The simplest way to understand the term capitalized cost reduction – also sometimes called “cap cost reduction” – is as a down payment on your leased vehicle. When you buy a car, you make a down payment to reduce the amount still due on the auto loan. Similarly, when you lease a car, any cash down payment reduces the amount being financed under the lease. The terms “capitalized cost reduction” and “down payment” are virtually interchangeable, but one applies to car leasing, while the other applies to car purchasing.
The term “capitalized cost” is somewhat archaic sounding, because it is a holdover from the days when the practice of auto leasing was used strictly for business purposes or commercial vehicles. In those days, the auto lease needed to be declared on taxes the same way business equipment would be – as a cost to the business that was capitalized over a term. “Cap cost” for a leased vehicle includes the negotiated price, plus any fees or taxes that will be included in the financed amount (i.e., whatever was not paid in cash upon signing). If you were applying for a car loan, that would be called the “financed amount” of the loan.
A cap cost reduction, or capitalized cost reduction, is simply the down payment that you make against your car lease. It may also be called “cash due at signing.” It is important to understand that the cap cost reduction is not a security deposit, and will not be returned to you at the end of the lease. It is a form of prepayment on the total amount of the lease, which will serve to reduce your monthly payments because it reduces the differential between the net capitalized cost (gross capitalized amount of the purchase, minus the cap cost reduction) and the residual value of the vehicle at the end of your lease. This will result in lower monthly payments for you during the term of your lease.