What is a Disposition Fee? What Does Residual Value mean? Find Out What These Leasing Terms and Others Mean

Let’s be honest, leasing a car can often be confusing. In order to fully understand what you’re getting yourself into before you sign a lease, you should be able to understand the fine print. What does residual value mean? What all is included in the cost at lease signing? This guide is intended to help you better understand some common lease terms before you sign your lease and drive away in the car of your dreams.

Lease Terms

Residual Value: The residual value on your vehicle is essentially the amount the vehicle will be worth at the end of your lease period. For example, a new Camry valued at $25,000 may be worth close to $12,500 at the end of your lease, taking into account the use and wear you have put on the vehicle over the course of your lease.

Lease Equity: Say you’re interested in leasing a 2018 Toyota Camry. At the beginning of your lease, the vehicle will be assigned a residual value, which is the amount the car will be worth once your lease is over. If, for example, your lease is 36 months, and you ended up driving your vehicle less than the allotted mileage that was agreed upon in your lease, you will have what is known as lease equity, since the vehicle will be worth more than the predicted residual value that was given at the beginning of the lease. You may now use this lease equity towards leasing another vehicle at the dealership.

Mileage Limits: The mileage limit on your lease is simply the amount of miles you can drive in the leased vehicle annually. A common mileage limit is 12,000 miles a year, although this is not always the case. Low and high mileage limit options are available, although they will have an effect on the vehicle’s residual value at the end of the lease.

Excessive Wear/Use: No matter how careful you are when driving your new vehicle, some wear and tear is bound to happen during the extent of your lease. However, any excessive wear or use to the vehicle could lead to extra charges at the end of your lease. A common rule of thumb for excessive exterior damage is any damage that exceeds the size of a credit card (including scratches, dents, etc.). For more information and examples, visit Toyota’s wear and use guide.

Disposition Fee: This fee covers the dealership’s cost to recondition the car and get it prepared for resale once you return the vehicle to the dealer. An average disposition fee is anywhere between $250 and $400. Many dealerships will waive the disposition fee if you finance or lease another vehicle through their dealership.

Early Termination: An early termination fee is just as it sounds: a fee for terminating your lease before your lease end date. Early termination fees vary among dealerships and could be a substantial cost.

Acquisition Fee: An acquisition fee is put in place in order to cover the cost of arranging the lease. Some dealerships may allow the acquisition fee to be bundled with your monthly payment, and some require that it is paid up front in full. This fee also varies between dealers, and is usually a few hundred dollars.

Capitalized Cost Reduction: Cap cost reduction is similar to a down payment. The higher initial amount put towards the vehicle will essentially reduce your monthly payments accordingly. Monthly lease payments can be determined by taking the net cap cost and subtracting the residual value of the vehicle.

Knowing leasing terminology is an important step before you sign any leasing paperwork. Make sure you understand all of the terms in your lease agreement and ask your sales advocate if you have any questions regarding your lease.