How to Calculate an Auto Lease by Hand and Save Lots of Money

Consumers Lease Over 50% of Their Cars, Learn How a Lease Works.

The auto lease is a mainstream method to buy a vehicle today. For decades, conventional financing was the only way to buy a new vehicle besides writing a check in the full amount. In the early ’80s, Ford Motor Company brainstormed that they would be able to sell 250% as many new cars over a 5 year period which was becoming the standard length for a new car loan as it offered the lowest payment. We will discuss in another article if buying or leasing is better but first we need to understand the mechanics of how a lease is calculated and the options afforded ant consumer.

Calculation of a Auto lease

This calculation can be used on ANY item besides a car that offers a lease plan option. Before we actually go into the bones of the calculation which is quite simple as far as math, we need to discuss what the terms are that will factor into a lease.

Lease factor definitions

• M.S.R.P.–Manufacturers Suggested Retail Price.
• Net Cap Cost (NCC)–Actual Sell price of vehicle after negotiations.
• Cap Cost Reduction(CCR)–Down payment or trade-in.
• Term (T)–Length of lease.
• Money factor (MF)–Interest rate paid on the lease…Convert by multiplying by constant of 2400.
• Residual (R)–What the value of the auto will be at lease termination or after final payment.
• Monthly Interest (MI)–the amount of interest paid for the monthly lease charge.
• Monthly Depreciation (MD)–the amount the vehicle depreciates monthly.
• Monthly Payment (MP)–the total monthly payment to lease the car.

 

Lease Payment in 4 Easy Steps

1. Calculate the Residual–MSRP minus % equals value of car at termination. (MSRP – %=R).

   This percentage is set by the industry who estimates what a car will be worth. Auto manufacturers, if they are subventing the lease price with an incentive, may offer an inflated residual to get a lower payment without discounting the cost of the money. This is a critical factor and one reason why a car can give you a great monthly payment if the gurus think the car will be a top performer and hold it’s value. It’s one of the reasons that Japanese cars lease better than American manufactured cars as a rule. A Golden Rule: The higher the residual the lower the payment

2. Monthly Depreciation Calculation–Net Cap Cost minus Residual divided by Term equals Monthly depreciation (NCC-R/T=M.D).
3. Monthly Lease or Interest Charge Calculation–Net Cap Cost plus Residual times multiplied by Money Factor (NCC+R x MF=MI)
4. Calculating Monthly Payment—Monthly Depreciation times Monthly Interest equals Monthly payment (MD + MI =MP)

 

A Lease Calculation Example

Lease factors

• 2014 Honda Accord EX
• MSRP: $26,470
• Negotiated Price: $24,243
• Down Payment: $0
• Term: 36 months
• Residual Percentage: 63%
• Money Factor: .00287 Convert for interest rate (MFx2400=A.P.R.) .00287x 2400 = 6.88%

***Calculation for a 2014 Honda Accord EX Automatic for 36 months with $0 Down payment. Keep in mind that $0 Down does not include the cost of taxes, registration and title fees. They be paid upfront or rolled into the Cap Cost and spread over the term of the lease.

Step 1: (MSRP x%=R) $26,470 x 67% =$17,735 is the Residual value or Buyback.

Step 2: (NCC-R/T=M.D) $24,243 – $17,735/36 =$180.78 Monthly depreciation.

Step 3: (NCC+R x MF=MI)$24,243 + $17,735 x .00287=$120.48 Monthly Interest.

Step 4: (MD + MI =MP) $$180.78 + $120.48 =$301.26 Monthly Payment.

Simple stuff that no one needs a financial or lease calculator to understand and compute. A regular calculator or a piece of paper with the necessary factor take all the guess work out of figuring out a lease. This information can save you thousands of dollars.

Lease Termination time:

Three options at lease termination:

• Surrender vehicle: They can walk away but normally they will have to pay a disposition fee that was pre-set at the time of the contract closing. At this time any excess wear and tear and mileage charges will be noted on the vehicle condition report and soon you will get a notice in the mail to pay these charges. Divide those charges into the term of the lease, add them to the payments and that will be your new cost basis on how much that car cost you to lease
• Buyback at Residual amount: You love the car and want to keep it, just write a check or get secondary financing for the amount owed as valued by the original residual value on the contract. Dealerships have the right and do exercise that right to charge an administration fee that can range from $250 to $1,000 to broker the car deal for you. The finance companies and manufacturers don’t hold a dealer license so they are forbidden by law so dealer’s do have the right to pay for their overhead and profit accordingly.
• Trade the car: Not always going to work but suppose you barely drove the car and the vehicle only has 5,000 miles on it when the residual was established using a 45,000 mile standard. Well, you probably have equity in the car meaning, you paid more monthly depreciation than the car actually depreciated. In some cases you may have some money going to your next vehicles cap cost reduction if that is the case. Always find out what your gross buyback option is compared to what the value of your car is, sometimes you will be surprised and it doesn’t cost anything to assess this information.
• Private Sale of the vehicle: Check the value of the vehicle in an appraisal guide such as Autotrader, Kelley Blue Book, Edmunds. If the value of your car exceeds the buyout amount, it may be worth your time and trouble, executing the buyout and selling the vehicle on the private market making the profit yourself. A family member may need a vehicle and you know the car’s history so it could be an excellent purchase for family or friend.