DavidG

If anyone is still following this thread since the last archive, I want to clarify the comment of a followup post stating that MF * 24 seemed to give a number too low to truly represent interest rate. The problem with that post is that the poster assumed that the "loan" involved in a lease is the difference between the capitalized cost (selling price - down payment) and the residual. This is incorrect. When you lease a car, you are borrowing the full cost of the car. After all, the dealership is being payed by the bank for your car. You then pay off the "loan" at a slower rate than a normal 3-5 year loan such that, at the end of the lease, the balance left on the loan is equal to the residual value of the car, and the return of the car itself becomes the last payment. This is known as a balloon loan. While a lease, strictly speaking, is not set up on paper as a true balloon loan, it works in a very similar fashion.<p>So, when the lease starts off, you are paying interest on the full cap cost of the car. At the end of the lease, the remaining loan balance is that of the residual cost. On the average, then, your outstanding balance is, well, the average of the two:<p>(cap cost + residual)/2<p>Interest per month would thus be this average balance times the interest rate divided by 12:<p>(Int Rate) * (cap cost + residual) / (2 * 12)<p>or<p>(cap cost + residual) * (Int Rate / 24)<p>or<p>(cap cost + residual) * MF<p>This is why you multiply MF by 24 to get "interest rate."<p>The only error here is that interest on a real loan is calculated each month on the outstanding balance of that same month. So, you initially pay more interest and then, as the balance decreases, you pay less. If you average these interest payments, however, you get a similar number to calculating the interest on your "average" outstanding balance, as described above.<p>In any case, my formula for lease payments described in the prior posts is exact and is the same formula used by Audi financing, so it's still useful even if the above discussion is confusing.

vik

When I was thinking lease, I went to every lease site I could find. Despite the fact that I am now able to calculate leases, I never understood the mechanics behind what was happening. Your post did an excellent job of explaining the reasoning behind the math. Thanks!<p><br>-vik<br>1.8tqms (2 weeks away)

marc

(thanks)

Guest

would still be much higher than the MF * 2. One should not be charged interest on the full amount of the car when one is merely paying the depreciation. You simply cannot compare a balloon note to a lease IMO. A balloon note is simply financing the entire balance of the vehicle. Lease is merely financing the depreciation or cap cost - residual. Why do you think it is called a money factor instead of interest? The effective rates would be usurious in many instances.<p>Your analysis is good. I have run the numbers many times on vehicles I have purchased or have been interested in purchasing and have been amazed by the actual effective rates of interest.