Motor Vehicle Lease Law and Legal Definition

Motor vehicle leasing is based entirely on the concept that you pay for the amount by which a vehicle's value depreciates during the time you're driving it. Depreciation is the difference between a vehicle's original value and its value at lease-end (residual value), and is the primary factor that determines the cost of leasing. MSRP is the full price for a vehicle as displayed on its window sticker, including optional packages. Destination charges and dealer fees are not considered part of MSRP, although these charges are part of the overall cost of the vehicle.

When you and your dealer sit down and agree on a price for a leased car, this becomes the capitalized cost, or "cap cost." In a good lease deal, the cap cost will be significantly less than MSRP. Cap cost is sometimes called lease price.Capitalized cost (lease price) can be reduced by rebates, factory-to-dealer incentives, trade-in credit, or a cash down payment. These are known as cap cost reductions. Even modest cap cost reductions, such as a down payment, can create significantly smaller monthly lease payments, especially in shorter leases.

The wholesale worth of a car at the end of its lease term, after it has depreciated, is called its residual value. The higher the residual value, the more the car is worth at lease-end — and the lower your lease payments.Lease term is the length of time a car is leased, usually expressed in number of months. Typical leases are 24, 36, or 48 months, although "oddball" terms, such as 30, 39, and 42 months are frequently seen in lease promotional ads.

The interest payment is expressed as a money factor, sometimes called lease factor, and is specified as a small decimal number such as .00297. (Note: dealers will sometimes confuse you by quoting money factor as a larger decimal, such as 2.97, which means .00297, because it sounds like an attractively low annual interest rate.) Money factors can be converted to annual interest rate (APR) by multiplying by 2400 (yes, it is always 2400 and is not related to the length of the loan in months). For example, a money factor of .00297 multiplied by 2400 = 7.13%.