Trying to figure out the math... ES350 lease

tcfrisco

I've got an offer on a ES350 base model with some additional options MSRP $41,821/Sale price 39,922. With tax, title, fee's 42.768.42.

They are asking for $5,231 down less 1st pmt and $1,000 incentive = $3,874

$3,874 = $2,499 down, $145 document fee$131 inspection/title and $700 in additional fees.

Monthly pmt after all of that = $357

The $3,874 seems a bit excessive. Can someone give me some advice on how to pick these numbers apart and what a 'real' deal should look like?

Many thanks!
TC

severn

This is how you calculate a lease payment.

First, understand exactly what a lease is. You are buying a vehicle and trading it in while having negotiated the trade in value ahead of time. Effectively, you are renting the trade in value, or residual, and paying down the rest. So, half of the payment is a mere rental of the residual:

P = Price
R = Residual
I = Interest Rate per Period
N = Number of Periods

Pmt1 = R*I

The other half of the payment is a loan payment on the difference between the price and residual:

Pmt2 = ((P-R)*I)/(1-(1+I)**-N)

Or, coded for Excel:

Pmt2 = ((P-R)*I)/(1-POWER(1+I,-N))

Total lease payment is the sum of Pmt1 and Pmt2, or:

Pmt = R*I+((P-R)*I)/(1-(1+I)**-N)

When someone gives you a “money factor”, someone else has done the calculation for you. And, because the formula is affected by price, residual, interest rate, number of periods, trade in value and money down, when any of those factors change, so does the money factor, despite what a money lender may tell you.

stever

Posts like that remind me why I don't lease.

Thanks @severn.

kyfdx

Well.. that's mostly correct, except for the money factor.

The money factor is a constant, that is a substitute for the interest rate. It doesn't change with the other variables.

Mr_Shiftright

So scholars, to the point---how does tcfrisco's lease look? Seems all right to me, although I'm not sure what $700 additional fees are, and it would be nice to not pay as much up front.

stever

The risk with putting any money down up front is losing part or all of that money if the vehicle is totaled in an accident or stolen and never recovered.

Mr_Shiftright

I've always wondered about that--why is the risk any less than if you put $5000 on a new car and the same thing happens? In both cases, insurance just pays off your loan or lease tickets.

stever

Most insurance policies just pay fair market value, which may not cover your "investment" in the car after the initial depreciation. GAP Insurance just pays the difference between the fair value of the car and the balance owed on the financing.

Maybe there's "replacement" insurance available on leases but can't say I've heard of that - just on purchases.

kyfdx

Mr_Shiftright said:

I've always wondered about that--why is the risk any less than if you put $5000 on a new car and the same thing happens? In both cases, insurance just pays off your loan or lease tickets.

That's it.. the bank is providing GAP insurance on the lease. So, the insurance pays off your "loan", even if it's more than the fair market value of the car.

Without GAP, the bank doesn't pay off your loan... they just pay for your car.. any shortage would be up to you.

severn

Like a loan, the cost of a lease is reduced by anything down. Unlike a loan, if the car is written off, the leasee gets nothing back (from insurance). That’s the risk you take with a down payment on a lease, however, the chances of a vehicle being written off are typically very low so you'll likely continue to save money in the short and long run as planned.

Also, yes, technically, the money factor is directly related to the interest rate by a simple formula, but money lenders typically use the money factor to hide the interest rate, which is what really matters and which is often customised to the leasee. Effectively, the money factor was introduced to cause confusion and complexity. When buying or leasing, always negotiate the price (low), residual (high), interest rate (low), and trade in value (high). Don’t waste your time discussing the money factor.

Michaell

severn said:

Like a loan, the cost of a lease is reduced by anything down. Unlike a loan, if the car is written off, the leasee gets nothing back (from insurance). That’s the risk you take with a down payment on a lease, however, the chances of a vehicle being written off are typically very low so you'll likely continue to save money in the short and long run as planned.

Also, yes, technically, the money factor is directly related to the interest rate by a simple formula, but money lenders typically use the money factor to hide the interest rate, which is what really matters and which is often customised to the leasee. Effectively, the money factor was introduced to cause confusion and complexity. When buying or leasing, always negotiate the price (low), residual (high), interest rate (low), and trade in value (high). Don’t waste your time discussing the money factor.

I respectfully disagree with some of what you are saying. There are only two variables in a lease - the negotiated selling price (cap cost) and the money factor. The MSRP is fixed, as is the residual rate (set by the finance company). We don't recommend trying to convert the MF into an interest rate - it screws up the math in trying to calculate a lease payment.

The math involved is no more complicated than anything you learned in 5th grade - add, subtract, multiply, divide. My co-host's 10 year old built the spreadsheet that he uses today.