What Is a Capitalized Cost Reduction in Car Leasing?

The capitalized cost, also known as “cap cost”, is the most important component of your car lease. It's the price tag you and your car dealer agree on for the vehicle - often referred to as the "lease price". This price is usually more attractive than the manufacturer's suggested retail price (MSRP).

The capitalized cost is the foundation of your lease because it influences all other aspects, including your monthly payments. So, it's important to negotiate the lowest price possible.

A cap cost can appear in two forms: gross capitalized cost and net capitalized cost. The gross capitalized cost is the agreed price of the car plus any taxes or fees that are linked to the lease agreement. Meanwhile, the net capitalized cost is what's left of the gross cap cost after accounting for any rebates or cost reductions. This net cap cost is the final price of the vehicle, which determines your monthly lease payment.

The capitalized cost in a lease is typically bumped up by various charges like registration fees, taxes, insurance, service contracts, and extended warranties. But it can be reduced again by things like down payments, trade-in allowances, manufacturer rebates, and dealer coupons.

Sometimes, there's a limit to how much you can reduce the cap cost, for instance, it might be capped at 20% of the vehicle's MSRP or its value. Every leasing company has different rules, so it's important to familiarize yourself with yours.

Keep in mind that the more money you put down, the more you can decrease the amount you'll need to finance on your lease. However, this comes with a risk - if something happens to your car before the end of the lease, you won't get your down payment back.

How is capital cost reduction calculated?

A cap cost reduction is like a down payment, but it's specifically for leases. When you lease a car, you're essentially renting it for a set period, usually between 24 to 36 months. Your lease cost is determined by taking the purchase price of the car, subtracting what the leasing company predicts it will be worth at the end of the lease, and then adding interest to that remaining amount. 

For example, if you lease a $35,000 Tesla Model 3 and the company estimates it will be worth $15,000 at the end of three years, your lease payments will cover the difference, which is $20,000.

The cap cost reduction is an amount you can pay upfront to lower your overall lease cost. So, if your total lease cost is $4,000, you could pay $1,000 upfront, reducing your monthly lease payments to cover the remaining $3,000. It's pretty much like making a down payment on a car purchase.

A capitalized cost down payment on a lease, often referred to as a "cap cost reduction", is the upfront payment you make when initiating a car lease. It's similar to a down payment when buying a car. This amount directly reduces the total cost that you're financing, which in turn lowers your monthly lease payments. It can include cash, trade-in allowances, rebates, or other discounts. It's important to note that unlike a car purchase, this down payment doesn't build equity because you don't own the car at the end of the lease.

Every financial decision depends on your personal situation. It's a good idea to consider your budget, financial goals, and risk tolerance before making such decisions.

Pros:

• Lower monthly payments: A capitalized cost reduction (down payment), can reduce the total amount being financed, leading to lower monthly lease payments.
• Improved affordability: Lower monthly payment makes the lease more affordable, especially if you have budget constraints.
• Lower interest rates: With a lower cap cost, you'll pay less interest over the lease term.
• Negotiable: You can negotiate the capitalized cost reduction of your lease, similar to bargaining the price when buying a car.

Cons: 

• Higher upfront cost: A cap cost reduction requires upfront cash or the value of a trade-in. This can be a big financial commitment and may impact your cash flow.
• Reduced flexibility: Unlike a down payment on a car purchase, a capitalized cost reduction is non-refundable. If you decide to terminate the lease early or the car gets totaled, you won't get that money back.
• Risk of loss: If the leased vehicle is stolen or totaled shortly after making a capitalized cost reduction, you may not be able to recover the full value of your down payment.

Yes, it is possible to negotiate a capitalized cost reduction when leasing a car. The capitalized cost reduction is essentially the amount of money you are putting down upfront to lower the overall cost of the lease. When negotiating the lease terms with the dealership or leasing company, you can discuss and negotiate the amount of the down payment or trade-in value that will be applied towards the capitalized cost.

It's time to move beyond the traditional, cumbersome leasing methods and welcome the efficiency of a FINN car subscription. With FINN, you have the liberty to choose your ideal vehicle and start enjoying it almost instantly. Say goodbye to concerns over separate payments for insurance, registration, or maintenance – as all these costs are conveniently consolidated into one straightforward monthly fee.