Car Leasing Tools and Tips

Car Leasing Tools and Tips.

Car Leasing Defined

The basic concept of leasing is very simple. After driving a vehicle for a certain amount of time and number of miles, the car will be worth less. If you bought a brand new car and then drove it for three years, it would now be worth less than when it was new. For example, a brand new car cost $20,000, but after driving the car for three years, it is now worth only $12,000.

A lease is defined as the bank presetting the value of the vehicle after the customer drives it for a number of years. In the scenario above, the bank may decide that after the customer has driven the new car for three years, it will be worth $12,000. The vehicle’s value at the end of that period of driving is called the Residual. By forecasting a residual value for the vehicle, it is possible to calculate how much per month it will cost the customer to drive the vehicle.

The three elements of a lease payment

A lease payment is generated primarily 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 affect the payment in a different way.

The cap-cost element is self-explanatory: the lower the price, the lower 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 (bank’s) perspective. The residual is the amount that the bank is obligated to pay for the vehicle at the end of the lease, while the money-factor is used to calculate how much money they are making on each payment.

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