Are you torn between leasing and buying a car? This post dives into the car leasing formula, helping you make an informed decision. If you’re considering leasing a car, use our calculator to estimate your monthly payments. Let’s explore the pros and cons of both options.
HANDPICKED RELATED CONTENT:
Leasing a Car vs Buying
How to Save Money on Car insurance
Car Buying: The Traditional Route
Owning a car outright with cash is the dream, but it’s not always feasible. Most people rely on loans and credit cards to afford big-ticket items like cars. This desire to own creates a web of mortgages, credit card debt, and loans with high-interest rates.
Car Leasing: A Different Approach
HANDPICKED RELATED CONTENT:
Leasing a Car vs Buying
How to Save Money on Car insurance
Leasing offers an alternative. Instead of financing the entire car, you’re essentially renting it for a set period, typically 36 months. You agree not to exceed a certain number of miles during the lease.
Use our online calculator to estimate your monthly lease payments. Fields marked with “*” are required. Use the “tab” key on your keyboard to navigate the fields. If you don’t know the values of the required fields, contact your dealer for exact numbers or run different scenarios to see the possible outcomes.
Key Factors in Car Leasing
1. Manufacturer Suggested Retail Price (MSRP)
This is a sticker on the car’s window. This is the manufacturer’s suggested retail price. The sticker price is non-negotiable, but it plays a crucial role in calculating the lease cost. The Selling Price (SP) is negotiable, but MSRP is not.
The Residual Value Total (explained next) is derived from the MSRP value.
As an example, suppose, MSRP of a car you are considering leasing is $20,000 and you negotiate the selling price down to $17,000. Residual Value Total (RVT) is still calculated out of MSRP $20,000 x 60% = $12,000 instead of a selling price $17,000 x 60% =$10,200.
Why is this important?
At the end of the lease, the Residual Value Total (RVT) of the car is estimated to be $1,800 higher for you to purchase if you decide to finance the remaining cost of the car or buy it outright.
2. Residual Value Percentage (RVP)
This percentage is set by the dealer, non-negotiable, and impacts the car’s future value at the end of the lease. Choosing the right RVP is essential.
For example, if the Residual Value Percentage (RVP) is 60 percent, then the automobile you are leasing today for $17,000 (SP) is estimated to have the Residual Value Total (RVT) of $12,000 by the end of the lease ($20,000 x 60% = $12,000).
Most experts recommend shopping for a higher residual value percentage. However, whether shopping for a higher RVP or a lower RVP depends on what your intentions are at the end of the lease.
With a smaller percentage, you will have the option to purchase a car, a residual value of which is well under the market value by the end of the lease but with much higher monthly payments during the lease.
HANDPICKED RELATED CONTENT:
Leasing a Car vs Buying
How to Save Money on Car insurance
To continue the example with a $20,000 car and 60% RVP, RVT in three years for that car will be $12,000 with monthly payments approximately from $180 to $200.
With 30% RVP, the same car will have $6,000 of RVT by the end of the lease but with payments of approximately $340 to $360 per month during the lease.
Which choice should you make?
Your decision largely depends on your post-lease intentions for the car. If you plan to return the vehicle to the dealer at the end of the lease, look for dealerships offering a higher Residual Value Percentage (60% and above).
On the other hand, if your goal is to finance the car’s purchase, even with a residual value significantly below the market price at lease end, and you can handle higher monthly payments during the lease period, consider dealerships with the lowest Residual Value Percentage (50% and below).
Remember this guiding principle: A higher RVP value results in a higher Residual Value Total (RVT) at the lease’s conclusion, translating to lower monthly payments. Conversely, a lower RVP value means a reduced RVT at lease end but comes with higher monthly payments. Choose the option that aligns with your long-term goals and budget.
3. Residual Value Total (RVT)
Calculate this value by multiplying MSRP by RVP. It’s the estimated market value of the car at the lease end.
Suppose the Manufacturer Suggested Retail Price (MSRP) is $20,000, and the Residual Value Percentage (RVP) is set at 60%. In this scenario, the Residual Value Total (RVT) amounts to $12,000, representing the projected market value of the vehicle at the conclusion of a 3-year lease covering 36,000 miles. If you wish to retain the car, you have the option to finance the residual value total at the end of the lease.
4. Selling Price
Engage in negotiations to reduce the selling price and thereby decrease your overall expenses.
5. Fees
Be aware of various fees like registration, acquisition, down payment tax, and documentation fees. Negotiate where possible.
Combine all the fees into a single sum for convenient calculations:
Registration: The cost varies based on your driver’s license registration location. You have the opportunity to negotiate with the dealer to cover this expense on your behalf.
Acquisition Fees: These fees are set by the dealer and may reach as high as $1000. It’s advisable to attempt negotiating a reduction in this amount. While the dealership might not always agree to lower the fee, it’s worth making the effort.
Down Payment Tax: It’s essential to verify whether this tax is included in your deal or not. Ensure to confirm its status.
Documentation Fees: Once again, these are dealership fees. Although the amount may seem insignificant, every $20 saved goes directly into your pocket.
Summing up all these fees simplifies the calculation process.
6. Gross Cap Cost (GCC)
This is the total cost of the deal.
7. Cap Cost Reduction (CCR)
Sum of your down payment, trade-in value, and rebate. A higher CCR reduces your GCC.
8. Adjusted Cap Cost (ACC)
Calculate this value by subtracting CCR from GCC.
Subtract CCR (item 7) from GCC (item 6). The ACC value is used to calculate the monthly payment.
9. Depreciation Amount (DA)
Find it by subtracting RVT (item 3) from ACC (item 8).
10. Base Payment
Divide DA (item 9) by the number of lease months.
For example, if you intend to lease a car for 36 months, divide DA by 36.
11. Money Factor
This value is set by a dealer and is non-negotiable. The Money Factor (MF) is an interest rate charged to finance the deal.
12. Rent Charge
Calculate by multiplying ACC (item 8) and RVT (item 3) by the Money Factor (item 11). The value represents the amount charged to rent a car.
13. Pretax Lease Payment
This is your monthly payment pre-taxed. To calculate, add Base Payment (item 10) and Rent Charge (item 12).
14. State Sales Tax
Consult with your state’s DMV office to determine the value of State Sales Tax applicable in your state. In certain states, no sales tax is levied whatsoever. To find out the specific sales tax rate applicable in your state, visit Visit USA.gov for accurate information.
15. Post Tax Lease Payment
This is your total monthly payment. To calculate, multiply the Pretax Lease Payment (item 13) by the State Tax (item 14) value.
Table 1. Example of a car leasing formula based on $20,000 MSRP, 60% RVP, and a $17,000 selling price.
| Name | Value | Comments |
| 1. MSRP | $20,000 | Non-negotiable. Set by a dealer |
| 2. Residual Value Percentage (RVT) | 60% | Non-negotiable. Set by a dealer |
| 3. Residual Value Total (RVT) | $12,000 | MSRP x RVT ( $20,000 x 60% =$ 12,000) |
| 4. Selling Price | $17,000 | Negotiable |
| 5. Total Fees: | $1,379 | The SUM of items (5a) through (5d) ($680 + $699 + 0 + 0 = $1,379) |
| a. Registration | $680 | Set by a dealer. Negotiable |
| b. Acquisition | $699 | Set by a dealer. Negotiable. |
| c. Down-payment tax | 0 | Set by a dealer. |
| d. Documentation fees | 0 | Set by a dealer. Negotiable. |
| 6. Gross Cap Cost | $18,379 | The SUM of Selling Price (4) and Total Fees (5) ($17,000 + $1,379 = $18,379) |
| 7. Cap Cost Reduction | $3,200 | The SUM of Item (7a), (7b), and (7c) ($2,000 + $1,200 + 0 = $3,200) |
| 7a. Down Payment | $2,000 | Any cash out of pocket. May or may not be required by a dealer. |
| 7b. Trade-in | $1,200 | Value of a trade-in car (if any). |
| 7c. Rebate | 0 | Offered by a dealer (if any). |
| 8. Adjusted Cap Cost | $15,179 | Subtract Item (7) from Item (6) ($18,379 – $3,200 = $15,179) |
| 9. Depreciation Amount | $3,179 | Subtract Item (3) from Item (8) ($15,179 – $12,000 = $3,179) |
| 10. Base Payment | $88.31 | Divide Item (9) by the number of lease months ($3,179/36 = $88.31) |
| 11. Rent Charge | $51.37 | The SUM of Items (8) and (3) multiplied by item (12) ($15,179 + $12,000) * 0.00189 = $51.37 |
| 12. Money Factor | 0.00189 | Non-negotiable. Set by a dealer |
| 13. Pretax lease Payment | $139.68 | The SUM of items (10) and (11) ($88.31 + $51.37 = $139.68) |
| 14. Post tax Lease Payment | $143.86 | Multiply Item (13) by State Sales Tax (15) ($139.68 + 3% = $139.68 + (139.68 *3%) = $143.86) |
| 15. State Sales Tax | 3% | Check your state for State Sales Tax value. Navigate to US DMV. In the search box, type your state. Once you arrive at your state’s DMV page, search Sales TAX in the search box. |
Making the Choice
Online Car Leasing Calculator by @PennySavedIsPennyGained.com #CarLeasingCalculator Click To Tweet
The decision between leasing and buying hinges on your plans after the lease. If you want to return the car, seek higher RVP values. For those planning to finance the purchase, consider lower RVP values despite higher monthly payments.
Remember, a higher RVP results in a higher RVT (estimated market value) at the lease end and lower monthly payments. Conversely, a lower RVP leads to a lower RVT but higher monthly payments.
In the end, it’s essential to crunch the numbers and choose the option that aligns with your goals and budget.
THIS POST MAY CONTAIN AFFILIATE LINKS, MEANING I RECEIVE A COMMISSION FOR PURCHASES MADE THROUGH THESE LINKS, AT NO COST TO YOU. PLEASE READ MY DISCLOSURE FOR MORE INFO.
