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.

How to Get the Best Price on a New Vehicle

Let a former car professional who has retailed thousands of cars and ran some of the largest car dealerships in the United States help you avoid the pitfalls and traps when you purchase a new car.

 

Tips on how to get your best trade-in allowance

The old car just died, you knew this day was coming and put it off for as long as you could. It’s time to go and buy a shiny new car. Thrilled? Yeah right, about as much fun as going to the dentist. I would agree if you are unprepared, it will feel like torture and probably hurt your wallet as much as a trip to old painless Paul. But with some proper planning, research and due diligence, it can be a great trip, especially when you win. Nothing better than the new car smell and knowing you won the battle at the dealership.

 

“A battle is won before it is ever fought”

No truer words were ever spoken and this was said by Sun Tzu, a great warrior in 500 B.C. And he didn’t even drive a car. Proper homework for the battle at the car dealership starts on line with research. After you have narrowed down which car you are interested in purchasing. You can now do the research required to get the best deal.

Researching Incentives

First thing you need to find out are what incentives are on the car. They can be in form of rebate, owner loyalty programs, matching down payments because of miles or points accrued on credit cards. There are sometimes special lease price or subvened finance charges that can give you a 0% interest rate. There are military rebates, sometimes some fortune 500 companies, like General Electric, offer employee rebates for buying American cars. Hybrid and Electric cars have federal rebates and some states offer rebates as well on Eco-friendly cars. All of these rebates are programs with definite expiration dates so be aware of them as well.

Researching invoice price

Websites like Kelley Blue Book, Edmunds, and Autotrader all offer manufacturer invoice pricing. These are legitimate prices that dealerships pay for their cars. Now before you get all huffy that the invoices are bogus and don’t reflect every dime a dealer pays. You are right there is some hidden money. They don’t include holdback, special stair step volume discounts dealers get for hitting volume plateaus, advertising money, and floor-plan costs, which is the amount of money it costs for the dealership to keep the car on the lot in inventory. But the invoice truly reflects what the dealership sales manager perceives as rock bottom. The General Manager and owner operate the business using different numbers but what should concern you is the sales manager as he or she will set the lowest price the dealer will accept.

Best Price strategies–There are a few strategies to use when negotiating.

• Work from invoice up, not M.S.R.P. Down.
• Work on a particular model in stock.
• Be flexible to a point of options and color.
• Understand that the dealer has a time frame for when this car needs to be off the lot, be flexible.
• Some cars are just plain high demand/high price vehicles and are hardly discounted if at all.
• Be friendly, Be fair and most of all don’t get personal, it’s business.
• Shop a few dealers before settling on the best price and most convenient location for you.
• Check your own bank or credit union for bank rates.
• Be aware that the dealer Finance and Insurance manager’s job is to sell you a warranty and other high margin vehicle options and mark-up the finance rate. Be wary of them.
• Take a friend with you. Dealerships can be intimidating so it is nice to have someone on your side
• Hold your cards close to your vest and don’t say, “Wow, I love that car.” That’s a bad move.

A new car should be a great time in anyone’s life. That new car feel and smell. The new gadgets to play with and the look on the neighbor’s face all make for the fun. Overpaying for a car is no one else’s fault but your own, so do your due diligence, do the research and hit the open roads with that brand new car and know you got a great deal.