How Car Leasing Works – Example Lease Deal

One of the best ways to learn about car leasing (and most anything else) is by example. A comprehensive easy-to-understand example illustrates how it works with explanations and numbers. Finally we describe, with example, how to determine if the deal is good, or not.

Average Car Lease Example

Lets’s assume we want to lease a new car for 36 months (the Lease Term), at 12,000 miles a year, that has a sticker price of $30,000.

Our dealer offers a $2000 discount that makes the selling price $28,000. On top of that, there is an acquisition fee of $595 and a dealer doc fee of $495, as well as official tag and registration fees of $110 for a total of $1200. Added to the selling price of the car, total cost is $28,000 + $1200 = $29,200. It’s known as the Gross Capitalized Cost.

Let’s also assume that we plan to make a $5000 down payment to reduce our monthly payment amount. This is called Capitalized Cost Reduction. Most leases do not require a down payment, but don’t confuse down payment with the total amount of money due at lease inception, which will include not only down payment (if any) but also the first month’s payment.

If we have a trade vehicle, the dealer’s offered trade value is also treated as down payment, and therefore part of Capitalized Cost Reduction. It would be added to any cash (if any) we choose to pay down. We’ll assume no trade vehicle in our deal.

In our example here, we now subtract Capitalized Cost Reduction from Gross Capitalized Cost, we get $24,200 as our Net Capitalized Cost. This is the amount that the lease will be based on. It’s sometimes simply called Cap Cost.

Let’s continue to assume that the particular car we have chosen has a 3-year lease end residual percentage of 50%. This is a percentage of MSRP sticker price — in our case 50% of $30,000 = $15,000 — not the discounted or negotiated selling price. $15,000 becomes the Residual Value in this lease deal.

Finally, let’s assume the interest rate in this deal is 5.0% APR, which is divided by 2400 to get .0021 as our Money Factor.

Since we now know all the factors of our lease (Cap Cost, Residual Value, Lease Term, and Money Factor) we can proceed to calculate our Monthly Lease Payment to be $337.22, using the Lease Payment Calculator in this Lease Guide.

If sales tax is charged is charged on the monthly lease payment, it must be added to each payment. For example, if our local sales tax rate is 6.00%, our total payment will be $337.22 + $20.23 = $357.45 .

Is It a Good Deal?

Knowing the monthly payment for our lease deal is important, especially if we have the underlying figures to calculate it ourselves. It allows us to compare different deals and check dealers’ numbers to detect hidden charges and mistakes that result n a different monthly payment number than our own.

The only way a dealer’s payment figure can be different than ours is because he’s using different numbers in his calculations.

Assuming our payment figure agrees with those of our dealer, there are number of ways to determine if our lease deal is good, just average, or bad.

One way is to use features of our Lease Kit.

We can check the make/model of our vehicle in the Vehicle Lease Ratings table. In our example our vehicle will fall into the “Average” category. If we look at the Residual Calculator for a 12,000 mile, 3 year lease, we find that our Residual Percentage of 50% is better than average. We might choose to let the Lease Evaluator in the Lease Kit do some of this work for us. We plug in our numbers and find that our lease deal is rated as Good, which is better than Average but not quite Excellent.

If our dealer had given us a detailed copy of our lease contract, we could use the Lease Inspector in the Lease Kit to actually plug in numbers from the contract form to get the best and most detailed evaluation of our deal. We have assumed that we don’t yet have access to that contract in this example.

Another way to evaluate our lease deal would be to use the “One Percent Rule.” It’s quick but much less accurate and offers only a rough “ballpark” result. Dividing our base monthly payment of $337.22 by $30,000 MSRP yields .0112, or 1.12%, which again says our deal is not bad, but not excellent as it would if the result had been closer to 1.00%.

Finally, we could use LeaseGuide’s Lease Deal Evaluator calculator, which produces more definitive results than the One Percent Rule technique, but not quite as accurate as the Lease Evaluator or Lease Inspector in the Lease Kit. If we use it for our example here, it again tells us our lease deal is rated Good, better than Average.

So, is this example car lease deal worth considering?

Yes, the deal appears to be better than average and worth accepting, although if you compare deals for the same or similar cars from different dealers, and use the techniques used in this example to evaluate them, you might find an even better deal.

Summary

We have presented a real-life car lease example with numbers and explanations, hoping to help explain how a car lease works from a financial perspective. It shows how lease payments car calculated using a number of key factors, and how to determine if a deal is worth considering.