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What Is Capitalized Cost Reduction?

Esther Ejim
Esther Ejim

A capitalized cost reduction is a term that is commonly associated with the auto sales industry due to its application in the lease and sale of vehicles. The application of a capitalized cost reduction in any sales transaction involving a vehicle serves the same purpose that a down payment does when an individual is trying to purchase a real estate property. That is to say that a capitalized cost reduction is an initial payment made by the person who is either trying to buy the vehicle or lease it from the auto company. The main purpose of the capitalized cost reduction is to bring the total balance of the money the individual will have to pay for the car to a more manageable level. In addition to this, it also serves the further purpose of making the terms of monthly repayment appear more inviting to the prospective customer due to the lower monthly rates the person will be allowed to pay after the credit in the form of capitalized cost reduction has been applied to the total charges.

For example, if a customer goes to an auto sales company to purchase a new vehicle, he or she might be able to obtain some kind of financing agreement for the payment of the total cost of the vehicle. By applying a capitalized cost reduction, the auto sales company will successfully reduce the monthly payment the customer will make in respect of paying off the debt owed on the car. One of the methods for the application of a capitalized cost reduction is through the trade-in of the previous vehicle by the customer in return for reduced payments. In such a situation, the value of the old car will be calculated and added to the account of the customer in the form of credit that will serve to bring the total costs down.

Man climbing a rope
Man climbing a rope

Another method by which the auto sales company can use capitalized cost reduction in its dealings with a customer is in the area of an outright down payment by the customer. The auto sales company will determine the exact percentage of the total sales amount that the customer will be required to put down as a down payment. Also, rebates may be used to reduce the total sales amount to a lower amount than what it would have been without the application of the rebate. These measures also translate to lower monthly payments for the customer.

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