Definitions of Auto Loan and Lease Terms

Acquisition Fee

A fee charged by some leasing companies for originating the loan, just as mortgage lenders charge points as an origination fee. This fee is often not specified in a contract, but rolled into the capitalized cost when calculating monthly payments.

Actual cash value

The amount of money that a broker or dealer has invested in the purchase and repair of a used vehicle.


Also known as options. These are features added on to the car often by the dealer such as a CD stereo, anti-theft system, detailing and undercoating. Some items are purely decorative, known as "mop and glow," and do not add any value to the car.


The initial amount paid to a dealer based upon a percentage of the loan amounts or value of the collateral. Non-prime loans have a greater risk and as a result the dealers are paid a lesser amount of the actual loan amount. The remaining percentage (residual) is sometimes shared between the lender and dealer over time.


The method of retiring a standard auto loan. In it, a steady stream of constant payments pays down the loan principal and interest. The first payments are comprised almost entirely of interest; the last almost entirely of principal.

Amount due at lease signing

The total amount due before the consumer can take delivery of a leased vehicle. It can include any security deposit, title fee, capitalized cost reduction; monthly payments paid at signing and registration fees.

Amount financed

The principal that is financed. It could include the cost of the car, the cost of an extended warranty, the cost of credit life insurance and other items rolled into the payments.

Balloon payment loan

A type of loan in which a consumer agrees to pay a large, pre-determined amount at the end of the term.

Blue Book

Formally, it refers to the Kelley Blue Book, an industry guide dealers use to estimate wholesale and retail vehicle pricing. In common parlance, "the blue book price" can actually refer to a price looked up in one of the many guides to pricing. The books now come in a variety of hues, are issued by many organizations, and are commonly available online or in the reference sections of public libraries.

Base price

The cost of a car without options. This price includes standard equipment and the manufacturer's warranty and is printed on the Monroney sticker.

Capitalized (cap) cost

A leasing term that refers to the price of the car. The lower the capitalized cost, the lower the monthly lease payment. The cap cost is negotiable and can be reduced by a cash down payment, trade-in or a manufacturer's rebate; it can be increased by the loan acquisition fee or costs left over from a previous lease.

Captive finance company

A finance company related to a specific dealer or manufacturer.

Closed-end lease

The most common type of car lease. The lessee may return the car at the end of the lease term, pay any end-of-lease costs, such as the disposition fee, and the lease agreement is over. In a closed-end lease, the lender assumes the risk of predicting the value of the vehicle (its residual value) at the end of the lease's term. Closed-end lease payments are somewhat higher than open-end lease payments.

Consumer Leasing Act

A federal law passed in 1976 and amended in 1996 that spells out the requirements for disclosure of leasing costs and terms. Generally, the law covers vehicles leased for personal or family use; for periods in excess of four months; and for a total contractual obligation of less than $25,000. The Federal Reserve Board publishes a consumer guide to leasing that covers the leasing plans covered by the act.

Credit life insurance

A type of life insurance that helps repay the loan if the consumer becomes disabled. It is optional coverage. When taken out, the cost of the policy is sometimes rolled into the loan principal amount.

Dealer charges

Charges for extra services or products sold by the dealer, including rust proofing, undercoating and extended warranties.

Dealer holdback

An allowance, usually between 2 percent and 3 percent of MSRP that manufacturers provide to dealers. A holdback allowance may allow the dealer to pay the manufacturer less than the invoice price. A buyer could obtain a car below invoice price and the dealer would still make a profit. Dealer incentives

Dealer incentives

Programs offered by manufacturers to increase the sales of slow-selling models or to reduce excess inventories. Dealers may elect to pass on the savings to the buyer.

Dealer invoice

The amount that a dealer is invoiced by the manufacturer for a vehicle and any options.

Dealer preparation, or dealer prep

An additional charge to consumers that dealers try to impose on buyers. It represents pure profit for the dealers, who have already been paid by the manufacturer for the cost of preparing the car for sale.

Dealer sticker price

This is the Monroney sticker price plus the suggested retail price of dealer-installed options, dealer preparation and undercoating. It usually appears on a separate sticker.


The condition that occurs when a consumer fails to fulfill the obligations set out in the loan or lease.


An amount of money held by the dealer to hold a deal for a period of time until the paperwork is complete; usually applied toward the down payment. Also see security deposit.

Destination charge

The fee charged for transporting the vehicle to the dealer from the manufacturer or port of entry. This charge is to be passed on to the buyer without any markup.

Direct financing

A smart buyer's practice. A buyer who lines up financing through an outside financial institution rather than through the dealer is said to have direct financing. This doesn't mean dealer financing is a worse deal -- on the contrary, some dealers offer deeply discounted financing. But arranging the financing separately allows the buyer to focus on one thing -- getting the best price on a car, rather than mixing pricing and financing. Consumer advocates urge buyers to keep the deals separate: Get the best price on a vehicle, and then see if the dealer can beat the pre-arranged financing.

Disposition fee

A fee charged by some lessors at the end of a lease. The sum, spelled out in the lease, charges consumers for the privilege of giving back the vehicles they had leased.

Down payment

A payment in cash or trade-in value that reduces the amount of a car's purchase price that is financed.

Early termination charge

Charges that the lessee must pay if the car is turned in early before the term of the lease is over.

Equal Credit Opportunity Act

A federal law that prohibits discrimination in credit transactions on the basis of race, color, religion, national origin, sex, marital status, age, source of income or the exercise of any right under the Consumer Credit Protection Act.

Excess wear charge

Most leases set limits for wear and tear on the car during the lease term. The lessee must pay charges for exceeding the limits when turning in the car at the end of the lease.

Extended warranty

Also known as service contract. A contract that covers certain car repairs or problems after the manufacturer or dealer's warranty expires. Car manufacturers, dealers and independent companies sell extended warranties. With a new car, the extended warranty usually must be purchased by the end of the first year of ownership.

Fair market value

The amount that a willing buyer would pay at a certain point in time for the vehicle in an arms-length transaction.

Finance lease

See open-end lease.

Gap insurance

A type of insurance offered to auto lease customers. It pays the difference between what you own and what the vehicle is worth in the event the car is stolen or destroyed.


See dealer holdback.


In auto terms, a contract in which one party agrees to pay for another party's financial loss resulting from a collision, theft, or other damage. Leases and loans generally require consumers to maintain a certain level of insurance.


The cost of borrowing money, expressed as a percentage.

Invoice price

The manufacturer's initial charge to the dealer. The price may not be the dealer's final cost because dealers receive rebates and other incentives from the manufacturer. The invoice price always includes freight, also known as the destination charge.

Kelley Blue Book

The best known of the car-pricing guides. Les Kelley, a California used-car dealer, founded the company. The first edition, in 1926, included values for such cars as a 1926 Packard sedan limousine with balloon tires ($3,825), and a 1921 Nash touring car with clock ($50). Today's editions have listings for more than 10,000 cars, vans and trucks.


An agreement, usually for two to five years, that allows the lessee to drive a car for the term of the lease, but the lessee does not own the car. A monthly lease payment is usually lower than a car loan because the lessee is paying only for depreciation on the car plus charges. The lessee is usually responsible for repairs, maintenance and insurance on the vehicle.

Lease extension

The continuation of an existing lease, at the original monthly payment, usually on a month-by-month basis.

Lease-like loan

Also known as payment saver loan. It combines features of a lease and a conventional auto loan and is most often offered by credit unions. Payments can be as much as 30 percent less than a conventional amortized loan, because a lease-like loan has a big balloon payment at the end. (See amortization.) Requires no down payment or security deposit. Mileage allowance is usually higher at 18,000 miles per year. At the end of the loan, the borrower can sell or trade in the car and pay off the loan balance, or keep the car and refinance the amount owed, or return the car to the lender as payment for the balance.


The person who grants the lease.

Market value

See fair market value.

Mileage allowance or mileage limitation

The number of miles specified in a lease, that a car may be driven over the life of the lease.

Mileage charge

Extra charges the lessee must pay if the car is driven over the lease's mileage allowance, usually 12,000 to 15,000 miles per year.

Money factor

A leasing term that expresses the cost of borrowing. It is similar to the interest rate paid on a conventional car loan, but it is expressed as a difficult-to-understand fraction. To convert the money factor to a recognizable interest rate, multiply it by 2400. For example, a money factor of .00345 x 2400 = 8.28 percent interest. The money factor is negotiable, and consumers who lease a new car should look for a money factor close to the current interest rate charged for new-car loans.

Monroney sticker

The sticker on the car window that shows the base price, the manufacturer's installed options with the manufacturer's suggested retail price (MSRP), the manufacturer's destination charge, and the car's fuel economy (mileage). Federal law requires this label and it is only removed by the purchaser. Named after A.S. "Mike" Monroney, a longtime Oklahoma congressman who wrote the Automobile Information Disclosure Act.

Mop and glow

A term used inside the car industry to refer to add-ons, especially paint sealant, that do little to add to the value of a car, but a great deal to add to the dealer's profit.


Stands for Manufacturer's Suggested Retail Price. It represents the manufacturer's recommended selling price for a vehicle and each of its options.

National Automobile Dealers Association

A trade organization that publishes the NADA Official Used Car Guide, which provides retail prices for most used cars to consumers, and provides trade-in values in a confidential list to dealers.

National Vehicle Leasing Association

A trade group for automotive leasing companies that can provide direction on understanding leasing contracts and terms.

Negative-equity financing

Financing for new car buyers who owe more on their trade-in than the car is worth. Financial advisors say at least 30 percent of cars traded in have a negative equity balance. For example, if the outstanding balance on a car loan is $14,000, but the trade-in allowance is only $12,000, the loan is "upside-down" by $2,000. New federal regulations that went into effect Oct. 1 make it clearer to consumers through the lease paperwork when they have negative equity. Under the new rules, a space for negative equity appears on the new finance contract and $2,000 would be added to the finance amount of the new auto loan. See also upside-down.

Open-end lease

Sometimes called a finance lease. It usually offers lower payments, but carries a risk for the consumer. Under an open-end lease, the lessee must pay any difference between the residual value of the car as stated in the lease and the fair market value of the car, if lower, at the end of the lease. The lessor pays for the appraisal that sets the value. If the consumer doesn't agree with it, the consumer may pay for a binding, independent appraisal by someone agreed to by both parties. Because the lessee is taking on the risk of having to come up with this extra payment, the payments are lower than for a closed-end lease.


Also known as add-ons. These are features added to the car often by the dealer such as a CD stereo, anti-theft system, detailing and undercoating. Some items are purely decorative, known as "mop and glow," and do not add any value to the car.

Preparation charges

See dealer preparation.


This is also called the Capitalized Cost. This is the final price you arrive at when buying a car. This price is generally the same whether you decide to lease or buy the car - it is the starting point from which all other negotiations are based.


In a standard auto loan, the amount financed, which is due on a certain date and usually paid off through an amortized loan. Also see amortization.

Purchase option

The terms of a lease under which amount that the lessee may pay the lessor at the end of the lease to purchase the vehicle. The price the lessee will pay is usually the residual value.

Reality checklist

A 17-question worksheet to calculate leasing costs created by Ralph Nader's new Consumer Task Force for Automotive Issues.


A manufacturer's reduction on the price of the car as an incentive to buyers. Rebates appeal to people with no credit or less-than-perfect credit who cannot qualify for the lowest-rate loan. A rebate may also appeal to first-time buyers who don't have a lot of cash for a down payment or another car to trade in.

Reconditioning reserve

Another name for the security deposit paid when leasing a vehicle.

Residual value

The amount agreed upon to represent the value of the car at the end of a lease. This number is generally 40-75% of the final negotiated price of the vehicle. This number is commonly artificially inflated by manufacturers' leases to reduce the depreciation of the car over the term of the lease. This, in turn, lowers your monthly lease payments. The residual value depends on the length of the lease (lower if the term is longer, since the car depreciates) and what

Rule of 78

A type of financing where the loan is weighted so all of the interest is paid off in the first year.

Security deposit

Sometimes called reconditioning reserve. An amount, often the same as one month's payment, the dealer holds to be sure that the car will be returned in good condition. It is to be returned, less fees and damage charges, at the end of the lease. This is a refundable payment generally to insure the leasing company against above-average wear-and-tear that may result.

Service contract

See extended warranty.

Simple interest loan

A method of allocating the monthly payment between interest and principal. The interest charged is determined by the unpaid principal balance on the loan, the interest rate, and the number of days since the last payment. The rest of the payment goes to the principal. Making early payments or additional payments will reduce the loan's principal and cut the total interest paid over the life of the loan.

Sticker price

This shows the base price, the manufacturers installed options with the manufacturer's suggested retail price (MSRP), the manufacturer's destination charge and the fuel economy (mileage). It is the Monroney label affixed to the car window and is required by federal law. The label may not be removed by anyone other than the purchaser.


The length of the loan or lease, usually 24, 36, 48 or 60 months.


The written evidence that proves the right of ownership of a specific vehicle.

Trade-in value

The amount that the dealership will credit you for the vehicle you provide as partial or full payment for another vehicle. Amount credited is frequently about 5 percent below the wholesale value of the vehicle.

Up-front costs

The costs that must be paid at the time of signing a car lease agreement. These can include the first month's payment, a refundable security deposit, a capitalized cost reduction or down payment, taxes, registration and other fees.


A position that consumers find themselves in when the outstanding balance of an auto loan is higher than the current fair market value of the car. It is most common in the early years of a lease or loan, when car is depreciating rapidly but the balance owed remains very high. Also see depreciation.

VIN (Vehicle Identification Number)

A number assigned to the vehicle by the manufacturer. Each number is unique and appears on the vehicle's registration and title.

Walk-away lease

See closed-end lease.


A guarantee, from a dealer or a manufacturer that a vehicle will perform as expected or specified. A warranty usually covers specified mechanical problems for a set number of miles or amount of time.