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The sixth generation 3 series, chassis code F30. 2013 model year 328i and 335i sedans now in production. Read the F30 frequently asked question thread for all your basic question and dive into all the details in the ultimate F30 information thread.

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  #1  
Old 10-04-2012, 08:38 AM
kkapdolee kkapdolee is offline
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Help with lease calculation in the state of Texas

Hi,

I'm trying to understand the math behind lease calculation and I would appreciate your help.

I was told by the dealer that in the state of Texas, you pay the tax not for the depreciation value of the car during your lease but for the entire price of the car. This makes it a little difficult for me to use a regular lease calculator I can find online. Honeslty, I'm a little confused. I may have a round about way of calculating as I have tried several different approaches. Please let me know if there is a better way to calculate specifically for a lease in Texas.

The following are the numbers for a lease for a 3 series sedan with the options that I want.

MSRP: 45,000
Sales price: 42,500 (estimate according to Edmunds.com)
Residual %: 62%
Residual value: 27,900 (45,000 * 0.62)
Money factor: 0.00135
Tax rate: 6.25%
10k miles a year
36 months

I'm thinking of paying 0 down payment. Therefore, my approach is to add tax for the total sales price in the beginning (that is, 42,500 * 1.0625) then financing this resulting number. After I calculate the monthly lease amount (monthly depreciation + monthly tax + financing cost), I will add taxes to just the financing cost as I hadn't accounted for that yet. I get the following.

42,500 * 1.0625 = 45,156.25 -> sales price + tax on the entire sales price
45,156.25 - 27,900 = 17,256.25 -> total depreciation + tax payments
17,256.25 / 36 = 479.34 -> monthly depreciation including tax payments
(45,156.25 + 27,900) * 0.00135 = 98.63 -> monthly financing charge on depreciation+tax
98.62 * 0.0625 = 6.16 -> tax on the monthly financing charge

So the total monthly payment will be
monthly depreciation including tax + monthly financing charge + tax on the monthly financing charge
479.34 + 98.63 + 6.16 = 584.13

Questions:
1. Are my calculations above correct? (Actually, I may have partially double taxed myself as it looks like I'm taxed on the financing cost of the tax I pay)
2. How much other fees can I expect? I already included the 895 destination fee into the MSRP and sales price. I know there is 725 acquisition fee which I haven't included yet. How much in TT&L and others can I expect?
3. Is the standard residual percentage for a 10k mile 36 month lease 62%?
4. Can you please show me a better way of calculating the lease amount in Texas?

Thank you very much for your help!
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  #2  
Old 10-04-2012, 09:12 AM
kkapdolee kkapdolee is offline
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Hi, its the OP again.

An alternative way of calculating this I thought of is the following.

Just use the EZ Calculators app on my iPhone to calculate the monthly payments for the lease as if I'm leasing from another state where I don't pay the tax for the entire car price but only for the monthly deprecation + financing fees.
405.56 -> monthly depreciation
95.04 -> monthly lease (financing) fee
31.29 -> monthly tax on (deprecation + lease fee)

And then, add the taxes of the residual value of the car for which I haven't accounted for.
27,900 * 0.0625 / 36 = 48.44 -> monthly additional tax payments

Therefore, the total monthly payment becomes 405.56 + 95.04 + 31.29 + 48.44 = 580.33

Is this the correct way to calculate and how do I adjust for additional fees? The lease calculators I find doesn't seem to add lease fees to the tax not yet paid. I had in mind something similar to a car loan where you incur interest payments on the tax you pay for the car..

I appreciate your help. Thanks.

Last edited by kkapdolee; 10-04-2012 at 09:15 AM.
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  #3  
Old 10-04-2012, 11:18 AM
thegandalf thegandalf is offline
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Quote:
Originally Posted by kkapdolee View Post
Hi,

I'm trying to understand the math behind lease calculation and I would appreciate your help.

I was told by the dealer that in the state of Texas, you pay the tax not for the depreciation value of the car during your lease but for the entire price of the car. This makes it a little difficult for me to use a regular lease calculator I can find online. Honeslty, I'm a little confused. I may have a round about way of calculating as I have tried several different approaches. Please let me know if there is a better way to calculate specifically for a lease in Texas.

The following are the numbers for a lease for a 3 series sedan with the options that I want.

MSRP: 45,000
Sales price: 42,500 (estimate according to Edmunds.com)
Residual %: 62%
Residual value: 27,900 (45,000 * 0.62)
Money factor: 0.00135
Tax rate: 6.25%
10k miles a year
36 months

I'm thinking of paying 0 down payment. Therefore, my approach is to add tax for the total sales price in the beginning (that is, 42,500 * 1.0625) then financing this resulting number. After I calculate the monthly lease amount (monthly depreciation + monthly tax + financing cost), I will add taxes to just the financing cost as I hadn't accounted for that yet. I get the following.

42,500 * 1.0625 = 45,156.25 -> sales price + tax on the entire sales price
45,156.25 - 27,900 = 17,256.25 -> total depreciation + tax payments
17,256.25 / 36 = 479.34 -> monthly depreciation including tax payments
(45,156.25 + 27,900) * 0.00135 = 98.63 -> monthly financing charge on depreciation+tax
98.62 * 0.0625 = 6.16 -> tax on the monthly financing charge

So the total monthly payment will be
monthly depreciation including tax + monthly financing charge + tax on the monthly financing charge
479.34 + 98.63 + 6.16 = 584.13

Questions:
1. Are my calculations above correct? (Actually, I may have partially double taxed myself as it looks like I'm taxed on the financing cost of the tax I pay)
2. How much other fees can I expect? I already included the 895 destination fee into the MSRP and sales price. I know there is 725 acquisition fee which I haven't included yet. How much in TT&L and others can I expect?
3. Is the standard residual percentage for a 10k mile 36 month lease 62%?
4. Can you please show me a better way of calculating the lease amount in Texas?

Thank you very much for your help!
Unrelated question: Have you considered paying the tax up front (with the rest of the applicables fees) to avoid financing it? Otherwise you are paying interests on the tax

I am no expert so don't take my word for this but I think you are taxing yourself twice (and paying financing on the cost).

Now let me try this logic from scratch so we can compare results:

Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97
This is where your calculation ends, no need to calculate tax on it since you rolled that already into your negotiated price. So we get to the same result if you remove the tax caculation again.
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  #4  
Old 10-04-2012, 11:31 AM
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tturedraider tturedraider is offline
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Quote:
Originally Posted by thegandalf View Post
Unrelated question: Have you considered paying the tax up front (with the rest of the applicables fees) to avoid financing it? Otherwise you are paying interests on the tax

I am no expert so don't take my word for this but I think you are taxing yourself twice (and paying financing on the cost).

Now let me try this logic from scratch so we can compare results:

Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97
This is where your calculation ends, no need to calculate tax on it since you rolled that already into your negotiated price. So we get to the same result if you remove the tax caculation again.
This is the most purely financially prudent approach.
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  #5  
Old 10-04-2012, 11:39 AM
Slythex Slythex is offline
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Ok, a few things:

a- have the dealer's finance guy work through the calculations for you ahead of time. That way you can tell if your manual calculations work out correctly. If you have a discrepancy, ask them to explain.

b- It's not clear at what point you pay taxes. Do you pay the sales tax on the entire thing (capitalized in), or is there also a per month tax or what?

c- this seems like a good explanation:
http://www.leaseguide.com/Articles/texas-auto-lease.htm

d- Using the explanation from that article (and I reverse engineered their numbers), it's a fairly simple calculation:
Overall tax -> 42500 * .0625 = 2656
MSRP 45000
Negotiated 42500
Adjusted Cap Cost = 42500 + 2656 = 45156
Depreciation: (45156 - 27900)/36 = 479.33
Finance Cost: adjusted cap 45156 + 27900 = 73056 * .00135 = 98.63

Monthly = 479.33 + 98.63 = 577.96

This does NOT include any incidental fees like origination, title/plate, messenger, etc.

Now, the article I referenced does NOT appear to charge tax on the monthly finances, so I think that's the difference between your numbers and mine. And I'm not sure you should, since you pay on the entire sale price of the car.

e- the upfront costs. Again, ask your dealer AHEAD of time. Not all can be capitalized so you may have to pay some cash up front. Aside from the 725 acq fee, I'd estimate something like a few hundred, including tire fee, registration/plate, etc. I was going to share my PA numbers, but I can't find them here at work. Oh wait, I found them on another post of mine:
85 doc/title/tire, 75 DMV, 725 acqusition. There was some local county level PA tax that I omitted. Obviously these are just ballparks.

You can ask your dealer to give you this stuff early in the process. This is NOT secret.
Hell, I walked through the specifics via email with the finance guy at my dealer, and it made it easy. He was able to explain any discrepancy in my calculations, etc. (I think I was about 5 dollars/month off due to a weird Allegheny County, PA tax on cap cost reductions)
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  #6  
Old 10-04-2012, 11:49 AM
thegandalf thegandalf is offline
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Quote:
Originally Posted by tturedraider View Post
This is the most purely financially prudent approach.
I've done a few leases before, and I am the first one to admit that when I leased my first car, I really didn't know what I was doing => So I paid too much!

Second one: I had learnt some lessons so I negotiated very hard the price of the car (only to find out later on that I really got nailed with the MF) => So I paid too much.

By the third one, I had learnt my lesson and managed to get a failry good deal. This is when I learned to pay upfront all the fees (to avoid paying interest on items which are mainly dealership profit). Still I didn't know about the risk associated with principal reduction, so did provide a hefty downpayment. => This was my first trully good deal. The car wasn't stolen or totalled, so the risk of doing the downpayment paid off...

Now I know: Avoid downpayments (MSDs are a better strategy) or asume the risk (it can be like playing russian roulette). Try to pay up all the fees (and in your case I would consider the taxes) as I don't want the leasing company to rip further benefits from this items.
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  #7  
Old 10-04-2012, 12:46 PM
kkapdolee kkapdolee is offline
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Thank you everyone for your excellent replies!

I will definitely ask the dealership to walk me through their calculation and compare.

thegandalf, can you please explain the risk factor in paying a down payment for a lease? I've heard this from many people online but I don't quite understand it. What happens if during your lease your car gets totaled or stolen? Do you not have to pay for the vehicle value?

Thanks
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Old 10-04-2012, 01:09 PM
thegandalf thegandalf is offline
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Quote:
Originally Posted by kkapdolee View Post
.

thegandalf, can you please explain the risk factor in paying a down payment for a lease? I've heard this from many people online but I don't quite understand it. What happens if during your lease your car gets totaled or stolen? Do you not have to pay for the vehicle value?

Thanks
All of the lease deal I've had carry GAP insurance (I don't know if some don't). I also have some gap coverage with my insurance (small impact to the premium so I never remove it).

So if your car is stolen or totalled, this gap coverage will cover the difference between the 'market value of the car' and what you still owe in your lease.

The problem is that it will not give you any money back. So whatever amount you provided as cap reduction (down payment) will be lost. You are basically helping the leasing company since your cap reduction lowered their gap exposure.

If you don't do a cap reduction you do some higher monthly payments , but you don't run the risk of completely losing the cap reduction amount.


As an example, on the deal I am currently considering, over the life of the loan, if I was to do a $2,750.00 cap reduction, I would have a monthly paument of roughly $410.
If I don't do cap reduction the monthly payment would be roughly $495.

So $410*36 + $2750 = $17,510.00
Vs. $495*36 + 0 = $17,820.00

By not dowing cap reduction I pay over the life of the lease an extra $310 (or $8.61 per month). But if something does wrong early in the lease I wouldn't be out of $2750. It's like taking insurance...

P.S. I hope this was clear, I do have a tendency to attempt to over explain and often finish up with a clar as mud explanation.
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  #9  
Old 10-04-2012, 01:51 PM
kkapdolee kkapdolee is offline
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Thanks again for your explanation thegandalf.

So let's say you were to total or lose (stolen) your leased car after 12 months at an at fault accident. The GAP insurance covers the loss and you pay neither the car value nor the rest of the lease payments? Or does it only cover the difference between what I owe and the market value of the car? For example, if I still owe 10,000 on the car and the market value of the car after 12 months is 30,000, the GAP insurance only covers the difference amount of 20,000 and I still have to pay the rest of the 10,000 for the remaining 24 months of my lease term? If that is the case, I don't see much of an advantage to not paying any down payment...

Thanks.

Last edited by kkapdolee; 10-04-2012 at 01:59 PM.
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Old 10-04-2012, 02:38 PM
thegandalf thegandalf is offline
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Yup. That's it. You still have to figure out a way to get into a new car, but at least you are not on the hook for the old one. Just make sure the lease includes some gap protection (as I said maybe they all do, but I prefer to ask every single time)
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  #11  
Old 10-04-2012, 03:11 PM
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tturedraider tturedraider is offline
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Quote:
Originally Posted by kkapdolee View Post
Thanks again for your explanation thegandalf.

So let's say you were to total or lose (stolen) your leased car after 12 months at an at fault accident. The GAP insurance covers the loss and you pay neither the car value nor the rest of the lease payments? Or does it only cover the difference between what I owe and the market value of the car? For example, if I still owe 10,000 on the car and the market value of the car after 12 months is 30,000, the GAP insurance only covers the difference amount of 20,000 and I still have to pay the rest of the 10,000 for the remaining 24 months of my lease term? If that is the case, I don't see much of an advantage to not paying any down payment...

Thanks.
GAP pays the difference in the value of the car and what the insurance pays. BMWFS automatically provides GAP with all their leases. So, $30,000 owed on the lease - insurance pays $23,000 and GAP pays the other $7,000.

If you make a down payment you don't necessarily lose all of it, but you assume risk you don't need to. You put down $10,000 so only $20,000 owed on lease. Insurance pays $23,000. You get reimbursed the extra $3,000 the insurance paid over the $20,000 owed, but you're out $7,000.

Read about the Multiple Security Deposit program offered by BMWFS in the Ask a Dealer forum. You can reduce the Money Factor (which translates to the interest rate) by 0.00049, 0.00007 reduction for each extra security deposit and you can do seven extra deposits.

Your dealer may discourage you from doing this, 'cause they don't always understand their own program.

To calculate the interest rate multiply the MF x 2400. 0.00049 x 2400 = a 1.176% reduction in the interest rate.

You get back the security deposits at the end of the lease. Effectively it ends up being a type of savings account. The amount of interest you save over the life of the lease usually ends up in the amount of money you put down in MSDs returning a yield between 7% - 10%.
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Last edited by tturedraider; 10-04-2012 at 03:21 PM.
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Old 10-04-2012, 09:04 PM
kkapdolee kkapdolee is offline
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Thank you all for your help above.

Can someone make sense out of leasing and please explain to me the real relationship between the Money Factor and the APR? I'm perplexed by the lease calculation..

As thegandalf said and as I now understand, you calculate the monthly payment in car lease the following way.
Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97

Why do you "add" instead of "subtract" the [monthly depreciation + tax] and the [residual value]? Does anyone else find it absurd that when you hold negotiated price constant and increase the residual value, you pay more financing cost because [monthly depreciation + tax] + [residual value] becomes a greater number and you are multiplying that greater number by the same money factor? An extreme example would be a car with 40,000 negotiated price. Let's say the car only depreciates $36 over the next 36 months and let's ignore all taxes and fees or simplicity's sake. The monthly depreciation would be $1 but the monthly financing cost on the $1 would be (40,000 + 39,964) * 0.00135 = $107.95. While I am basically financing $1 per month, I pay $107.95 on financing fee on that $1! Can anyone please explain to me how this is? Am I missing something?

I tried to think leasing analogous to getting a loan.

Let's say I were to pay my lease with 100% down payment financed by a third party. If I use the supposedly same APR as the money factor, that is, I use the APR equal to (money factor * 2400%) for the loan, then will I arrive at the same monthly payments as if I paid 0% down payment and leased the car from the dealer?

Let's keep all the numbers (negotiated price, tax, money factor, and residual value) in the original example at the top. In the beginning, I owe in total, 45,156.25 - 27,900 = 17,256.25
For a lease, as thegandalf calculated above,
(1) monthly depreciation comes out to be 479.34
(2) monthly financing fee comes out to be 98.63
The total monthly payment therefore, is 577.97.

For a loan amount of 17.256.25, using the amortization schedule with the APR of 3.24% = (0.00135 * 2400%), I get the following.
A total monthly payment (part of which goes to the principal and the other part goes to the interest) of
$503.66. Looking at another way, that is the same monthly depreciation of $479.34 (as in the example above) and monthly loan financing fee of only $24.32 (=503.66 - 479.34) vs the lease financing fee of $98.63 even though I apparently used the same interest rate.

I've read and heard from people that an easy way to understand the money factor is to simply multiplying it by 2400% to arrive at the APR. However, in my two examples, this is clearly not the case. The money factor of 0.00135 apparently does not equal APR of 3.24%. Can anyone shed some light on this matter? I am very confused.

Going back to the extreme example above in which a $40,000 with no fees or taxes gets depreciated only $1 a month, the financing cost on that 36% at the APR of 3.24% would result in a monthly payment of $1.05 vs. $108.95 in the case of leasing. The financing cost in the loan is essentially $0.05/month vs. $107.95/month in leasing.

Can anyone please clarify this for me? Did I misunderstand something here? Please expalin...

Thank you very much in advance!

Last edited by kkapdolee; 10-04-2012 at 09:28 PM.
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Old 10-04-2012, 10:07 PM
SD330i SD330i is offline
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Quote:
Originally Posted by kkapdolee View Post
Thank you all for your help above.

Can someone make sense out of leasing and please explain to me the real relationship between the Money Factor and the APR? I'm perplexed by the lease calculation..

As thegandalf said and as I now understand, you calculate the monthly payment in car lease the following way.
Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97

Why do you "add" instead of "subtract" the [monthly depreciation + tax] and the [residual value]? Does anyone else find it absurd that when you hold negotiated price constant and increase the residual value, you pay more financing cost because [monthly depreciation + tax] + [residual value] becomes a greater number and you are multiplying that greater number by the same money factor? An extreme example would be a car with 40,000 negotiated price. Let's say the car only depreciates $36 over the next 36 months and let's ignore all taxes and fees or simplicity's sake. The monthly depreciation would be $1 but the monthly financing cost on the $1 would be (40,000 + 39,964) * 0.00135 = $107.95. While I am basically financing $1 per month, I pay $107.95 on financing fee on that $1! Can anyone please explain to me how this is? Am I missing something?

I tried to think leasing analogous to getting a loan.

Let's say I were to pay my lease with 100% down payment financed by a third party. If I use the supposedly same APR as the money factor, that is, I use the APR equal to (money factor * 2400%) for the loan, then will I arrive at the same monthly payments as if I paid 0% down payment and leased the car from the dealer?

Let's keep all the numbers (negotiated price, tax, money factor, and residual value) in the original example at the top. In the beginning, I owe in total, 45,156.25 - 27,900 = 17,256.25
For a lease, as thegandalf calculated above,
(1) monthly depreciation comes out to be 479.34
(2) monthly financing fee comes out to be 98.63
The total monthly payment therefore, is 577.97.

For a loan amount of 17.256.25, using the amortization schedule with the APR of 3.24% = (0.00135 * 2400%), I get the following.
A total monthly payment (part of which goes to the principal and the other part goes to the interest) of
$503.66. Looking at another way, that is the same monthly depreciation of $479.34 (as in the example above) and monthly loan financing fee of only $24.32 (=503.66 - 479.34) vs the lease financing fee of $98.63 even though I apparently used the same interest rate.

I've read and heard from people that an easy way to understand the money factor is to simply multiplying it by 2400% to arrive at the APR. However, in my two examples, this is clearly not the case. The money factor of 0.00135 apparently does not equal APR of 3.24%. Can anyone shed some light on this matter? I am very confused.

Going back to the extreme example above in which a $40,000 with no fees or taxes gets depreciated only $1 a month, the financing cost on that 36% at the APR of 3.24% would result in a monthly payment of $1.05 vs. $108.95 in the case of leasing. The financing cost in the loan is essentially $0.05/month vs. $107.95/month in leasing.

Can anyone please clarify this for me? Did I misunderstand something here? Please expalin...

Thank you very much in advance!
Do The MSDs. We just did a lease on our new 335i. We did 7 MSDs. I think that is the maximum allowed. Ask the Finance Department or your CA to explain it in more Detail. Good Luck.
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  #14  
Old 10-05-2012, 08:12 AM
thegandalf thegandalf is offline
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Quote:
Originally Posted by kkapdolee View Post
Thank you all for your help above.

Can someone make sense out of leasing and please explain to me the real relationship between the Money Factor and the APR? I'm perplexed by the lease calculation..

As thegandalf said and as I now understand, you calculate the monthly payment in car lease the following way.
Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97

Why do you "add" instead of "subtract" the [monthly depreciation + tax] and the [residual value]? Does anyone else find it absurd that when you hold negotiated price constant and increase the residual value, you pay more financing cost because [monthly depreciation + tax] + [residual value] becomes a greater number and you are multiplying that greater number by the same money factor? An extreme example would be a car with 40,000 negotiated price. Let's say the car only depreciates $36 over the next 36 months and let's ignore all taxes and fees or simplicity's sake. The monthly depreciation would be $1 but the monthly financing cost on the $1 would be (40,000 + 39,964) * 0.00135 = $107.95. While I am basically financing $1 per month, I pay $107.95 on financing fee on that $1! Can anyone please explain to me how this is? Am I missing something?

I tried to think leasing analogous to getting a loan.

Let's say I were to pay my lease with 100% down payment financed by a third party. If I use the supposedly same APR as the money factor, that is, I use the APR equal to (money factor * 2400%) for the loan, then will I arrive at the same monthly payments as if I paid 0% down payment and leased the car from the dealer?

Let's keep all the numbers (negotiated price, tax, money factor, and residual value) in the original example at the top. In the beginning, I owe in total, 45,156.25 - 27,900 = 17,256.25
For a lease, as thegandalf calculated above,
(1) monthly depreciation comes out to be 479.34
(2) monthly financing fee comes out to be 98.63
The total monthly payment therefore, is 577.97.

For a loan amount of 17.256.25, using the amortization schedule with the APR of 3.24% = (0.00135 * 2400%), I get the following.
A total monthly payment (part of which goes to the principal and the other part goes to the interest) of
$503.66. Looking at another way, that is the same monthly depreciation of $479.34 (as in the example above) and monthly loan financing fee of only $24.32 (=503.66 - 479.34) vs the lease financing fee of $98.63 even though I apparently used the same interest rate.

I've read and heard from people that an easy way to understand the money factor is to simply multiplying it by 2400% to arrive at the APR. However, in my two examples, this is clearly not the case. The money factor of 0.00135 apparently does not equal APR of 3.24%. Can anyone shed some light on this matter? I am very confused.

Going back to the extreme example above in which a $40,000 with no fees or taxes gets depreciated only $1 a month, the financing cost on that 36% at the APR of 3.24% would result in a monthly payment of $1.05 vs. $108.95 in the case of leasing. The financing cost in the loan is essentially $0.05/month vs. $107.95/month in leasing.

Can anyone please clarify this for me? Did I misunderstand something here? Please expalin...

Thank you very much in advance!
Sorry, I acutally don't have a great answer to this question...
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  #15  
Old 10-05-2012, 09:06 AM
tturedraider's Avatar
tturedraider tturedraider is offline
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Quote:
Originally Posted by kkapdolee View Post
Thank you all for your help above.

Can someone make sense out of leasing and please explain to me the real relationship between the Money Factor and the APR? I'm perplexed by the lease calculation..

As thegandalf said and as I now understand, you calculate the monthly payment in car lease the following way.
Negotiated price + tax= 42,500 * 1.0625 = $45,156.25
(1) Monthly depreciation: (45,156.25-27,900)/36 = 479.34
(2) Financing: (45156.25+27900)*.00135=98.63
Monthly Payment (1+2): $577.97

Why do you "add" instead of "subtract" the [monthly depreciation + tax] and the [residual value]? Does anyone else find it absurd that when you hold negotiated price constant and increase the residual value, you pay more financing cost because [monthly depreciation + tax] + [residual value] becomes a greater number and you are multiplying that greater number by the same money factor? An extreme example would be a car with 40,000 negotiated price. Let's say the car only depreciates $36 over the next 36 months and let's ignore all taxes and fees or simplicity's sake. The monthly depreciation would be $1 but the monthly financing cost on the $1 would be (40,000 + 39,964) * 0.00135 = $107.95. While I am basically financing $1 per month, I pay $107.95 on financing fee on that $1! Can anyone please explain to me how this is? Am I missing something?

I tried to think leasing analogous to getting a loan.

Let's say I were to pay my lease with 100% down payment financed by a third party. If I use the supposedly same APR as the money factor, that is, I use the APR equal to (money factor * 2400%) for the loan, then will I arrive at the same monthly payments as if I paid 0% down payment and leased the car from the dealer?

Let's keep all the numbers (negotiated price, tax, money factor, and residual value) in the original example at the top. In the beginning, I owe in total, 45,156.25 - 27,900 = 17,256.25
For a lease, as thegandalf calculated above,
(1) monthly depreciation comes out to be 479.34
(2) monthly financing fee comes out to be 98.63
The total monthly payment therefore, is 577.97.

For a loan amount of 17.256.25, using the amortization schedule with the APR of 3.24% = (0.00135 * 2400%), I get the following.
A total monthly payment (part of which goes to the principal and the other part goes to the interest) of
$503.66. Looking at another way, that is the same monthly depreciation of $479.34 (as in the example above) and monthly loan financing fee of only $24.32 (=503.66 - 479.34) vs the lease financing fee of $98.63 even though I apparently used the same interest rate.

I've read and heard from people that an easy way to understand the money factor is to simply multiplying it by 2400% to arrive at the APR. However, in my two examples, this is clearly not the case. The money factor of 0.00135 apparently does not equal APR of 3.24%. Can anyone shed some light on this matter? I am very confused.

Going back to the extreme example above in which a $40,000 with no fees or taxes gets depreciated only $1 a month, the financing cost on that 36% at the APR of 3.24% would result in a monthly payment of $1.05 vs. $108.95 in the case of leasing. The financing cost in the loan is essentially $0.05/month vs. $107.95/month in leasing.

Can anyone please clarify this for me? Did I misunderstand something here? Please expalin...

Thank you very much in advance!
A lease is basically a balloon note. The residual is the equivalent of the balloon payment. You pay interest on the balloon for the entire term of the financing.
Roughly using your numbers - you are not only financing $17,000. You are also financing the $28,000 residual, for a total of $45,000. You only make principal payments on $17,000, but you make interest payments on $45,000.

You pay more interest when the residual/balloon is higher, because you are paying less toward principal each month. Higher principal balance equals more interest paid.

The interest rate with a 0.00135 MF is 3.24% in either scenario. You need to use a balloon note calculator. www.bretwhissel.net/amortization/
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Last edited by tturedraider; 10-05-2012 at 09:50 AM.
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  #16  
Old 10-05-2012, 10:28 AM
kkapdolee kkapdolee is offline
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tturedraider,

Thank you for your answer. I just verified what you said via an amortization schedule in excel and learned that what you said is accurate. You are right that leasing a 45k vehicle and giving it back at 28k in 3 years is not the same thing as borrowing the difference (17k) and paying it all back in 3 years. I missed the part where the principal that I am borrowing is actually much greater than the difference between the price of the car and its residual value. Now I understand that I need to account the entire car value as my base for interest. By the way, I arrived at roughly the same monthly payment 578.83 dollars (vs. 577.97) with 3.24% apr (0.00135*2400%) for my original example using your balloon payment logic. Thanks for your insight.

Thank you everyone. I'm learning something new every day here.
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  #17  
Old 10-05-2012, 10:39 AM
thegandalf thegandalf is offline
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Yup, thanks tturedraider. I knew that the difference was due to the full price of the car was the reason behind getting different results but I wasn't exactly sure how to word it, or calculate it!
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  #18  
Old 10-05-2012, 10:42 AM
tturedraider's Avatar
tturedraider tturedraider is offline
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Quote:
Originally Posted by kkapdolee View Post
tturedraider,

Thank you for your answer. I just verified what you said via an amortization schedule in excel and learned that what you said is accurate. You are right that leasing a 45k vehicle and giving it back at 28k in 3 years is not the same thing as borrowing the difference (17k) and paying it all back in 3 years. I missed the part where the principal that I am borrowing is actually much greater than the difference between the price of the car and its residual value. Now I understand that I need to account the entire car value as my base for interest. By the way, I arrived at roughly the same monthly payment 578.83 dollars (vs. 577.97) with 3.24% apr (0.00135*2400%) for my original example using your balloon payment logic. Thanks for your insight.

Thank you everyone. I'm learning something new every day here.
Thanks. I'm glad that was helpful.

Yeah, the auto industry would like people to think there's something magical about leasing that results in having a lower monthly payment, but the reality is ain't nobody givin' nobody nothin' for free. The main purpose of the money factor is to obfuscate the amount of the interest rate. 99.9998% of lessees never know what interest rate their lease is. Most don't even know there is one.
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Than & Then usage - "It was hotter than hades (comparison). Then later on (time) it got cool."

2006 330i Sonora w/ ActiveAutoWerke flash tune - I like it!
2004 330i ZHP Imola/NB - missed
2000 328i TiAg - gone but not forgotten

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Last edited by tturedraider; 10-05-2012 at 10:46 AM.
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