Lease Example #2 *This example assumes that the dealer will not disclose the money factor being used and a credit report suggests that the prevailing APR rate would be qualified for
What we know:
Capitalized Cost = $19,300
Residual Value = $10,615
Lease Term = 39 months
Prevailing New Vehicle APR = 6.79%
Monthly Payment Presented by the Dealer = $349.78
Tax Rate = 6.25%
What we don’t know:
Money Factor
The first calculation to make here is to figure out the depreciation, which again is the $19,300 capitalized cost less the $10,615 residual value. This amounts to $8,685 and since we know we are leasing over the course of 39 months, we simply divide the $8,685 depreciation amount by 39 to get a monthly figure of $222.69 attributable to the depreciation portion.
Unfortunately, as we pointed out above $222.69 is not the final monthly payment because we still need to add in the leasing company’s fee. We now know that this is first calculated by adding the capitalized cost and the residual value together:
$19,300 + $10,615 = $29,915
Now, we still have to multiply $29,915 by the money factor to arrive at the leasing company’s monthly fee, but our problem in this example is that the dealer is not disclosing it. Having done our homework and knowing what the prevailing new vehicle annual percentage rate (APR) is, along with having secured our credit report from trusted sources such as www.freecreditreport.com or www.myficoscore.com, we can back into the money factor we should be qualifying for by taking the prevailing APR of 6.79% and dividing it by 24:
.0679 / 24 = .0028
Now we have the numbers that we need to finish figuring the lease fee:
$29,915 x .0028 = $83.76
To add up both portions and arrive very closely at what the total monthly payment including tax should be:
222.69 Depreciation portion of the monthly payment
+ 83.76 Lease Fee
= 306.45 Subtotal
+ 19.15 Tax @ 6.25%
= 325.60 Total Monthly Payment
What we’ve uncovered here was the dealership upping the money factor to the tune of $24.18 per month (the difference between the $349.78 they’ve quoted as our monthly payment, less what the monthly payment should be). Because all other variables were set, we know this overage is coming from an inflated money factor that the dealer is almost certainly getting the majority of for “placing” our business with that particular leasing company.
The really outrageous thing that this example is that the overpayment amounts to $943.02 over the life of the lease – most all of which goes to the dealership nonetheless! Unfortunately, similar scenarios play out every day at dealerships across the country at the expense of unsuspecting lessees. In our opinion, as legal as this incredibly is, it amounts to an egregious pick-pocketing of the uneducated lessee since the customer is not aware of this practice. The dealership will try to justify it once they’ve been caught in the act (after having tried to keep this dirty little secret to themselves), by telling you that it’s their compensation for “placing your business,” or “arranging your financing!” Trust us that the only thing they’re arranging for is a heftier income statement at your expense. When you uncover this, respond like we do by letting them know that 1) you came to them, and 2) they didn’t go out of their way to arrange anything because writing the contract with a leasing company is inherent to the whole leasing process in and of itself!
Lease Example #3*This example shows a side-by-side comparison that the impact of negotiating the capitalized cost (total price) of the vehicle has on your resulting monthly payments and corresponding total outlay over the lease term.
What we know:
MSRP (Sticker Price) = $27,900
Negotiated from MSRP = $24,700
Residual Value = $13,392
Money Factor = .0031 (comparable APR of 7.4%)
Lease Term = 36 months
Paying Full MSRP Negotiating the MSRP
a) $27,900 - $13,392 = $14,508 a) $24,700 - $13,392 = $11,308
b) $14,508 / 36 months = $403.00 b) $11,308 / 36 months = $314.11
c) $27,900 + $13,392 = $41,292 x .0031 = $128.01 c) $24,700 + $13,392 x .0031 = $38,092 x .0031 = $118.09
d) $403.00 + $128.01 = $531.01 d) $314.11 + $118.09 = $432.20
Difference = $98.81/month or $3,557.16 over the life of the lease
a) Depreciation Amount (Capitalized Cost – Residual Value)
b) Monthly Depreciation Fee = Total Depreciation Amount / Term
c) Monthly Lease Fee (Capitalized Cost + Residual Value x Money Factor)
d) Monthly Payment* = (Monthly Depreciation Amount + Monthly Lease Fee)
The difference of $98.81 represents the extra monthly amount in this example that you would pay had you been an uneducated lessee lead to believe that because you weren’t buying the vehicle the sales price didn’t matter. In overall terms, you are saving $3,557.16 over the 36 month life of the lease in this example that would have gone directly towards making dealer ownership a little wealthier. The $3,557.16 figure in this example is one which the dealership would get up front in a lump sum from the leasing company, all of which you’d be unnecessarily paying for over the next 36 months. |
