Leasing against buying
A lease is not a loan. You pay for the part of the car you use up, plus a finance charge on the money the leasing company has tied up. That is why the payment is lower and why you own nothing at the end.
The two halves of the payment
- Depreciation: the capitalized cost minus the residual value, divided by the number of months. This is the part you consume.
- Rent charge: the finance cost. The Federal Reserve's own leasing guide gives the formula: the money factor multiplied by the sum of the adjusted capitalized cost and the residual value.
Add them, add sales tax on the payment in most states, and that is the monthly figure.
About the money factor
The money factor is a decimal, not a rate. The industry convention is to multiply it by 2,400 for an approximate APR equivalent, and we show that number, but be careful with it: the Federal Reserve's guide warns that a money factor “is not a lease rate and cannot be converted to a lease rate by moving the decimal point”, and there is no federal requirement for a lessor to disclose a lease rate at all. Treat the converted figure as a rough comparison, and compare total costs as well.
What the lease must tell you
Regulation M requires the lease to disclose the amount due at signing, the payment schedule and the total of payments, the gross capitalized cost, any capitalized cost reduction, the adjusted capitalized cost, the residual value, the rent charge, the base payment, the term, the early termination liability, and the standards for excess wear and mileage. If any of those are missing from the paperwork, ask.
The charges that arrive later
- Excess mileage, charged per mile over the annual limit.
- Excess wear, judged at return against the lease's standard.
- Early termination, which the FTC warns can be substantial.
A lease is cheapest per month and least flexible. Buying costs more per month and leaves you with a car. The comparison above puts numbers on that for your deal.
Quick answers
How is a car lease payment calculated?
Depreciation (capitalized cost minus residual, divided by the months) plus a rent charge (the money factor times the sum of the adjusted capitalized cost and the residual), plus sales tax in most states.
What is a money factor?
The finance charge on a lease, written as a small decimal. Multiplying it by 2,400 gives a rough APR equivalent, though the Federal Reserve cautions that it is not a lease rate.
Is leasing cheaper than buying?
Cheaper each month, usually dearer over time, because you never own anything. The comparison above prices both over the same period.
What is residual value?
What the leasing company expects the car to be worth at the end, set as a percentage of MSRP. A higher residual means less depreciation to pay for and a lower payment.
What does it cost to end a lease early?
Often a substantial charge. The FTC warns early termination can cost thousands, and the lease must disclose how the charge is worked out.
Sources
- Federal Reserve, Keys to Vehicle Leasing, the money factor and rent charge; the same guide's FAQ on lease rates
- 12 CFR § 1013.4 (Regulation M), required lease disclosures
- Federal Trade Commission, financing or leasing a car
- Federal Reserve G.19, new car loan rates for the buying comparison