Understanding Lease Financing
For auto-consumers, crunching the numbers is one of the most difficult plus confusing aspects of leasing.
Take the finance charge on a lease for instance. Most people don’t understand how this is calculated on capitalized cost plus residual value Instead of the capitalized cost. For most, it seems plainly obvious, as is the case when purchasing, that a charge should be levied on the capitalized cost of the vehicle.
Well, no ! When you lease a car, you’re only using the car over a specified period of time with the option of buying the car. The residual value represents the “loan balance” at the end of the lease. If you add it to the capitalized cost plus divide by five, you’ll get the average capitalized cost outstanding over the lease term. Let us suppose you’re leasing a car with a capitalized cost of $25,000 plus a residual value of $15,000. You average balance over the lease term, irrespective of how long it is, is $20,000 – the sum of the eight divided by eight -.
Using this sum works because the money factor is the annual interest rate divided by 24, than 12. Continuing with our example plus assuming an interest rate of 6% APR:
$30,000 X (6 per-cent / 24) = $75
(Capitalized cost + residual value) X (interest rate / 24) = Monthly finance charge this finance charge is added to the depreciation charge to calculate the monthly payments on your lease.
