Auto leasing has increased in popularity in the last few years and many car buyers are facing the same question over and over: leasing, financing or paying cash. Despite the increased new car sales through leasing programs, many automotive consumers don’t understand how car leasing works and most important, when shopping for a lease deal, they are turned off by the “leasing vocabulary”.
Many people who own businesses or are self-employed could greatly benefit from car leasing – tax write-offs primarily- but they are not comfortable with the unfamiliar language or the entire leasing process.
It’s a fact that many people leasing new cars are overpaying because they didn’t do their homework first so they couldn’t score the best deal. So, it’s our duty to teach everyone and educate on how to score the best lease deal. But in order to do that, we need to take it step-by-step.
Our previous article published last week, focused on “How to Lease a Car” process and how to simply calculate car lease payments. Since I received many emails inquiring about car leasing, today we’re moving a step closer to the final lesson which will show you how to negotiate and obtain the best lease payment.
Our article today will get you familiar with the financing terms and details, the leasing vocabulary.
Auto Leasing Guide – Car-Leasing Glossary
Captive Finance Company - This is the finance company that is owned by or affiliated with the manufacturer. BMW Financial Services, Infiniti Financial Services, American Honda Finance, Nissan Motor Credit – these are all examples of different Captive Finance Companies.
MSRP -Short for “Manufacturer Suggested Retail Price” . Basically, it’s the list price of the vehicle as delivered.
Sell price - This is the price you negotiate to pay with the dealer.
Cap Cost Reduction - This is a payment made at the beginning of the lease with the intent to lower all future monthly payments. You are pre-paying a portion of the lease up-front. Remember: If the car is totaled or stolen, you lose this money.
Cap Cost - This is short for Capitalized Cost, a part of how the Depreciated Value of the vehicle is calculated. This amount is just a calculation, and can not generally be negotiated. This is equal to the sell price – Cap Cost Reduction.
Residual value (usually a percentage)- This value is established by the lender. It is sometimes quoted as a percentage, sometimes as a dollar figure. It is generally non-negotiable, as no one you are going to meet at the dealership has the authority to change this number.
Residual Value – This is the MSRP multiplied by the residual percentage.
Depreciated Value – This is the capitalized cost minus the residual value. It is a calculation based on negotiated and quoted numbers.
Money Factor – abbreviated MF. This is the “interest rate” of the automotive leasing world. If you want to judge a MF from a lender against interest rates for a purchase, you can multiply by 2400 to get a rough APR. This is not directly comparable, as the interest on a lease is computed differently than a financed purchase.
Term - This is the length of the lease, in months. Normal is 12, 24, 36, 39, 48. It can be any number, but anything longer than 48 is usually a really bad idea. Most leases have a sweet spot between 30 and 39 mos (where the monthly payment is lowest).
Principle Payment – this is a term in my lease calculator, but it is one of two parts that make up a lease payment. It is the Depreciated Value from above, divided by the Term from above. This is how much you pay toward the depreciated value of the vehicle each month.
Interest Payment – this is also a term in my lease calculator, and it tells you how much interest you pay on the vehicle each month. It’s really a very different calculation than most people are accustomed to seeing. It is the Capitalized Cost + Residual Value, all multiplied by the Money Factor. –> (CapCost + ResidVal) * MF.
Monthly Payment - This is the Principle Payment plus the Interest Payment added together. Sales tax is done differently on a state by state basis, so I can’t cover that here. In some states, it’s added to the payment each month (and that’s how the below calculator is built), but other states add it to the whole car value.
Lease support – This is money that the manufacturer provides to the leasing company (usually their own) in exchange for better lease terms. It’s an internal transfer to the manufacturer’s captive finance company (BMW Financial Services), you won’t see this on a 3rd party bank lease.
I hope this helps and please stay tuned for our next article on how to score the best lease deal!