Calculating the Monthly Payment
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No discussion about leasing would be complete without an
explanation on how the monthly payment is calculated. Once you
understand the terms and their meaning, calculating a lease
payment is relatively simple.
Constant Yield Method
This method is used by all major leasing companies except
Ford Motor Credit (see below). To calculate the monthly payment
using the constant yield method, use the three steps below:
STEP 1. Determine the monthly depreciation:
Monthly Depreciation = (Cap Cost -
Residual) / Number of Months
STEP 2. Determine the monthly finance charge
(sometimes called the lease charge):
Monthly Finance Charge = (Cap Cost
+ Residual) x Factor
STEP 3. Add the monthly depreciation to the
monthly finance charge to obtain the monthly payment before
taxes.
Monthly Payment = Monthly
Depreciation + Monthly Finance Charge
If you live in a state that taxes only the payment, you can
calculate the payment with sales tax. Simply multiply the
payment by 1 plus the sales tax rate (e.g., 1.06 for a state
with a 6% tax rate).
The plus sign in the formula in step 2 for the monthly
finance charge is not a typo. The finance charge is based on the
sum of the cap cost and the residual, not the difference. People
are used to hearing that in a lease you only "pay for only
the part you use" and hence should only pay interest on the
depreciation (difference between cap cost and residual). This is
not the case at all. Instead, the best way to think of a lease
is like a balloon loan where the principle is the cap cost and
the balloon payment is the residual value which is made by
turning in the car.
Ford APR Method
The interest rate quoted by Ford dealers will not
represent the true APR of the lease. This is because Ford adds
an administrative fee of approximately 0.00111 times the cap
cost to each monthly payment. This makes the monthly payments
fell about 1.5% higher than the rate quoted by the Ford dealer.
Consider the sample Ford lease below:
Cap Cost = $21,400
Residual = $16,683
Months = 24
Interest Rate Quoted by Dealer: 9.0%
The Ford Payment would be the monthly payment at 9% using the
constant yield method plus 0.00111 times the cap cost, or
$338.08 + $21,400 (.00111) = $361.84
The equivalent APR for this monthly payment stream is 10.5%.
Expert Lease Pro
Software
Often you know all the terms of the lease except one. With the
above equation one can solve for any one unknown variable. But
the math can get a little messy for some folks. If this is the
case, check out Expert Lease Pro software published by Chart
Software. Not only will this excellent program help you with the
math, but it comes with a war chest of tools and data to help
you negotiate the sharpest deal and to help you make the right
lease/buy decision. Click above to learn more about Expert Lease
Pro.
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