Lease Financing

Posted on | September 17, 2008 | Leave a Comment

For auto-consumers, crunching the numbers is one of the most difficult and confusing aspects of leasing. Take the finance charge on a lease for instance. Most people just dont understand how this is calculated on capitalised cost AND residual value instead of just the capitalised cost. For most, it seems plainly obvious, just as is the case when purchasing, that a charge should be levied on the capitalised cost of the vehicle.

Well, no quite! When you lease a car, youre 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 and divide by two, youll get the average capitalized cost outstanding over the lease term. Let us suppose youre leasing a car with a capitalized cost of $25,000 and 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 two divided by two.

Lease Financing
Using this sum works because the money factor is the annual interest rate devided by 24, rather than 12. Continuing with our example and 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.

To lease, you have two possible choices: either lease through a dealers finance source or through an independent lease company. A conventional dealer has a captive finance source, which can be the car manufacturers financial company, such as BMW Financial Services, Honda Motor Credit or General Motors Acceptance Corporation (GMAC), or a major national bank such as Chase Manhattan. Independent lease companies are no financial obligation to any single one manufacturer financing source, but work with dealers anywhere in the country.

Financing Info
Conventional dealers provide better lease-deals on limited-time promotions. Factory-subsidized cars that have subvented money factors and residuals are very attractive lease deals and can be very hard to beat anywhere else. Independent lease companies can offer you unbiased and professional advice on vehicle selection regardless of make and model. This is because they are not tied to a single manufacturer or financing source, unlike conventional dealers who have to sell specific models. They can also be more flexible regarding negotiating lease terms like residual value and mileage. Ultimately, if you prefer a more personal and customer-oriented relationship with your leasing agent, then you will do well with an independent leasing company.