Car Lease Residuals and Money-Factors

A lease payment is primarily generated from three elements: the Cap-Cost (the price), the Residual (value of the vehicle at the end of the lease), and the Money-Factor (comparable to an interest rate).  Each one of these elements will effect the payment in a different way.

 

 

The cap-cost element is self-explanatory: the cheaper price, the cheaper the payment.  However, the residual and money-factor can affect the lease differently.

The easiest way to look at the relationship between the residual and money-factor is to look at it from the leasing company's (banks) perspective. The residual is the amount that the bank is obligated to buy the vehicle at the end of the lease. Whereas, the money-factor is used to calculate how much money they are making on each payment. 

 

If a leasing company would like to make the most money over the Term of the lease they would apply a high money factor.  Conversely, if the leasing company would like to own the vehicle at the end of the lease at a good price they would use a low residual.  For example, a bank could set the residual at a low value that would enable them to sell it easily or for a profit.

 

This means a lease can have different money factors and residuals and it would result in the same payment.

 

Let’s look at two different scenarios based on the same cap-cost (price) and term (number of months). These examples will have different residuals and money-factors and yet the will produce the same payment of $318.

Price (cap-cost) of vehicle is $20,000 and a 36 month (3 year) lease.

Scenario 1

The Residual is $12,000 producing a balance of $8000 (the depreciation).

$8000 divided by 36 months is $222 per month.

Therefore, $222 of each lease payment is depreciation.

 

                      

The Money-factor is .0030 which will yield a lease charge of $96

Therefore; $96 of each lease payment is the lease charge.

The Total Payment is $222 + $96 = $318
 

Scenario 2

The Residual is now a lower value of $10,000, producing a balance of $10,000.

 

$10,000 divided by 36 months is $277 per month.

Therefore, $277 of each lease payment is depreciation.

 

The Money-factor is .00135 which will yield a lease charge of $41

Therefore; $41 of each lease payment is the lease charge.

The Total Payment is $277 + $41 = $318

 
 

In the First Scenario, the residual is $12,000, meaning the bank will own the vehicle for $12,000 at the end of the lease.  This amount could be more than the car could be worth in three years.  Therefore, the leasing company is charging $96 on each payment.

In the Second Scenario, the Residual is $10,000, meaning the bank will own the vehicle for $10,000 at the end of the lease.  This could be exactly what the car could be worth in three years so the bank is only making $41 on each payment.

It is wise for the customer to request the residual value and money-factor of every lease payment that is quoted by the dealer.

In the first scenario the bank charged approximately $2000 more in lease charge over three years than the bank in the second scenario.  However in the second scenario the bank will own the vehicle at the end of the lease for only $10,000, which is $2000 less than the bank in the first scenario.

If all this doesn’t affect the customer’s payment, so why should the customer care? The reasoning is if the customer is considering the option of purchasing the car for the residual value at the end of their lease, they should look for a lease with a low residual like the second scenario. In this scenario, most of their lease payment is going to “pay-down” the value of the car and less is going to the lease charge.