Coming from an automotive finanacing background, I am a big leasing advocate - especially in our chosen professions. I realize this may be too much information for some and perhaps a bit boring, but I do get asked this question fairly often.
So, how do they come up with the lease payment? It is composed of three factors:
- Depreciation
- Lease Charge (could be considered interest)
- Sales Tax
For an example, I will use a car that is currently running a lease special. For a lease, an interest rate is not actually used - the term is referred to as a Money Factor. There is a way to convert a money factor to a rate - I will get to that in a bit.
All new vehicles come with an MSRP. In this case it is 26630. A lease will be set up with a Net Cap Cost, which means your sale price after any applicable rebates and dealer discounts. In this example, our Cap Cost is 23227.26, meaning discounts and rebates totaling 3402.74 (26630 - 23227.26).
The next part of the equation is the Residual Percentage. This is just like it sounds - a percentage of the MSRP. This multiplied by the MSRP will result in a Residual Value, also know as the price you can purchase the vehicle at the end of the lease. In a lease you are not obligated to buy at the end, which is the beauty of it. If the residual percentage is 59%, the residual value is 15711.70 (26630 x 0.59).
This is where the first part of the payment comes in. The depreciation, or 'use of the car' is the difference between the Net Cap Cost and Residual Value. This amount is 7515.56 (23227.26 - 15711.70). This amount is not paid back all at once, but is instead divided over the term of the lease. If our term is 36 months, we will divide the depreciation by 36, resulting in a monthly amount of 208.77 (7515.56 / 36). That is the first part of the payment. Here is the second:
Add together the Residual and the Net Cap Cost - it will come out to 38938.96 (23227.26 + 15711.70). This number is then multiplied by the Money Factor, which is .00129 in this scenario. The Money Factor is set by the factory and will be provided by the dealer. If you find a lease quote online, it will likely not show it, but every other number is there to work it backwards. Our Money Factor multiplied by 38938.96 is 50.23. Add this to our depreciation amount and our lease payment totals $259 per month. Not bad for a $27000 car.
The last part is sales tax - it is added monthly to the payment. If your tax is 8.0%, multiply that by your payment and add them together. 259 x .08 = 20.72, resulting in a monthly payment of $279.72.
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