It seems that every day the car buyers are faced with the same question: leasing, financing or paying cash for their new car. While many of us are familiar with the financing terms and details, there are a lot of people that are confused about the leasing process, leasing vocabulary and an understanding of how a lease is computed.
This article focuses on "closed-end leases". A "closed end lease" defines the value of the vehicle at lease end, where an open ended lease leaves you subject to a balloon payment. We'll cover the latter in another article.
Leasing Vocabulary
Captive Finance Company - This is the finance company that is owned by or affiliated with the manufacturer. BMW Financial Services, Infiniti Financial Services, American Honda Finance, Nissan Motor Credit - these are all examples of different Captive Finance Companies.
MSRP -Short for "Manufacturer Suggested Retail Price" . Basically, it's the list price of the vehicle as delivered.
Sell price - This is the price you negotiate to pay with the dealer.
Cap Cost Reduction - This is a payment made at the beginning of the lease with the intent to lower all future monthly payments. You are pre-paying a portion of the lease up-front. Remember: If the car is totaled or stolen, you lose this money.
Cap Cost - This is short for Capitalized Cost, a part of how the Depreciated Value of the vehicle is calculated. This amount is just a calculation, and can not generally be negotiated. This is equal to the sell price - Cap Cost Reduction.
Residual value (usually a percentage)- This value is established by the lender. It is sometimes quoted as a percentage, sometimes as a dollar figure. It is generally non-negotiable, as no one you are going to meet at the dealership has the authority to change this number.
Residual Value - This is the MSRP multiplied by the residual percentage.
Depreciated Value - This is the capitalized cost minus the residual value. It is a calculation based on negotiated and quoted numbers.
Money Factor - abbreviated MF. This is the "interest rate" of the automotive leasing world. If you want to judge a MF from a lender against interest rates for a purchase, you can multiply by 2400 to get a rough APR. This is not directly comparable, as the interest on a lease is computed differently than a financed purchase.
Term - This is the length of the lease, in months. Normal is 12, 24, 36, 39, 48. It can be any number, but anything longer than 48 is usually a really bad idea. Most leases have a sweet spot between 30 and 39 mos (where the monthly payment is lowest).
Principle Payment - this is a term in my lease calculator, but it is one of two parts that make up a lease payment. It is the Depreciated Value from above, divided by the Term from above. This is how much you pay toward the depreciated value of the vehicle each month.
Interest Payment - this is also a term in my lease calculator, and it tells you how much interest you pay on the vehicle each month. It's really a very different calculation than most people are accustomed to seeing. It is the Capitalized Cost + Residual Value, all multiplied by the Money Factor. –> (CapCost + ResidVal) * MF.
Monthly Payment - This is the Principle Payment plus the Interest Payment added together. Sales tax is done differently on a state by state basis, so I can't cover that here. In some states, it's added to the payment each month (and that's how the below calculator is built), but other states add it to the whole car value.
Lease support - This is money that the manufacturer provides to the leasing company (usually their own) in exchange for better lease terms. It's an internal transfer to the manufacturer's captive finance company (BMW Financial Services), you won't see this on a 3rd party bank lease.
Usually when your buying a BMW, then the BMW Financial Services department offers frequently the best deal, but not always. BMW can support leases in two main ways: They can boost the residual or drop the money factor.
Negotiable terms:
Sell price
Cap Cost Reduction
Term
Quoted terms:
MSRP
Money Factor
Residual % or Value
I have already cover the lease calculation in another article, but the one I'm going to show you today it's a little more complex and in way, better.
Edmunds.com Sample Lease Calculation
| 1. | Sticker Price of the car plus options | | $23,000 |
| 2. | Times the residual value percentage | X | ..57 |
| 3. | Equals the residual value | = | $13,110 |
| 4. | Invoice price of car minus incentives (net capitalized cost) | | $20,000 |
| 5. | Minus the residual (From line 3) | - | $13,110 |
| 6. | Equals the depreciation over 36 months | = | $ 6,890 |
| 7. | Depreciation (Line 6) divided by term in months | ÷ | 36 |
| 8. | Equals the monthly depreciation payment | = | $ 191.39 |
| 9. | Net capitalized cost (From line 4) | | $20,000 |
| 10. | Plus the residual (From line 3) | + | $13,110 |
| | Equals | = | $33,110 |
| 11. | Times the money factor | X | .0037 |
| 12. | Equals money factor payment portion | = | $ 122.51 |
| 13. | Monthly depreciation payment (from line 8 ) | | $ 191.39 |
| 14. | Plus money factor payment portion (from line 12) | + | $ 122.51 |
| 15. | Equals bottom monthly lease payment | = | $ 313.90 |
I hope this clarifies some things and it helps you understand the leasing process better.
