Comments on: How Car Lease Payments are Calculated http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm Building Wealth through Saving and Investing Sun, 12 Feb 2012 23:42:26 -0330 http://wordpress.org/?v=abc hourly 1 By: cashback cards http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-108756 cashback cards Wed, 23 Dec 2009 13:25:45 +0000 http://www.milliondollarjourney.com/?p=1124#comment-108756 I think you explained this well, and when you compare apples to apples leasing is a huge rip off in my opinion. You forgot to state the fact that you have several if not many terms and conditions when it comes to leasing as well. Great information...I really enjoyed seeing the break down like this. This is yet just another reason why craiglist looking up for used cars are becoming more and more valueable and common. I think you explained this well, and when you compare apples to apples leasing is a huge rip off in my opinion. You forgot to state the fact that you have several if not many terms and conditions when it comes to leasing as well.

Great information…I really enjoyed seeing the break down like this. This is yet just another reason why craiglist looking up for used cars are becoming more and more valueable and common.

]]> By: Michael James http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107548 Michael James Wed, 25 Nov 2009 22:53:06 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107548 I managed to figure this stuff out. Those interested can read my <a href="http://michaeljamesmoney.blogspot.com/2009/11/understanding-car-lease-payments.html" rel="nofollow">explanation of car lease payments</a>. I managed to figure this stuff out. Those interested can read my explanation of car lease payments.

]]> By: cannon_fodder http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107546 cannon_fodder Wed, 25 Nov 2009 22:39:46 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107546 The Money Factor seems to come from converting to a percentage (hence x 100) and 12 months per year. My guess is that by also using a factor of 2 it can give the impression that it represents the interest rate, and a lower one at that. For example, some contracts that specify a Money Factor might write it as 2.75 (rather than the correct 0.00275). If you don't know any better, you might think this is the interest rate. In fact, the interest rate will be approximately 6.6%. Since it is used only in car leasing (apparently) one has to think it is there to obfuscate and perhaps mislead. The Money Factor seems to come from converting to a percentage (hence x 100) and 12 months per year. My guess is that by also using a factor of 2 it can give the impression that it represents the interest rate, and a lower one at that.

For example, some contracts that specify a Money Factor might write it as 2.75 (rather than the correct 0.00275). If you don’t know any better, you might think this is the interest rate. In fact, the interest rate will be approximately 6.6%.

Since it is used only in car leasing (apparently) one has to think it is there to obfuscate and perhaps mislead.

]]> By: Edwin http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107545 Edwin Wed, 25 Nov 2009 22:29:14 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107545 One big advantage of the lease is that you can match your lease length with the length of the warranty on the car. So if you continuously lease your cars, although you are paying more than someone who purchases and keeps a car, you are always covered under the warranty. This way you don't have to deal with the car breaking down (which in my experience with my previous car, cost me more per month than a new car) and having to dole out a huge chunk of change. Another benefit that you pay for is getting a new car every 3 or so years, which I'm sure is a very attractive option for a lot of people. One big advantage of the lease is that you can match your lease length with the length of the warranty on the car. So if you continuously lease your cars, although you are paying more than someone who purchases and keeps a car, you are always covered under the warranty.

This way you don’t have to deal with the car breaking down (which in my experience with my previous car, cost me more per month than a new car) and having to dole out a huge chunk of change.

Another benefit that you pay for is getting a new car every 3 or so years, which I’m sure is a very attractive option for a lot of people.

]]> By: Steve http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107514 Steve Wed, 25 Nov 2009 00:06:30 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107514 Having worked for a major manufacturer there are a few reasons why dealers push the lease. For one it guarantees the fact that you will need a new vehicle in 2-4 years, and guarantees that you will return to their dealership as you have to return the car or negotiate to buy it. They pay thousands a month on advertizing and if you lease, they don't have to pay you anything to entice you to come back because you contract mandates that you do that anyways. Lease customers are typically happier with their purchase than people who buy as they are less picky about things that may go wrong, because after all they know in their head they aren't keeping it forever. And a happier customer means they are more likely to return to lease or purchase again from the same dealer. It also makes it easier for the sales guy to close the deal on someone who is getting out of a lease. Because at the end of the contract you need a car, one way or another. That added pressure helps get a deal done, where as someone who owns can take their time and always has the opportunity to walk away. As far as profit for the dealer there are only small kick backs for leases, but the same kickbacks are available from the factory or banks for purchase financing. So either way it doesn't make much of a difference for them that way. The major difference is that your monthly payments are less on a lease than they would be if you did purchase financing. So after the credit checks the finance and insurance manager knows what you can afford to pay monthly. Their job is to maximize your payment. If you can afford $800 a month and your purchase finance payment is $700 then they only have $100 a month worth of product they can sell you. If however your lease payment is only $500 then they have $300 worth of product they can sell you and still get you approved. And all that extra stuff has a much higher mark up than the car itself. Hope that sheds some light on the true motivations of dealers. Guaranteed repeat visits to the dealership, happier customers, set intervals to switch and sell cars, more room to sell extras. Having worked for a major manufacturer there are a few reasons why dealers push the lease. For one it guarantees the fact that you will need a new vehicle in 2-4 years, and guarantees that you will return to their dealership as you have to return the car or negotiate to buy it. They pay thousands a month on advertizing and if you lease, they don’t have to pay you anything to entice you to come back because you contract mandates that you do that anyways. Lease customers are typically happier with their purchase than people who buy as they are less picky about things that may go wrong, because after all they know in their head they aren’t keeping it forever. And a happier customer means they are more likely to return to lease or purchase again from the same dealer. It also makes it easier for the sales guy to close the deal on someone who is getting out of a lease. Because at the end of the contract you need a car, one way or another. That added pressure helps get a deal done, where as someone who owns can take their time and always has the opportunity to walk away. As far as profit for the dealer there are only small kick backs for leases, but the same kickbacks are available from the factory or banks for purchase financing. So either way it doesn’t make much of a difference for them that way. The major difference is that your monthly payments are less on a lease than they would be if you did purchase financing. So after the credit checks the finance and insurance manager knows what you can afford to pay monthly. Their job is to maximize your payment. If you can afford $800 a month and your purchase finance payment is $700 then they only have $100 a month worth of product they can sell you. If however your lease payment is only $500 then they have $300 worth of product they can sell you and still get you approved. And all that extra stuff has a much higher mark up than the car itself.

Hope that sheds some light on the true motivations of dealers. Guaranteed repeat visits to the dealership, happier customers, set intervals to switch and sell cars, more room to sell extras.

]]> By: jon_snow http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107499 jon_snow Tue, 24 Nov 2009 14:48:26 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107499 On my own "million dollar journey" I'm going to avoid the temptation to buy a new vehicle when my existing one is perfectly fine... but that new car smell is wonderful, no doubt about it. On my own “million dollar journey” I’m going to avoid the temptation to buy a new vehicle when my existing one is perfectly fine… but that new car smell is wonderful, no doubt about it.

]]> By: Ms Save Money http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107488 Ms Save Money Mon, 23 Nov 2009 23:27:08 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107488 I don't think I would EVER lease a car because in the end for the most part, I'll be at a loss. However, between buying a used beater car and leasing, I'd probably rather lease because the mechanical problems w/ the used car would probably be pretty high, too. I don’t think I would EVER lease a car because in the end for the most part, I’ll be at a loss. However, between buying a used beater car and leasing, I’d probably rather lease because the mechanical problems w/ the used car would probably be pretty high, too.

]]> By: SaveABunch http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107486 SaveABunch Mon, 23 Nov 2009 20:35:05 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107486 Bottom line: Leasing is the most financial draining option to the consumer. If you must purchase a brand new vehicle, at least do it with cash! Bottom line: Leasing is the most financial draining option to the consumer. If you must purchase a brand new vehicle, at least do it with cash!

]]> By: Briefcases http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107485 Briefcases Mon, 23 Nov 2009 20:25:13 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107485 I had always been taught that leasing a car was a bad idea. The final price would always be higher than what it would cost with financing. The only advantages are the lower monthly cost and the fact that you can return the vehicle. If you return the vehicle, you have basically just rented the vehicle at a high price. No thank you. I had always been taught that leasing a car was a bad idea. The final price would always be higher than what it would cost with financing. The only advantages are the lower monthly cost and the fact that you can return the vehicle. If you return the vehicle, you have basically just rented the vehicle at a high price. No thank you.

]]> By: Michael James http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107483 Michael James Mon, 23 Nov 2009 19:28:19 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107483 I think you may be mixing future dollars with present day dollars. If I understand you correctly, the residual value is in dollars from 3 years from now. So the residual value will actually be less when viewed in present-day dollars. I think the lease fee calculation is just an approximation to a more complex present value calculation of all the dollar amounts. When I take the 36 monthly payments of 497.77 plus a lump sum payment of 15,276.60 in 36 months all brought to present value at 4.9231% per year, the result is a present day value of 29,880. This is very close to the stated interest rate of 4.9%. Your calculated interest rate on the depreciation of 14.2% is the result of mixing dollars from different times without adjusting for the interest rate. I think you may be mixing future dollars with present day dollars. If I understand you correctly, the residual value is in dollars from 3 years from now. So the residual value will actually be less when viewed in present-day dollars. I think the lease fee calculation is just an approximation to a more complex present value calculation of all the dollar amounts. When I take the 36 monthly payments of 497.77 plus a lump sum payment of 15,276.60 in 36 months all brought to present value at 4.9231% per year, the result is a present day value of 29,880. This is very close to the stated interest rate of 4.9%. Your calculated interest rate on the depreciation of 14.2% is the result of mixing dollars from different times without adjusting for the interest rate.

]]> By: nobleea http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107479 nobleea Mon, 23 Nov 2009 16:12:42 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107479 You pay interest and principal on the borrowed money for the depreciation. You pay interest only on the buyout amount (since you are getting temporary use out of their asset). I leased a car before. I loved it. Until it came down to 1 year remaining. Seeing the payments go out every month and knowing that you'll have nothing to show for it in a year is disconcerting. I had planned on buying it out at the end of the lease, but that would mean another 4 years of payments. I couldn't stand it anymore, so I bought the car out, sold it privately, and bought a much cheaper used car. I don't think I'll ever buy a new car again. You pay interest and principal on the borrowed money for the depreciation. You pay interest only on the buyout amount (since you are getting temporary use out of their asset).

I leased a car before. I loved it. Until it came down to 1 year remaining. Seeing the payments go out every month and knowing that you’ll have nothing to show for it in a year is disconcerting. I had planned on buying it out at the end of the lease, but that would mean another 4 years of payments. I couldn’t stand it anymore, so I bought the car out, sold it privately, and bought a much cheaper used car. I don’t think I’ll ever buy a new car again.

]]> By: FrugalTrader http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107474 FrugalTrader Mon, 23 Nov 2009 13:22:56 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107474 Mike, the residual value came straight from the Honda website. SavingING, here's a another article I wrote on <a href="http://www.milliondollarjourney.com/pros-and-cons-of-taking-over-a-car-lease.htm" rel="nofollow">taking over a car lease.</a> Mike, the residual value came straight from the Honda website.

SavingING, here’s a another article I wrote on taking over a car lease.

]]> By: saveING.ca This is why I signed up with ING Direct http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107473 saveING.ca This is why I signed up with ING Direct Mon, 23 Nov 2009 13:20:17 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107473 The single best way to drive a late model car at the lowest possible cost is to take over someone's existing car lease. It's less expensive than buying and less expensive than taking out a new lease. Why? Most existing car leases were taken out months ago when car manufacturers were offering incredible money-losing lease deals and very low monthly payments. Many people who took those great lease deals now need to get out after losing jobs or suffering other financial distress. Most lease companies allow those leases to be transferred to someone else by simply paying a transfer fee. The single best way to drive a late model car at the lowest possible cost is to take over someone’s existing car lease. It’s less expensive than buying and less expensive than taking out a new lease.

Why?

Most existing car leases were taken out months ago when car manufacturers were offering incredible money-losing lease deals and very low monthly payments. Many people who took those great lease deals now need to get out after losing jobs or suffering other financial distress. Most lease companies allow those leases to be transferred to someone else by simply paying a transfer fee.

]]> By: Sarlock http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107472 Sarlock Mon, 23 Nov 2009 13:17:55 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107472 There's a reason the car salesmen push you to lease... it's a far better return on money and they dealership gets a nice kickback. There’s a reason the car salesmen push you to lease… it’s a far better return on money and they dealership gets a nice kickback.

]]> By: Mike Kolcun http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107471 Mike Kolcun Mon, 23 Nov 2009 13:15:34 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107471 Thanks for the post, We recently decided to purchase a used vehicle, we ended up getting a 2007 model (the 2010 model was available new) with 40k km on it. We just couldn't justify the new purchase price, even after figuring the best possible deal via carcostcanada.ca Where did the residual value figure come from? Thanks Thanks for the post, We recently decided to purchase a used vehicle, we ended up getting a 2007 model (the 2010 model was available new) with 40k km on it.

We just couldn’t justify the new purchase price, even after figuring the best possible deal via carcostcanada.ca

Where did the residual value figure come from?
Thanks

]]> By: FrugalTrader http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107470 FrugalTrader Mon, 23 Nov 2009 13:07:52 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107470 Chris, to be honest, I'm not sure where the 2400 comes from but it seems like a rule of thumb.(http://www.investopedia.com/terms/m/money-factor.asp). Anyone have any ideas? Chris, to be honest, I’m not sure where the 2400 comes from but it seems like a rule of thumb.(http://www.investopedia.com/terms/m/money-factor.asp).

Anyone have any ideas?

]]> By: Chris http://www.milliondollarjourney.com/how-car-lease-payments-are-calculated.htm/comment-page-1#comment-107469 Chris Mon, 23 Nov 2009 12:45:41 +0000 http://www.milliondollarjourney.com/?p=1124#comment-107469 Where does that 2400 number come from? Is it some sort of rule of thumb? I always thought that the correct way to calculate a lease payment was that you were basically taking out a loan for the entire value of the call and then calculating payments so that after the term, you still have an outstanding "debt" equal to the residual value. Where does that 2400 number come from? Is it some sort of rule of thumb?

I always thought that the correct way to calculate a lease payment was that you were basically taking out a loan for the entire value of the call and then calculating payments so that after the term, you still have an outstanding “debt” equal to the residual value.

]]>