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# 2013 and earlier-Honda Accord Lease Questions

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## Comments

436That's why I pay close attention to your posts - you've got all the bases covered.

Thanks, Bill

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0 · Like LOL163btw, 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.

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0 · Like LOL603You 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

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0 · Like LOL436Why would the residual even need to be in the formula?

You can do the short version if you want.

Thanks, Bill

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0 · Like LOL603Yup, 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

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0 · Like LOL436Thanks for the help,

Bill

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0 · Like LOL163- Spam
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0 · Like LOL436Thanks, Bill

Sorry I opened Pandora's box

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0 · Like LOL27,671Think 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)..

MODERATORPrices Paid, Lease Questions, SUVs

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0 · Like LOL603Because 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

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0 · Like LOL436Thanks,

Bill

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0 · Like LOL603John

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0 · Like LOL603You 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

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0 · Like LOL603Many thanks for your highly valued service to our country! May God Bless you and yours.

Regards,

John

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0 · Like LOL27,671MODERATORPrices Paid, Lease Questions, SUVs

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0 · Like LOL436Anyway, thanks for your help and I will be sure to check out your site in detail over the next few days.

Take care, Bill

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0 · Like LOL603All the Best,

John

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0 · Like LOL436Bill G

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0 · Like LOL27,671When 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..

MODERATORPrices Paid, Lease Questions, SUVs

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0 · Like LOL603The 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

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0 · Like LOL