Lease Calculation Terminology

annual percentage rate (APR)

A simple loan rate, such as 6.5%, familiar to anyone who has taken out a loan or mortgaged a home. It represents the percentage of the loan amount that you will pay annually for the privilege of borrowing the money.

lease: lease price

The total cost of leasing the vehicle, excluding the down payment (monthly charges multiplied by the term).

lease: residual value

The projected market value of a vehicle at the end of the lease, used to determine the cost of the lease at the time of negotiation. maintains a database of residual values for thousands of new vehicles.

loan: amount financed

The loan amount, the amount you are borrowing from the lender (vehicle price plus sales tax minus down payment and trade-in value).

loan and lease: down payment

A lump payment, typically in cash, that reduces the amount required to finance the purchase or lease of a vehicle. In leasing, a down payment is also referred to as a “capitalized cost reduction,” where the capitalized cost is akin to the vehicle price in a loan scenario.

loan and lease: total cost to own

Compares the total spent to own the vehicle, including down payment and trade-in value; in leasing, this total also includes the residual value of the vehicle. Acquisition fees, destination charges, tag, title, and other fees and incentives are not included in this calculation, which is an estimate only.

This comparison ignores an important consideration: what you do with the money you save during the course of the loan or lease. Because leases typically demand lower up-front and monthly costs compared with financing, they can leave more money in the hands of the lessee. If you invest this money in a high-interest venture, it can tip the scales in the favor of leasing.

loan and lease: total spent

The sum of costs (total monthly payments plus down payment and trade-in value). Remember, the consumer who financed now owns the car; the lessee does not. Acquisition fees, destination charges, tag, title, and other fees and incentives are not included in this calculation, which is an estimate only.

money factor

Money factor is not an annual percentage rate. In a lease, the lease company uses the “money factor” — an arbitrary fractional number, such as .0042 — to calculate the lease charge or fee. The monthly payment combines the resulting fee with the depreciation charge (the total value the car loses over the term of the lease divided by the number of monthly payments). To better understand the money factor, multiply it by 2,400 to arrive at a more typical APR; this calculation will be slightly above the equivalent APR that the money factor represents. This percentage is more useful in comparing leases with each other than with loans, however, because it doesn’t account for all fees and only loans build equity. For example, a rate of 9.84% [.0041 x 2,400] on a lease, while lower, is not necessarily a better deal than a 10.4% APR on a loan, all other factors being equal.

Also, if a dealer quotes you a money factor such as 3.1, which sounds like a low APR, you can multiply that by 2.4 in order to get the equivalent APR. In this case, the rate would be akin to a 7.44% APR.


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