Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!





2013 and earlier-Honda Accord Lease Questions

1265266268270271274

Comments

  • gmanusmcgmanusmc SoCalPosts: 436
    Agreed, you need to work out the numbers to see how it might work out. But in general terms, I'm talking about those who see that nice lease payment that's 100 bucks less than buying, decide to buy at lease end and are stuck with a much higher used vehicle interest rate than if they had taken the 0.9 right from the start. And I do see your point that if you get that super low money factor, you pay next to nothing in interest during the lease term so I guess the interest paid if and when financing the residual wouldn't hurt as badly.

    That's why I pay close attention to your posts - you've got all the bases covered.

    Thanks, Bill
  • huskerfan5huskerfan5 Posts: 163
    Sorry, but I have to disagree. The monthly payment the document is referring to represents all the types of items subject to sales tax that are included in the monthly payment. The tax is calculated once based on that amount. Yes, the lease payment will change if you put that into the capitalized cost but you would not recalculate the tax. If you took that approach, it would be an endless cycle of recalculating the “monthly payment” each time you adjusted the tax and changed the capitalized cost.
    btw, this is not the just the opinion of a frequent poster to this forum, but if Edmunds.com existed 30 years ago when I was maintaining my continuing profession education requirements and paying my registration fees, my user name would have been huskerfan5, CPA. :)
  • delta737hdelta737h Posts: 603
    edited August 2013
    gmanusmc,

    You made the following comment...

    "If you finance the residual at lease end, you are essentially paying double interest on that amount of money. Example: If you lease an Accord EXL for a cap cost of 25k and residual of 15k, you would pay $30 a month interest on a money factor of .00075 (25k + 15k x .00075). If you then purchase the vehicle at lease end and finance, you're paying interest again on the 15k."

    Actually, that's not true because you're really paying interest on the unpaid lease balance. Interest is levied on the depreciated balance (i.e, outstanding lease balance) beginning with the adjusted captialized cost and terminating at the resididual vaue. I think where you may be getting hung up is with the expression...

    .00075 (25k + 15k x .00075).

    which is inaccurate to start with. It should be...

    .00075 (25k + 15k)

    which yields the interest on the average unpaid balance. I think you know the correct formula but forgot to distribute 0.00075 to the 25k as well. I also believe that you wanted to illustrate that interest is levied on the residual as follows...

    0.00075 x 25k + 0.00075 x 15k

    But, that line of thinking isn't quite right. Theoreticially, the formula for the interest component is ...

    (interest rate/12) (adj. cap + residual value)/2.

    This simplifies to...

    (interest rate/24) (adj. cap + residual value)

    where (interest rate/24) is just the money factor (interest rate is expressed as a decimal instead of a percent).


    So, given .00075 (25k + 15k), it's understandable why a lot of people mistakenly believe that interst is levied on the residual... it's not. Again, it's levied on the outstand lease balance which starts with the adj. cap cost and ends at the residual value. So, those that execute a residual buyout, are, indeed, picking up where the lease left off. That is, the lease ends at the residual and the buyout begins at the residual.

    You may want to check out the following lease amortization schedule...

    https://autoleasegeek.com/wp-content/uploads/2010/12/sample-lease-amortization-s- chedule.pdf

    Hope this helps.

    John
    TheAutoLeaseGeek
  • gmanusmcgmanusmc SoCalPosts: 436
    edited August 2013
    John - thanks - went back and looked at the post i made and somehow what I posted is not what I meant - typo I guess. I'm familiar with leasing so I understand that it should've been .00075 (25k + 15k). I should've proofread more closely. But if you indeed apply the money factor to the entire 40k during the lease term, how is that not paying interest on the residual?

    Why would the residual even need to be in the formula?

    You can do the short version if you want.

    Thanks, Bill
  • delta737hdelta737h Posts: 603
    edited August 2013
    gmanusmc-

    Yup, I thought so.

    A lease is amortized in much the same way that a loan is amortized. You begin by computing interest on the adlj. cap less the first payment. The interest is deducted from the base payment to determine the amount of principle to be deducted from the previously lease balance. This process continues for the entire term of the lease. The ending lease balance is the the residual value. At that point, you'll either return, trade, or buy the car for the amount of the residual. If you buy, you'll have to pay tax on the residual which can be financed.

    But, you never pay interest on the residual because the lease balance, which always exceeds the residual, is reduced each month until the final balance is reached. This balance is the residual. Now, if you extended the lease for an additional 3 months beyond say, a 36 month lease for example, then some fund providers may continue to amortize the lease beyond the residual so that after 39 months, you could buy the car for something less than the residual. This is the only situation in which one would pay interest on the residual. I think if you click on the link and look at the lease amortization schedule that I provided in the earlier post, you'll see what I'm talking about.

    Am I making sense?

    John
  • gmanusmcgmanusmc SoCalPosts: 436
    Thanks John - I'm gonna take a look at your info when I can devote some more time to this. I've never looked at it this deeply. I just made an edit to my response to you that you probably haven't seen. You're making perfect sense but I guess where I get hung up is why does the residual even have to be in the formula if there is no interest on it? Why wouldn't the interest (money factor) not just be applied to the cap cost?

    Thanks for the help,

    Bill
  • huskerfan5huskerfan5 Posts: 163
    Brian, if you need more help when it's time to lease, just invite us down to your place in Myrtle Beach and we'll answer all your questions, but don't invite the AutoLeaseGeek or Bill won't come :)
  • gmanusmcgmanusmc SoCalPosts: 436
    That's ok - John seems to be a good guy and he only wants to make sure the leasing info is correct so I'd have no problem throwing down a beer with him if he's so inclined. I don't have time to study his site at the moment but will later on. Gary - what am I missing here - if there is no interest calculated on the residual, why is it a part of the formula that calculates the monthly cost of the lease?

    Thanks, Bill

    Sorry I opened Pandora's box
  • kyfdx@Edmundskyfdx@Edmunds Posts: 25,946
    They use the residual, because the amount subject to finance charges is an average of the CAP cost and the residual... Rather than adding them together, and then dividing by 2, they just add them together and make the division adjustment to the money factor.

    Think of it as a loan.. where you borrow the CAP cost, then pay the principal down to the residual amount... While a loan wouldn't have equal finance charges throughout, a lease does (which makes it easier to calculate)..

    Moderator - Prices Paid, Lease Questions, SUVs

  • delta737hdelta737h Posts: 603
    gmanusmc,

    Because the formula...

    MF x (Adj. Cap + Residual) reflects interest on the estimated average lease balance through the entire term. The expression...

    (int rate/12) x (adj cap + residual)/2 is equivalent to the above formula. The term...

    (adj cap + residual)/2 reflects the estimated average lease balance while the term...

    (int rate/12) reflects an estimate of the monthly interest rate.

    Remember that the formula [money factor x 2400] that is often quoted only gives an estimate of the interest rate. It's very close but it's not exact.

    John
  • gmanusmcgmanusmc SoCalPosts: 436
    Ok guys - I think you finally got through to this thick military mind - just did a loan calc based on my original example and the amount of interest comes out right for 32.5k financed at 1.9 for 36 months. I've just always looked at it simply as money factor multiplied by the sum of cap cost and residual. Now if we can get Brian to fly us into myrtle beach, we're set.

    Thanks,

    Bill
  • delta737hdelta737h Posts: 603
    Count me in!

    John
  • delta737hdelta737h Posts: 603
    kyfdx,

    You said essentially the same thing I said. However, your explanation is much shorter, easy to understand, and much more elegant than mine. Wish I had thought of it.

    John
  • delta737hdelta737h Posts: 603
    Hey Bill!

    Many thanks for your highly valued service to our country! May God Bless you and yours.

    Regards,

    John
  • kyfdx@Edmundskyfdx@Edmunds Posts: 25,946
    Thanks.. I get a little practice... ;-)

    Moderator - Prices Paid, Lease Questions, SUVs

  • gmanusmcgmanusmc SoCalPosts: 436
    Thanks John - and thank you for educating me on the more intricate mechanics of the accounting used to calculate the cost of a lease. I know you recognized what I was getting at (you obviously hear it a lot). I was trying to make the point that it might cost more in the end if, at lease end, the residual is financed at a used car interest rate rather than just doing a conventional finance right from the start at 0.9 or 1.9. I just stated it poorly.

    Anyway, thanks for your help and I will be sure to check out your site in detail over the next few days.

    Take care, Bill
  • delta737hdelta737h Posts: 603
    Thanks Bill. If you have any questions or suggestions for how my site can be improved, please let me know.

    All the Best,

    John
  • gmanusmcgmanusmc SoCalPosts: 436
    Thanks for the info kyfdx - between you and John, I see that auto lease amortization is a bit more complicated than the simple formula we all know and love. Using the formula you and John provided, I still come out with the same figure I had for the monthly lease cost so I guess all is good. I have been doing some looking and haven't come across a program or spreadsheet that calculates the detailed amortization. It's not critical to getting a good lease deal but it would be one of those nice to have things to have all the details at your fingertips. Again, thanks for your help.

    Bill G
  • kyfdx@Edmundskyfdx@Edmunds Posts: 25,946
    Well.. a lease always has a straight-line amortization, unlike a loan..

    When you calculate the monthly finance charge, that's not an average of all months, but the same every single month...

    So... if the CAP cost is $36K and the residual is $18K on a 36 month lease, then the lease balance will drop exactly $500, each month... And, the finance portion of the lease will be calculated on an average of the CAP + Residual.. so, finance charges apply to $27K, each month, regardless of current lease balance (in this example).

    Hope that helps a little..

    Moderator - Prices Paid, Lease Questions, SUVs

  • delta737hdelta737h Posts: 603
    edited August 2013
    Bill,

    The link I provided earlier...

    https://autoleasegeek.com/wp-content/uploads/2010/12/sample-lease-amortization-s- - - chedule.pdf

    directs you to a complete lease amortization schedule that was done on Excel.

    John
This discussion has been closed.