Cost cap reduction on a lease is really just a fancy legalese way of saying down payment. It is defined by one source as:
”The part of the initial money paid at lease inception that serves to reduce the amount owed on the lease. It is usually called, Capitalized Cost Reduction, or simply Cap Cost Reduction.”
It can also include your trade-in, dealer price reductions, and any manufacturer incentives applied to the vehicle.
Many car buyers who are new to leasing can be confused about the money that they are required to pay upfront because not all of it is the down payment (cost cap reduction). Some of that upfront cash covers the first month’s payment, tax, along with title and any other fees. Where you live determines exactly how much the associated fees will cost. As an example, a lease may require $3,000 due at signing. After all fees and the first payment are deducted from that amount, only $1,500 may be applied as cost cap reduction.
Most car leases do not require a down payment. The money due at signing is simply used to cover all fees and the first month’s payment. Many experts recommend that you do not put any additional money down because you can lose the investment if the vehicle is stolen or destroyed during the lease period. Instead, you could use the cash to pay down credit card debt or make an additional mortgage payment, reducing your debt utilization ratio and improving your credit score.