sonicblue6

I've been doing a lot of research on this, and am a nutty numbers guy, so I wanted to share what I found. Leasing has a "black box" reputation, but most of the calculations - once you know them - make sense. So, off we go!

Assumptions:
MSRP: $26,000
Negotiated Price: $25,000
True Down payment: $1,000 (not "total due up-front")
Term: 24 months
Residual Factor (RF): 60%
Money Factor (MF): .0025

Residual Value::
It's simply MSRP * RF, = $15,600. Note, this is the only calculation that uses MSRP as a basis. Everything hereafter will use your negotiated price!

Net Capitalized Cost (NCC):
Pretty straightforward to calculate, just like you'd calculate it for a conventional loan. It's the negotiated price, minus your down payment and any other dealer incentives, plus any fees that you want to add into the loan. Negative equity on a trade would end up here. Here, we just have: $25,000 - $1,000 = $24,000.

Depreciation:
This is the main component of our payment. It is simply your NCC minus the residual, or $24,000 - $15,600 = $8,400. You divide that by the months in your terms to get the first part of our payment = $8,400 / 24 = $350.00.

Interest / Rent Charge:
See below for detail, but the application of the money factor is actually very easy. Whereas the depreciation was calculated as [ NCC - Residual ], the base for the MF is [ NCC + Residual ], or $39,600. So, the monthly rent charge is simply = .0025 * $39,600 = $99.00.

Our base monthly payment is, therefore, $350.00 + $99.00 = $449.00 per month. Most states then add a % sales tax on top; in PA, the lease tax is 9%, so I would pay $489.41.

Total due up-front:
This is usually your down payment plus the first month's payment, plus any fees that are not rolled into the NCC.

That's basically it, but keep reading if you're really into this....


Money Factor Discussion:
The money factor actually starts its life as a good old-fashioned APR, let's say 6%. However, in a lease, you don't get away with paying interest on just the depreciation portion you use, you pay interest on the value of the asset over the life of the lease. At the start of the lease, the value is the NCC; at the end of the lease, the value is the residual. So, we have AVERAGE[ NCC , RES ]. Multiply that by the APR to get annual interest you pay, and then divide by 12 to get the monthly interest amount, aka the rent charge. Let's look closer at how we did that:

I averaged NCC and RES --> (NCC + RES) / 2
I then multiplied that by APR --> (NCC + RES) / 2 * APR
I then divided that by 12 to go from annual to monthly --> (NCC + RES) / 2 * APR / 12
Rearranging a bit, and combining /2 and /12 --> (NCC + RES) * APR / 24

That highlighted figure is our money factor. In this case, .06/24 = .0025. YAY! As you can see, providing the interest rate as a "money factor" instead, allows us to calculate the rent charge in one quick step, instead of the three I took above. NOTE: converting APR to money factor is independent of the lease term! Also note, you may see people quote "2400" as the conversion; this is only to allow people to quote the APR as "6" instead of ".06."

More General Discussion:
Leasing is no different than any other car purchase - negotiating the price is a win/win!! It decreases the NCC, which lowers the depreciation you pay, AND lowers the base for the rent charge. Work the agreed price of the car, every time.

A high residual amount decreases the depreciation you pay, but increases the basis for the rent charge. There's a "push/pull" here that you need to find a happy medium on. Depending on the price of the car, that higher residual can mean a hefty rent charge. For example, imagine a BMW with a NCC of $50K and a $34K residual at 24 months (both reasonable factors). Your MF base is $84K, and even a good APR like 5% equates to *gulp* $350/month in interest!


I did a quick search and didn't see anything else on here and, even though this stuff is available on various websites, I thought it'd be a useful resource on here. Hope it helps.

Razz1

Ok, nice post.

nycgps

iTrader: (1)

Like I always say, Lease is just stupid.

Pay 2 years worth of money to *rent a car*. In the end, you paid probably more than 1/2 of it, end up with nothing.

Anyway, good post !

thecow135

nice but could you summarize it in laymans terms for us NOOBS here?

myriadshalaks

iTrader: (1)

lease is good if you're a payment buyer. if all you care about is having a car and a low payment, and you have a high credit score, AND YOU DON'T DRIVE A LOT, lease is good for you. we put people in them all the time at toyota. they come in looking to buy, say, a 25k car at 300 a month. it can't really be done without a ton of money down. we put numbers in front of them that are more like 650-700 a month with 5 - 8 grand down. they freak. then we put them in a lease. bam: 300-450 a month with 0-1000 down. they smile. have a nice day. enjoy our car. but here's some rules.

sonicblue6

OK, so now you've brought on Part II of this discussion! Let's examine the "TRUE" cost of a car. I'll use some CX9 shopping I just did, numbers are approximate:

Car price: $35K, negotiated to $33K. Assume nothing down and all other up-front fees are the same for each program. At the end of three years, let's see where we are:

LOAN: Using a really good 2.9% interest rate, but adding full sales tax, a 5-yr "normal" loan would cost me $627/month, which is $22,572 over the three years. But, you own the car, right? Right, failing all other guesses, let's use the published lease parameter, which says it's worth (at 36 months) 52% of MSRP, or $18,200. BUT you also still have a liability against this asset, namely the 24 months remaining on your $627/month loan, or a balance of $14,603. So, at three years:

+ Car Asset = 18,200
+ Savings Asset = 0
- Payments = 22,572
- Loan Liability = 14,603
= negative $18,975.


LEASE: Using published lease parameters, it would cost me $484/month to lease, which is $17,418 over the three years. Assume I turn in the car and there are no mileage penalties or wear and tear (FTR, I did just this with a Nissan Pathfinder lease that actually had a few scratches and nicks, so skip the "they nail you on that little stuff" arguments). Moreover, assume a disciplined lessee would take the $143/month and put it an a good 4.5% money market, so that would accumulate to $5,507. Thus, after three years:

+ Car Asset = 0
+ Savings Asset = 5,507
- Payments = 17,418
- Loan Liability = 0
= negative 11,911

Advantage so far, lessee!

The smart people are saying, but what about after that? The lessee has to go do it all over again. OK, so let's say he does the exact same deal again, so after six years he's out double that, and I'll round up for another round of tags, etc..., to get up to $24,000.

After six years, the guy who owns the car has paid off his loan, which took a total of 627*60, or $37,619 over the whole loan. During the sixth year, he's smart and puts his $627/month in the bank, which accumulates to $7,681. However, his car has depreciated some more, probably worth (again, educated guess) only about 25% of its MSRP, or $8,750. His total over six years looks like:

+ Car Asset = 8,750
+ Savings Asset = 7,681
- Payments = 37,619
- Loan Liability = 0
= negative 21,188

So, after SIX years, the owner has finally snuck ahead. But has he really?? What if his car fell out of warranty during that time and he had to pay for a repair (which lessees rarely do). IF that payment goes into the bank, it's not all free cheese! It has to be earmarked for a VERY uncertain category, namely every single thing that requires upkeep (tires, brakes, belts) or actually fails with that car is on the owner's wallet, not a warranty. One "whammer" $2K repair bill just soaked up three months worth of saved payments. Lessees face FAR less volatility when it comes to repair bills, if they have any at all. Plus, that depreciation keeps ticking away as a negative to the owner's balance sheet every day...

The real wild card here is this: UTILITY! The fact is, that cars are not a financial asset, they are a utility. They're fun, they have gadgets we like/need/want, they provide driving enjoyment, all of which has some value attached to it. Someone who likes cars/technology/driving is not getting the same enjoyment out of driving a ten year old, as they would a new one.

OK, last note: the bottom line is, the push-and-pull of car ownership has to do with depreciation vs. maintenance/repairs. New cars depreciate quickly, but have little repair costs due to warranty. Old cars depreciate more slowly (or become worthless, so they stop depreciating) but can ring up huge repair bills. NO ONE, and I mean NO ONE, can tell you the "right" answer because, as I've shown, there's lots to factor in, and beyond a certain time frame, it becomes full of conjecture and best guesses. What I can say is, anyone who makes the blanket statement of "Leasing/buying is stupid because...." is wrong. Not only can one of them NOT be stupid, but it can, in fact, be the RIGHT and BEST choice - yes, financially - for that person.

sonicblue6

1. Negotiate like hell on price. It matters just as much as in any other transaction. I think most people see a lower payment on a lease and are happy, not realizing that full sticker is being used for the price.

2. Figure out your "NCC" - it's your negotiated price, minus your down payment, and then inclusive of anything else you'll finance.

3. Know your residual! I think dealers manipulate this. Generally speaking, here are some ballparks:

24 months: usually low 60%, can be as high as 70% (BMW, MB)
36 months: usually low 50%, can be as high as 60%
48 months: usually low 40%, can be as high as 50%

The residual % for 12K miles is usually 2% higher than for 15K miles; 10K miles is an additional 1% higher than 12K.

I am working with a website on potentially getting access to a full database of dealer lease parameters. Stay tuned.....

4. Do NOT let the money factor slide right by! Bring a calculator if you have to! Multiply it by 24 (or 2400, if you want to see a whole number result) and see if it's reasonable! Mazda's MF on the CX9 deal I was exploring was .00064, or 1.5%! That's a good deal. In contrast, BMW's program for 2007 335's is .00325, or 7.8%. There's a big spread out there and, depending on your price range, can make a material difference. Moreover, realize that MF -> APR has nothing to do with the term of the lease, the price of the car, anything. Judge it independently and simply don't sign a deal if the interest is unacceptable.

4. Payment = Depreciation payment ( [ NCC - RES ] / term ) + Rent ( [ NCC + RES ] * MF ).

Rems31

But cars nowadays are lasting longer and longer. My family's '97 civic runs just fine and never had any problems with it. With financing, your monthly payments will stop. As for the depreciation factor, buy a used one.

But there are advantages for leasing like if you use it for business purposes. You can write off your payments, insurance, and even gas...
There are pros and cons but to me, owning the car makes more financial sense cuz you get something at the end of all your payments :-P

nycgps

iTrader: (1)

leasing is good only if you want to change car every few years, dont want to deal with any problems down the road, and of course cheaper monthly payments.

my father's 95 mini-van Quest still runs. yeah it has a bit of problems. nothing really major and I think .... the total cost of repair for all these years is about hmm .... maybe 2 thousand something ? cuz radiator broke once, starter once, motor mount once, and something else I dont remember.

not a lot of money, for a 12 year old car.

and new cars these days last longer and longer (like Rems31 saids), hell new engines now call for 100K miles tune up. oh yes my father's mini-van, now 140K miles, never had a single engine problem. sure its noisy and not as smooth as new, but its still running.

IMO leasing is stupid because, like my previous post, you will pay about(most likely more) than 1/2 of the car's cost. but in the end you still own nothing.

Rems31

I think it's common knowledge that a lease is cheaper in the early years of the term. Cuz if you think about it, a lease is like financing except you pay the "down payment" at the end of the term instead of before it (ie the buy back option). I have a hunch that if you did your calculations at the end of the term and assume that you would purchase the car at the end of the lease, the two values would be equal.

mac11

iTrader: (1)

25k car even with nothing down over 60 months @ 10% tax and 20% interest is still under 600/month. Unless you are really ******* people with compound interest.

sonicblue6

Um, mac11, your math is off. If I finance $27,500 ($25K + 10% tax) over 60 months with 10% interest, that's $728.58/month. myriad isn't doing any ******* with compound interest, that's just how it works.

EDIT: the original quote said 20% interest, which I used, but restated it incorrectly.

Rems31

Oh one more thing...why are you comparing a 5-yr loan to a 3-yr lease when deciding who has the "advantage"?

mac11

iTrader: (1)

really?

http://www.cars.com/go/advice/financ...affordability=


looks like sub $600 to me. need i post a link with an amortization table as well?

how do you get 728/mo?

Rems31

^^ that's right
To calculate the monthly payments you solve Amt = payment x (1- ((1+i)^-n)/i

where i = interest rate, which in this case is 10%/12 since they usually advertise car interest rates as APR.
and n = number of months

Socket7

I looked into leasing an 8, as finance payments from the dealer were a bit steep.

I came to the following conclusion.

Leases are only worthwhile if you have the extra money to buy the car outright already. If you have the disposible income for a new sports car, but only want to keep it for 3 years, leasing is the way to go.

However, if you need to lease to make the monthly payments low enough to afford, then 3 years down the road you will find yourself out several thousand dollars, without any savings, and with no car.

I have done absolutely no math to support this conclusion, but it certainly seemed like how I'd end up if i leased an 8. Instead, I financed through bank of my parents. Low interest rates, but the worst customer service you've ever seen.

myriadshalaks

iTrader: (1)

we don't **** people. i gave you approx figures for a 48 month. that's how you should buy one if you really want to buy it. and most people don't qualify for an 8%. i was figuring 10-11 when i was rounding in my head.

nevertheless, your payment will be lower with a lease (depending on the lease program available ... if you qualify)

mac11

iTrader: (1)

no salesmen ever does. I mean, why would they ever consider personal gain when they could think about the well being of a perfect stranger instead?


yes, I'm sure someone walking in trying to finance 100% of a car is concerned about what his salesmen thinks about "how you should buy one if you really want to buy it". I know I had mentioned 60 month terms before you went back and edited that last post.


I don't think anyone here has questioned that. Only thing that is in question is how good of a deal that really is. For some its a great deal. For others, its not. I think that was the whole point of this thread?

myriadshalaks

iTrader: (1)

mac, clearly you have some bias against car salesman. but let me make this very clear. I am only trying to help here.

as you may know, compared to other retail businesses, the mark up at a high end dealership is minuscule -- 2-5 percent compared to 200-400 percent at, say, a clothing store. This has been federally mandated since senator maroni got "ripped" off. indeed, there's no ******* way we could ever have a 50 percent off sale. We really can't ream you except on your trade.

my commission on a new car if we let it out the door at the price on the sticker, that is, if we "wave" the taxes and fees (which is a damn good deal for the buyer), is 50 dollars. seriously, we can hardly make any money at all on a new car unless we "steal" a trade.

i'm just being honest here about how you should buy a car when you finance all of it. why pay 45k on a 25k car when you can pay 35k? in the long run, if you can't buy one flat out, but you can afford 75-100 more a month on payment, you should buy it that way. That's just common sense. less total money gets spent on your car.

Now, if you ONLY want a low payment AND a new car, leasing is the better option PROVIDED you don't drive a lot AND you have good credit. I'm just telling it to you straight, man. I don't care what you do. I'm not trying to sell you anything. I hate seeing people get upside down in their cars. But that's exactly what happens when you finance with little (less than 50 percent of the value) or no money down ... especially on long term loan. Most cars do not go up in value. This isn't like buying a house.

People try to make this way too complicated. It isn't.

p.s. i didn't edit that last post.

p.s.s. go try to negotiate at the gap. tell them you know they own the button up they have listed at 55 for 10. then offer them 11. See what happens. Car salesmen get a bad rap. But it's bullshit.

myriadshalaks

iTrader: (1)

i see what you're saying here. but you could just keep making roughly the same monthly and get a new car every 3 or 4 years. No one who finances can say that.

Rems31

no one who does that can say their payments stop :-p Why would you want to be in perpetual debt?

mac11

iTrader: (1)

I have a sever dislike for anyone, or any place or any industry where there is a different price or different rules for every person that walks in the door. Car dealerships, hospitals, airports - its all bullshit.

And I see you are trying to help out here so lets not turn this into a pissing contest. You and my personal feelings aside if someone has to do the math to figure out if leasing or buying is better in the long term, they are probably leasing and buying out at the end and they are probably financing for 60+ months. Regardless of how bad that is. I only financed 10K on my 8 but I still took it for 5 years. Yea, I'm going to pay a couple grand in interest, which sucks, but it makes for a nice convienence of having absolutely dirt cheap payments. I can take the other $2-300/month that I would have put into a payment on a 36month note and use it to pay down my higher interest credit cards and have more flexibility and leisure capitol. I also send extra on the car payment and will pay it off early. This actually should allow me to pay on the 60 month note for about a year and refinance it to a 36 month, keeping roughly the same payment (based in interest rate at the time) and effectively pay it off in ~48 mons. So in effect we are on the same page.

don't like it? get a new job. Apparently you could make more money at the gap anyway. so why do you stay?

myriadshalaks

iTrader: (1)

i've only been doing it for a couple weeks. i actually have a masters degree from an ivy league institution and could probably do several other things. I do it because I think it's profoundly interesting. I can also make a lot of money. I made 1500 my first week, and that's about the middle of the road for my dealership.

The rules are the same for every person. We want to make a profit off of everyone. You're absolutely right to do your homework. But here's all you need to know. The invoice of every car is printed in consumer reports. You can buy any new car for invoice plus 300 dollars.

Perhaps the next phase of this discussion should be about how to negotiate a lease (or a loan). First, you should show us the invoice. You should at least pretend to be a bottom line cash buyer rather than a payment buyer or a lease buyer. Work out the out the door price of your car. Again, that should be invoice plus 300 dollars for title transfer and fees. Then say, okay, I like that price. Then finance or lease that amount. You're usually better off getting financing outside of the dealership. Never buy extended warranty or gap insurance. Follow those steps, and you'll be fine. Also, never trade a vehicle at a dealership if at all possible. If you do, make sure you get all of the kbb trade in value rather than less than wholesale value (which is what we want to give you).

By the way, I plan to move over to a mazda dealership soon. If anyone is in florida, come see me. I'll sell at invoice plus all day just for the bonuses.

myriadshalaks

iTrader: (1)

You might think of it like this. Is your light bill a a debt? You're paying for a monthly service, namely, driving a car.

sonicblue6

No, what you need to do is stop being a smart ***, first off. $728/month is absolutely correct at the parameters YOU stated! Unfortunately, I restated your (and my) parameters incorrectly when I said 10% interest (kind of weird that I made the reverse of the same mistake you made, where you used 10, wrote 20, and I used 20, wrote 10). I wasn't looking at some link (that you didn't post back then), I actually calculated my own payment - you know, using the knowledge from my MATH DEGREE - and I'll construct my own amortization table, too, if necessary.