Lease Payment Calculation
Leasing lets you use an asset without buying it. Monthly payment equals depreciation (asset value minus residual, divided by months) plus finance charge (sum of asset and residual times money factor). A $30,000 car with 50% residual, 0.0025 money factor, 36 months costs $491/month - $417 depreciation and $75 finance charge.
Money factor is lease's equivalent of interest rate - multiply by 2400 to convert to APR (0.0025 = 6% APR). Residual value is estimated worth at lease end, expressed as percentage of original value. Higher residual means lower payments but less equity. At lease end, you can buy at residual price, return vehicle, or start new lease.
Leasing works best when you want low monthly payments, drive reasonable miles (leases limit 10-15k miles/year with penalties for excess), like new vehicles every few years, and use for business (tax deductible). Buying is better for high mileage, long-term ownership, or building equity. Never confuse low lease payments with good value - you're renting, not investing.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Depends on situation. Leasing: lower monthly payments, always drive new vehicle, no resale hassle, potential tax benefits for business. Buying: build equity, no mileage limits, flexibility to sell anytime, lower long-term cost. Buy if keeping 7+ years.
Three options - return vehicle and walk away (if under mileage limit and good condition), buy it for residual value (good if market value exceeds residual), or trade it in for new lease. Inspect for excess wear charges before returning.
Yes - negotiate selling price (lower is better), money factor (like interest rate), and residual value. Also negotiate fees, mileage allowance, and wear-and-tear terms. Everything is negotiable despite what dealers claim.