Understanding car lease numbers breakdown

Introduction

Leasing a car can turn from a great idea to a terrible financial decision as soon as you sign the contract. Let's break down what exactly is going on in a lease to help you make an informed decision before signing the law-binding contract. Learn more

Leasing Terms

1. Manufactured Suggested Retail Price (MSRP): This is the price of the vehicle as suggested by the manufacturer. This value is the same for all vehicles with exact same model, year, and specifications.

2. Markup: For a highly sought after vehicle, a car dealer can charge a markup price on top of the MSRP, making the vehicle more expensive than MSRP. This varies from dealer to dealer.

3. Discount: This is the opposite of markup, where the car dealer gives you a discount on top of the MSRP, making the vehicle cheaper than MSRP. This varies from dealer to dealer.

4. Incentive and Rebates: This is discount from the manufacturer. Everyone is eligible to be considered for these as long as they qualify. This should be considered separate from discounts from the dealer. Don't mix these two up.

5. Down payment: You can choose to put down a fixed amount of money upfront as cap cost reduction to lower the capitalized cost, which will lower your monthly payment. In the event that you get into an accident or etc, you do not get this money back. In 99% of the cases, you don't want to put any down payment for leasing.

6. Trade in Equity: Trade-in equity is the value of a vehicle that you personally own. This is also applicable to a vehicle that you are leasing.

7. Acquisition Fee: The acquisition fee is charged to set up a new lease with the financing company. It covers paperwork and administration associated with the lease.

8. Sales Tax: Depending on your state, you may or may not be required to pay sales tax. If you are required to pay sales tax, it is usually calculated as part of your monthly lease payment.

9. Other fees: Additional costs like auto insurance, GAP insurance, and license and registration fees can also be a part of the gross cap cost.

10. Gross Capitalized Cost: Also known as gross cap cost. This represents the negotiated price of the vehicle after appyling the cap cost reduction on the MSRP.

    • Gross Cap Cost = MSRP + Acquisition Fee + Sales Tax + Trade-In Credit + Other Fees

11. Capitalized Cost Reduction: Also known as cap cost reduction. This is used to reduce your cap cost.

    • Cap Cost Reduction = Discount + Incentives & rebates + Trade in equity + Down payment

12. Net Capitalized Cost Also known as net cap cost. This is the final selling price of the vehicle.

    • Net Cap Cost = Gross Cap Cost - Cap Cost Reduction

13. Money Factor: The money factor is the interest rate used in calculating the finance charge on the lease. It is similar to the interest rate in a loan but is presented differently. To convert the money factor to an approximate interest rate, multiply it by 2,400. For example, a money factor of 0.0025 would be equivalent to an approximate interest rate of 6%. Some brands allows refundable security deposits, which can help further lower the money factor.

14. Lease Term: This refers to the duration of the lease, typically expressed in months, such as 24, 36, or 48 months.

15. Mileage Limit: This refers to the annual mileage limit of your lease. If your total mileage at the end of the lease exceeds the total mileage limit, you will be charged a fixed rate per mile exceeded.

16. Residual Value: The residual value is the estimated value of the vehicle at the end of the lease term. It is usually expressed as a percentage of the car's original value. Higher residual values mean lower depreciation costs during the lease term. This value is pre-determined by the manufacturer based on the lease term and mileage. Sometimes additional addons such as maintenance package can bump this value.

Monthly Payment Calculation

Now that we have explained all the terms, let's break down how the monthly lease payments are calculated:

1. Depreciation Cost: The depreciation cost is the difference between the capitalized cost and the residual value.

   • Depreciation Cost = Net Cap Cost - Residual Value.
   • For example, if the capitalized cost is $30,000 and the residual value is 50% ($15,000), the depreciation cost would be $15,000.

2. Monthly Depreciation: Divide the depreciation cost by the number of months in the lease term.

   • Monthly Depreciation = Depreciation Cost / Lease Term
   • For instance, if the lease term is 36 months, the monthly depreciation would be $15,000 / 36 = $416.67.

3. Finance Charge: Multiply the net cap cost plus residual value by the money factor.

   • Finance Charge = (Net Cap Cost + Residual Value) * Money Factor.
   • For example, if the capitalized cost plus residual value is $45,000 and the money factor is 0.0025, the finance charge would be $45,000 * 0.0025 = $112.50.

4. Monthly Payment: Sum of monthly depreciation and finance charge

   • Monthly Payment = Monthly depreciation + Finance Charge
   • Using previous example, the monthly lease payment would be $416.67 + $112.50 = $529.17.