Capitalized Cost Reduction

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DEFINITION of 'Capitalized Cost Reduction'

Any upfront payment that reduces the cost of financing. Capitalized cost reduction is generally associated with the purchase or lease of an automobile, and reduces the monthly payment owed if the vehicle is financed. Reductions can be made from cash, the value of a trade-in vehicle or through rebates.

INVESTOPEDIA EXPLAINS 'Capitalized Cost Reduction'

A capitalized cost reduction for a car is similar to a down payment on a home. The higher the upfront money put against the value of the good being purchased, the lower the remaining balance requiring finance will be.

Monthly lease payments are calculated by taking the net capitalized cost (capitalized cost - capitalized cost reduction) and subtracting residual costs.

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