What Is a Capitalized Cost Reduction?

A customer receives the key to a leased car.
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DEFINITION
Also known as the down payment, the capitalized cost reduction lowers your monthly auto lease payments.

Also known as the down payment, a capitalized cost reduction lowers your monthly auto lease payments.

Definition and Example of a Capitalized Cost Reduction

A capitalized cost reduction is often referred to as the down payment you make when you take out a car lease. It may also include rebates, incentives, and other perks that will lower your monthly payments. Unlike a security deposit, it won’t be returned to you at the end of your lease.

Let’s say you’re in the market for a new lease. You visit the dealership and agree to lease your favorite SUV. The dealer offers you a $2,000 rebate and you put $5,000 down. In this situation, your capitalized cost reduction is $7,000.

While a capitalized cost reduction can make your lease more affordable on a monthly basis, the portion of it that is your responsibility will have to paid for upfront. This may be an issue if you don’t have enough cash saved or you’d like to allocate the money toward something else.

  • Alternate names: Cap cost reduction, cash due at signing

When you’re shopping for a car lease, you can negotiate the capitalized cost, just like you can with the purchase price when you buy a vehicle.

How a Capitalized Cost Reduction Works

The capitalized cost on a lease is usually increased by registration fees, insurance, taxes, service contracts, and extended warranties. It’s reduced by down payments, trade-in allowances, manufacturer rebates, and dealer coupons.

Often there is a maximum cap cost reduction. For example, it may be 20% of the MSRP or the value of the vehicle. Every lessor is different, so it’s a good idea to understand the rules of yours.

Generally speaking, the more money you put down, the less you’ll have to finance on your lease. However, making a down payment is risky because you won't get refunded if something happens to your vehicle before the lease is over.

Capitalized Cost Reduction vs. Adjusted Capitalized Cost

The capitalized cost reduction is the total of any rebate, cash down payment, trade-in allowance, or anything else that reduces the gross capitalized cost of the lease. While the term “adjusted capitalized cost” sounds similar, it actually has a different meaning.

The adjusted capitalized cost is the gross capitalized cost minus the capitalized cost reduction and the amount the lessor uses when calculating the periodic payments. You can think of it as the initial balance on your lease.

It’s important to note that if you move forward with a zero-down lease, meaning you don’t put any money down and you don’t receive any rebates, incentives, or other perks to lower your capitalized cost, your capitalized cost reduction would be $0.

Pros and Cons of Capitalized Cost Reduction

Before you take out a lease, keep in mind these benefits and drawbacks of a capitalized cost reduction.

Pros
  • Negotiable

  • Reduces monthly lease payments

Cons
  • May lose your down payment

  • Restrictions

Pros Explained

  • Negotiable: You do have some control over the capitalized cost reduction of your lease. This is because you may negotiate it, just like you’d negotiate the purchase price if you were to buy a car.
  • Reduces monthly lease payments: A cap cost reduction will lower your lease payments. It can free up your cash flow so you’ll have more money to save and spend each month.

Cons Explained

  • May lose your down payment: If you put money down to reduce the capitalized cost of your lease, know that you won’t get it back. You’ll most likely lose it if your vehicle gets totaled or stolen, especially during the first few months of your lease.
  • Restrictions: Depending on your lessor, there might be restrictions on the capitalized cost reduction you can make. For example, your maximum cap cost reduction might be 20% of the MSRP.

Contrary to popular belief, putting a down payment on a lease won’t save you money in the long run as it would with a car loan (although it can lower your monthly payments).

Key Takeaways

  • A capitalized cost reduction is the sum of any down payment, trade-in-allowance, or rebate that reduces your monthly lease payment.
  • You can and should negotiate your capitalized cost reduction.
  • While a capitalized cost reduction can lower your lease payments, putting any money down is risky because you may not get it back if something happens to your vehicle.

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