Leasing a car isn't as different from buying one as you might think. While you're only going to be paying for the portion of the car that you use, you're still making monthly payments for your car. You're also still paying interest on what you borrow -- it just isn't called interest. It's called a money factor instead.
Lease Money Factors
While many manufacturers advertise their car loan rates, lease money factors are harder to find. When you can find one, it's typically a very small number like 0.0025. To get lease factors, just ask your lender or the finance office at the dealer. Once you get one, multiply it by 2,400 to find the interest rate that it represents. For example, a 0.0025 money factor represents a 6-percent interest rate.
Two Other Numbers
To understand how your money factor affects your lease, you need to understand two other numbers -- your net capitalized cost and your residual. When you lease a car, you only pay for the amount of the car that you use while you have it. If you buy a $28,000 car and you use 53.57 percent of it, the car would have approximately $13,000 in value left over at the end of your lease. That's the residual. Your net capitalized cost is the amount of money that the car costs for the purpose of the lease. If the car has a $28,000 sticker price and you get a $2,000 rebate and put $2,000 down, its net capitalized cost would be $24,000.
Calculating Your Interest
Your dealer uses the money factor to figure out the interest portion of your lease payments. To find out what you'll be paying in interest every month, add together your net capitalized cost and residual, then multiply them by the money factor. For example, if you're buying a car with a net cost of $24,000 and a residual of $13,000 and your money factor is 0.002, your monthly interest will be $74. Here's what's a little bit confusing about this. While you're only using a portion of the car's value, you still have the whole car. As such, your lease interest is based on the entire value of the car as it goes down, even though your payments are only based on the part of the car that you use.
A Lease Payment
An example can help make sense of this. Assume that you're looking at a car with a $30,500 sticker price. The dealer lets you know that the residual on a 36-month lease is 56 percent, meaning that the car would still be worth $17,080 at the end of the lease, and that the money factor is 0.001875. If you negotiated the car down to $28,250 and put another $2,550 down, you'd end up with a net capitalized cost of $25,750. The portion of your lease payment is equal to your total depreciation divided by 36. To find this, subtract $17,080 from $25,750 to get your total depreciation of $8,670 and divide it by 36 to find your monthly depreciation of $240.83. To find your interest, add your net capitalized cost of $25,750 and your residual of $17,080 and multiply the result by 0.001875 to find a monthly interest payment $80.31. Your combined payment, not including taxes and fees, would be $321.14.
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