commitment. It is because of this commitment hesitation that many opt for leasing a new vehicle; allowing for the lessee to walk away from the vehicle at the end of the term if they choose to do so. This is also appealing to those who cycle through new vehicles on a regular basis. If you never intend to drive a vehicle for more than 3 years before trading in, vehicle leasing may be worth serious consideration. Whether this is driven by the consumer’s desire for a change of pace or need for up-to-date features in safety and technology, you will consistently be driving the newest variation of your favorite vehicle model; maybe even one of the redesigned new Toyota models like the RAV4!

The last notable benefit we want to highlight is the set residual value that is assigned to your leased vehicle at the inception of your lease. When you agree to your lease terms, your leased vehicles value at term end is already set. Like we saw during the global pandemic, used vehicle pricing is very volatile based on the current condition of the economy. By having that pre-determined figure at the inception of your lease, you know exactly how much it will cost you to purchase that vehicle at the conclusion of your lease term, if you so choose. If you decide not to purchase your leased vehicle, you can walk away with no strings attached.