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How Car Leasing Works

How Car Leasing Works

As with any business transaction, knowledge is power. The key to successful and smart auto leasing is understanding how the process works. Take the time to properly prepare yourself before making decisions, and learn to use leasing to your benefit. Tristate Auto Champs will do it’s best to simplify what a car lease is, what you’re paying for, and how it works. Without at least a basic understanding of leasing, knowing how to get a good deal and how payments are figured, you expose yourself to the very real possibility of making mistakes, significantly overpaying, or worse, being surprised during and after the lease term with fees and penalties. Leasing a car is not the same as buying or renting. Whether you are about to lease a new car or deciding what to do at the end of your current lease, it is important that you understand the basics. A car lease is an agreement between two parties, the lessor and lessee. You are the lessee and the leasing company, aka the financial institution is the lessor. You pay the leasing company for the right to drive the car. Your monthly payments don’t build ownership in the car. As you make your monthly payments, you are simply upholding your side of the lease agreement that allows you to drive the car for a predetermined period of time and mileage. The two primary factors that calculate how much you pay per month for your leased vehicle are its depreciation and your money factor.

Deprecation

Like all cars, vehicles lose value as you drive. This means the price it could sell for in the market decreases over time based on usage, condition, and the economy. To account for this loss of value, your leasing company requires you to pay for the value it expects your leased car to lose as you drive it. When you negotiate your lease, you and your leasing company agree on how much the car is worth at the beginning of the lease and your leasing company estimates how much it will be worth at the end of your lease. Ultimately, you have to pay for the difference between the car’s value at the beginning of the lease and what your leasing company expects it to be worth at the end of your lease. The graphic below illustrates how the two values are used to calculate the depreciation you pay for with your lease payments. A: The capitalized cost of your leased vehicle (sometimes known as the Lease Price) is the value of the vehicle at the beginning of your lease plus any additional fees that your lease issuer adds onto it. This is how much you’ve managed to reduce the price of the car. This may be due to your negotiation skills, rebates and incentives, or a down payment. The capitalized cost of your lease is negotiable before your lease, and like the purchase price of a car, you want to get the capitalized cost as low as possible, because doing so will help lower your monthly payments. B: The residual value of your leased vehicle is what your leasing company estimates the car will be worth at the end of your lease. They calculate residual values based on historical data and on the number of miles they expect you to drive your vehicle, which is usually 12,000 to 15,000 miles per year. Note, if you chose to buy your leased vehicle at the end of your lease, you often have the right to buy it at the residual value no matter what the car is actually worth.

lease calculation, lease chart, new car leasing, leasing 101, leasing explainedMoney Factor

The other big piece that determines your monthly lease payments is your money factor, or lease factor. The money factor on a lease is like the interest you would pay if you took out a loan on a car. Money factors are not expressed in percentages the same way that interest rates are. Instead, they are written as long decimal numbers. To calculate the interest rate, multiply the finance factor by 2400. The finance factor is based credit. Our advice: Read the advertised lease’s fine print and calculate the finance factor. Once you know the money factor, you can multiply it by 2400 to get the interest rate. Money Factor .00125 x 2400 = 3.00% interest. Lease agreements never list what the money factor is. So, to learn what your money factor will be, you will have to ask your leasing company or one of our auto concierge experts.