Capital Cost Explained!

The capital cost is the total cost of the asset, minus the discount plus all the options. No additional maintenance is included in the capital cost.

So for example, the list price for a Ford Focus Titanium is, say, £21,000. A leasing company might get a 20% discount on that vehicle, which then makes the price £16,800.00. The customer has requested an upgraded £400 satnav option. So the capital cost is now £17,200.00. Pretty simple. The leasing company will simply add the extra options, look at the pricing gap between the residual value and capital cost and work out your monthly contract hire rate based on those factors (in the simplest sense).

Unfortunately, the capital cost not something a leasing company would be able to adjust. The procurement (buying) teams simply cannot buy a vehicle cheaper than what the manufacturer has offered.

The only way a leasing company can adjust the capital cost is to provide you with the option of a used vehicle. Clearly, a 3-year-old vehicle can’t be the same price it was when it was new, so it provides a leasing company with the opportunity to adjust the capital cost to give a “real-world” price on how much that vehicle is worth at the current moment in time. However, this is also dependant on how much the asset currently owes them on their books. For example, if the vehicle is on a 2012-12 registration plate (March 2012) with 40,000 miles on the clock, then a leasing company will work out how much that vehicle costs today on those parameters, usually based on how much they could sell it for from a garage forecourt (the retail value). This closes the price gap between the capital cost and residual value and thus makes the monthly contract hire (lease) rates more competitive. If they feel the monthly contract hire rate is too expensive, then there may be an opportunity to adjust it. This provides a leasing company with more flexibility and more options.