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
This method is used by all major leasing companies except Ford Motor Credit (see
below). To calculate the monthly payment using the constant yield method, use the three
steps below:
STEP 1. Determine the monthly depreciation:
Monthly Depreciation = (Cap Cost - Residual) /
Number of Months
STEP 2. Determine the monthly finance charge
(sometimes called the lease charge):
Monthly Finance Charge = (Cap Cost + Residual)
x Factor
STEP 3. 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 2 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.
Expert Lease Pro Software
Often you know all the terms of the lease except one. With the above equation one can
solve for any one unknown variable. But the math can get a little messy for some folks. If
this is the case, check out Expert Lease Pro software published by Chart Software. Not
only will this excellent program help you with the math, but it comes with a war chest of
tools and data to help you negotiate the sharpest deal and to help you make the right
lease/buy decision. Click above to learn more about Expert Lease Pro.
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