Capitalized Cost

When discussing vehicle leasing, the capitalized cost, sometimes referred to as “cap cost”, of a vehicle refers to the amount that is being financed. This amount includes the cost of the vehicle less any applicable incentives, plus additional fees or charges. Typically, the lower the capitalized cost, the lower the lease payment.

Cap Cost Reduction

Occasionally, you may hear the term “cap cost reduction”. A cap cost reduction is an optional upfront payment to reduce the overall cap cost. Much in the same way you make a down payment when purchasing a vehicle, you can elect to make a cap cost reduction payment to lower your monthly lease rate.

Can a more expensive vehicle have a lower lease rate?

The answer to this question varies depending on the type of lease that you are talking about. With an equity lease, the lease rate is heavily influenced by the capitalized cost. Assuming things such as applicable incentives, interest rate, monthly depreciation percentage, and management fees are all equal, there is no scenario where a $35,000 vehicle would lease out for a lower monthly rate than a $30,000 vehicle.

However, this isn’t necessarily the case when referring to a closed-end lease. Because a closed-end lease rate is determined in large part by the residual value of a vehicle, it is possible for a more expensive vehicle to actually have a lower monthly lease rate than a cheaper vehicle.

Example) A $30,000 vehicle with a residual value at lease end of $10,000 leaves a $20,000 balance to finance. A $35,000 vehicle with a $17,000 residual value at lease end would leave a $18,000 balance to finance, thus resulting in a lower lease rate than the $30,000 vehicle.