Calculating the Monthly Payment
No discussion about leasing would be complete without an explanation on how the monthly payment is calculated. Once you understand the terms and their meaning, calculating a lease payment is relatively simple.
Constant Yield Method
STEP 1: Determine the Adjusted Cap Cost:
STEP 2. Determine the monthly depreciation:
Monthly Depreciation = (Adjusted Cap Cost - Residual) / Number of Months
STEP 3. Determine the monthly finance charge (sometimes called the lease charge):
Monthly Finance Charge = (Adjusted Cap Cost + Residual) x Factor
STEP 4. Add the monthly depreciation to the monthly finance charge to obtain the monthly payment before taxes.
Monthly Payment = Monthly Depreciation + Monthly Finance Charge
If you live in a state that taxes only the payment, you can calculate the payment with sales tax. Simply multiply the payment by 1 plus the sales tax rate (e.g., 1.06 for a state with a 6% tax rate).
The plus sign in the formula in step 3 for the monthly finance charge is not a typo. The finance charge is based on the sum of the cap cost and the residual, not the difference. People are used to hearing that in a lease you only "pay for only the part you use" and hence should only pay interest on the depreciation (difference between cap cost and residual). This is not the case at all. Instead, the best way to think of a lease is like a balloon loan where the principle is the cap cost and the balloon payment is the residual value which is made by turning in the car.
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