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
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.
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.
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 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.
