[TurboFan]

**I am not a financial planner, and this should not be taken as financial advice. You are responsible for your own financial matters**

I've only been on the forum a month or two now, but I've seen many similar posts relating to leasing questions. I thought I'd try to capture the main points of the questions in one place, and give you a calculator that you can use to approximate a lease payment.

I'm not going to cover open ended leases. You should be looking at closed-end leases. If you think you need an open ended lease, you already know more than this thread is going to cover. A closed end lease defines the value of the asset (vehicle) at lease end, where an open ended lease leaves you subject to a balloon payment.

If you're looking for an answer to the question of "Should I Lease or Buy", this isn't the place to look or ask. You need to make that decision based on many personal financial matters that you don't want to share in a public forum.

This is only intended to provide the reader with some basic leasing vocabulary and an understanding of how a lease is computed. First we'll cover the vocabulary of leasing, then cover the process. Then I'll go over the terms of a lease that are usually quoted and not negotiable, and those that are negotiable; know these, because there's no point in getting upset with the dealer because they won't negotiate on something over which they don't have control. Next we'll go over some basic traps you may encounter at a car dealer, and then run through a basic calculation using an example I will copy from Edmunds.

Captive Finance Company - This is the finance company that is owned by or affiliated with the manufacturer. BMW Financial Services, Infiniti Financial Services, American Honda Finance, Nissan Motor Credit - these are all examples of different Captive Finance Companies.

MSRP - Self explanatory. It's the list price of the vehicle as delivered.

Sell price - This is the price you negotiate to pay with the dealer. It is before you consider or apply any down payments or cap cost reductions.

Cap Cost Reduction - This is a payment made at the beginning of the lease with the intent to lower all future monthly payments. You are pre-paying a portion of the lease up-front. If the car is totaled or stolen, you lose this money.

Cap Cost - This is short for Capitalized Cost, a part of how the Depreciated Value of the vehicle is calculated. This amount is just a calculation, and can not generally be negotiated. This is equal to the sell price - Cap Cost Reduction.

Residual % - This value is established by the lender. It is sometimes quoted as a percentage, sometimes as a dollar figure. My calculator below uses the percentage.

It is generally non-negotiable, as no one you are going to meet at the dealership has the authority to change this number. As with any term in a lease that is quoted, and not a calculation, make sure you see the lease sheet from the dealer. Many will give you a summary on their own paper, and give you less favorable terms. They then pocket the difference as profit.

Residual Value - This is the MSRP multiplied by the residual percentage. Again, some dealers will just give you the value and leave you to calculate the percentage. They are hoping you will compute off the sell price, making the residual percentage look better. Having read this, you won't make that mistake.

Depreciated Value - This is the capitalized cost minus the residual value. It is a calculation based on negotiated and quoted numbers.

Money Factor - abbreviated MF. This is the "interest rate" of the automotive leasing world. If you want to judge a MF from a lender against interest rates for a purchase, you can multiply by 2400 to get a rough APR. This is not directly comparable, as the interest on a lease is computed differently than a financed purchase. We'll talk about that in a minute.

Term - This is the length of the lease, in months. Normal is 12, 24, 36, 39, 48. It can be any number, but anything longer than 48 is usually a really bad idea. Most leases have a sweet spot between 30 and 39 mos (where the monthly payment is lowest).

Principle Payment - this is a term in my lease calculator, but it is one of two parts that make up a lease payment. It is the Depreciated Value from above, divided by the Term from above. This is how much you pay toward the depreciated value of the vehicle each month.

Interest Payment - this is also a term in my lease calculator, and it tells you how much interest you pay on the vehicle each month. It's really a very different calculation than most people are accustomed to seeing. It is the Capitalized Cost + Residual Value, all multiplied by the Money Factor. --> (CapCost + ResidVal) * MF.

Monthly Payment - This is the Principle Payment plus the Interest Payment added together. Sales tax is done differently on a state by state basis, so I can't cover that here. In my home state of Ohio it's added to the payment each month (and that's how my calculator is built), but other states add it to the whole car value.

Lease support - This is money that the manufacturer provides to the leasing company (usually their own) in exchange for better lease terms. It's an internal transfer to the manufacturer's captive finance company (BMW Financial Services), you won't see this on a 3rd party bank lease.


So, you now have a rough idea of what goes into a lease. Take this information, look at your finances, have a rough idea of what you are looking for, and run some numbers through the calculator below. Use this information to decide if you should lease or buy.

Now you're ready to go look at cars.

When you get to the dealer and start haggling, many will ask you right away if you will lease or buy. Don't fall into this trap, you don't know yet. You can't decide until you know the financial terms of each type of deal.

Instead, as you negotiate, focus on the purchase price of the car. It's old advice, but it's been repeated because it's good advice. Believe me, no matter how good you are, the dealers finance people can find a way to sneak costs into a monthly payment negotiation, and you will lose 9 of 10 times. Focus on the negotiations on the price of the car, and when you have come to terms there, start looking at your finance options.

Since you are reading this on a BMW forum, you're probably looking at leasing a BMW. Every deal is different from each manufacturer, but they tend to follow trends. BMW wants you to lease the car, because they want you to come back and get another in 12-36 mos. They make money selling cars, so they will tailor their business to this.

As you look at your options, you will see offers from numerous lenders, and an offer from BMW Financial. Theirs will frequently be the best deal, but not always. BMW can support leases in two main ways: The can boost the residual or drop the money factor. They can also support finance options, but they don't do this nearly as often.

Boosted residual - this increases the residual percentage, which drops the depreciated value of the car. This reduces the monthly payment of the car, but increases the price you pay at the end of the lease if you buy the car out. This is usually the route that BMW and other car makers will take, because they don't usually want you to buy the car off lease - they want you to lease another car.

Drop the Money Factor - this reduces the monthy interest payment, and therefore the overall payment, just like a lower APR does to a loan. The manufacturer doens't usually do this for the reasons stated above.

To summarize lease support - if a car maker is going to spend $2000 per vehicle supporting a lease, they won't do it by subsidizing low money factors. That does not help them at lease end. They'll usually do it with higher residual values. They are banking on you loving their car and wanting to keep driving their brand after the lease is up. With a high residual, the payment is low, and it doesn't make sense to buy the car at lease end - it's cheaper to lease a new one, and that means more cars need to be built. If you're like most people, you just care about that low payment, and go get a new car at lease end.

Common traps

The main trap is trying to get you to negotiate monthly payments instead of the purchase price. They can give you a ridiculous monthy payment to start, and since most people don't know how to calculate the lease payment, they just barter without knowing what they are negotiating. The dealer comes down $80-$100 on the lease payment, you feel good, sign the papers, and they sell you a car at a huge profit.

The better way to go is to negotiate the sell price, then look at finance packages. You know what the car should sell for (or at least you should - if you don't, go back and do some research!), and can negotiate a reasonable deal. Then you can evaluate lease vs. own. Remember, when you lease, you are purchasing the usage of a vehicle with pre-defined terms, like length of term, number of miles allowed, allowable damage to the vehicle.

The next trap is having the dealer inflate the finance numbers in their favor. They may quote a residual value lower than what it really is, or give you a money factor above that being quoted to them. Do your homework, review the doucments from different lenders, and get quotes from multiple dealers on what the terms are from the captive finance company (like BMW financial). You can frequently find these numbers posted on this forum by reputable dealers that don't play these games. Shop this just like you shop the price of the car. You can get terms from a dealer that has a lousy price on the car, just to see what they are. All dealers get the same terms from BMW Finance, but there may be different promotions for different regions. All the dealers in one area are usually getting the same rates, but the guy in Iowa may have different incentives than the girl in California. It's all based on where you will title the vehicle.

Negotiable terms:
Sell price
Cap Cost Reduction
Term

These can all be negotiated during the leasing process.

Quoted terms:
MSRP
Money Factor
Residual % or Value

These are all quoted by the bank or Captive Finance Company, and can not be negotiated with the dealer under normal circumstances.

Sample Lease Calculation:
I've copied this from Edmunds, and the link is http://www.edmunds.com/apps/vdpconta...0/pageNumber=1

1. Sticker Price of the car plus options $23,000
2. Times the residual value percentage X .57
3. Equals the residual value = $13,110
4. Invoice price of car minus incentives (net capitalized cost) $20,000
5. Minus the residual (From line 3) - $13,110
6. Equals the depreciation over 36 months = $ 6,890
7. Depreciation (Line 6) divided by term in months ÷ 36
8. Equals the monthly depreciation payment = $ 191.39
9. Net capitalized cost (From line 4) $20,000
10. Plus the residual (From line 3) + $13,110
Equals = $33,110
11. Times the money factor X .0037
12. Equals money factor payment portion = $ 122.51
13. Monthly depreciation payment (from line 8) $ 191.39
14. Plus money factor payment portion (from line 12) + $ 122.51
15. Equals bottom monthly lease payment = $ 313.90


You can sort all this out on your own, or download this calculator and plug in the numbers in yellow. You can compare 9 different leases here: Lease calculator.zip It's an Excel spreadsheet zipped for posting.

I hope this is helpful. Thanks for reading!


EDIT - I wanted to add this post from MACE - it's a very good review of cap cost and multiple security deposits:

Originally Posted by Mace

Never put money down (known as "Capitalized Cost Reduction") is not gospel, just generally good advice. In a lease BMW Financial Services is actually buying the car, you're just renting it from them. If you do a CCR and total the car in an accident, all that money from your insurance company goes to BMWFS not you so any money you put into CCR is lost. Well, not really lost BMWFS gets it.

You have a few options to reduce your monthly payments. CCR is one but there are others. Negotiate a lower purchase price, omit options and/or negotiate down the money factor (essentially the same as interest on a purchase) to get the payments down. Even though you're not actually buying the car you're negotiating the price BMWFS will pay for it and the interest they will charge. The difference between this purchase price and the residual X interest + tax is what determines your monthly payment so you want to do everything you can get get the purchase price and interest (money factor) down just as if you're purchasing it outright.

Another option with BMW is called Multiple Security Deposits (MSD). If you're a new buyer you'll have to pay one security deposits but under MSD you can make up to seven more. The security deposit is your monthly payment rounded UP to the next $50 increment so $630 payment requires a $650 security deposit. The point to the MSD is that each additional security deposit cuts the money factor by .00007 so if you do all seven you'll cut your money factor by .00049 lowering your monthly payment and the total price of the lease. The really nice part about this is that you get all of your security deposits back (less excess wear and tear) at the end of the lease OR if you wreck your car. The only downside to MSD is that it will not lower your payments as much as CCR but it is perfectly save and a you get a good rate of return on that money while BMWFS holds it.

Let me add one more thing. Many people say that if you're planning on keeping the car go ahead and finance it because that's cheaper. That is not necessarily true. If you get a relatively low money factor and interest rates on a purchase is high it's usually cheaper to lease the car for three years and buy it at the end of the lease. If the situation is reversed and interest rates are low and money factor high this situation could be reversed. The only way to know for sure is to work the numbers and see how it comes out. You could be saving $200-$400 per month in a lease, putting some of that savings away during the lease will net you interest plus a nice nest egg toward the purchase at the end of the lease.

[John 070]

Originally Posted by TurboFan

download this calculator and plug in the numbers in yellow.

Makes me wonder how many people nowadays can even calculate a loan payment i.e. amortization schedule with a spreadsheet, let alone a pencil and calculator. I'm not saying we need to use a sliderule like our grandpas used to do, but somehow in our plug and play society a basic understanding of what's going on is missing.

[BMW F22]

lol Im in a finance class as we speak...

[TurboFan]

Originally Posted by John 070

Makes me wonder how many people nowadays can even calculate a loan payment i.e. amortization schedule with a spreadsheet, let alone a pencil and calculator. I'm not saying we need to use a sliderule like our grandpas used to do, but somehow in our plug and play society a basic understanding of what's going on is missing.

I learned the formula just long enough to pass the exam. I knew my spreadsheets and calculator would be around for a while. Dropped the equation from memory to remember more useless info like how many gallons of beer in a half-barrel (15.5).

[Ateneo_BluEagles]

hmmm using your calculation, i could lease a 335i cpe for $530 for 36 mos, 60% residual and .00165 MF...assuming i could get the car invoice sport pkge only and 0 down.... hmmmm

[TurboFan]

Good luck getting a coupe at invoice and getting that MF!

[Ateneo_BluEagles]

Originally Posted by TurboFan

Good luck getting a coupe at invoice and getting that MF!

^ patience is the key my friend, once the hype dies down and with the subprime/housing meltdown, great deals will be plentiful

thanks for the Leasing FYI post by the way

[CatOrtega3881]

Thanks TurboFan and thanks for helping me the other week. TurboFan really knows his stuff. I, for one, appreciate you taking the time to do this.

[TurboFan]

Originally Posted by Ateneo_BluEagles

^ patience is the key my friend, once the hype dies down and with the subprime/housing meltdown, great deals will be plentiful

thanks for the Leasing FYI post by the way

Agreed. I was patient on my sedan, worked over $3k off. I added an edit on the OP, talking about cap cost and multiple security deposits. Glad to help.

[TurboFan]

Originally Posted by CatOrtega3881

Thanks TurboFan and thanks for helping me the other week. TurboFan really knows his stuff. I, for one, appreciate you taking the time to do this.

You are most welcome.

[Ateneo_BluEagles]

Turbofan is this a good deal, I found this in the BMWUSA website. I've never leased a car in my life and I heard to never ever put a down payment on lease and do I get my security deposit back at the end of the lease. Thanks

2007 BMW 335i Coupe Lease Offer
$529*/month for 36 months

Vehicles registered outside of N.Y.
$529 First month's payment
$2,500 Down payment
$550 Security deposit
$3,579 Cash due at signing

[TurboFan]

With no down payment, that would be almost $600/mo.

The lease quoted on the website is usually not a good deal. It's a teaser, usually based on a sell price equal to MSRP, and few if any desireable options.

You have to know the sell price and MSRP to even guess if it's a good deal.

[Ateneo_BluEagles]

^Thanks for the heads up, appreciate it.

[tryangles]

Great post TurboFan. Thanks for taking the time out to educate all of us and contribute to the community!

[horatiub]

Great post!!

here is a good lease calc also: http://www.autoleaseadvisers.com/calc/calc.php

after you understand all the terms, you can use that one to double check your calculation

[!Xoible]

if ur a lease expert let me ask you a question. what happens if you void your warranty partially during your lease period?

[TurboFan]

Originally Posted by mantis

if ur a lease expert let me ask you a question. what happens if you void your warranty partially during your lease period?

I'm by no means claiming to be a lease expert. I'm only laying out the financial aspects of a lease. I haven't discussed anything about the warranty.

[!Xoible]

Originally Posted by TurboFan

I'm by no means claiming to be a lease expert. I'm only laying out the financial aspects of a lease. I haven't discussed anything about the warranty.

bummer... no worries. thanks for info tho, it's great

[flush01]

hey Turbo good post... I got a question tho, even if you put $0 down there's ganna be $1k security, first month, pdi, freigh, etc .... is it a good idea to roll all that into the payments or better to pay that 3k or so upfront?

[TurboFan]

Originally Posted by mantis

bummer... no worries. thanks for info tho, it's great

If you're talking engine-applied mods like exhaust, downpipes, ECU changes / piggybacks, you just need to return it to a stock condition before returning the lease. The ECU would have to be removed, but I'm not sure about the exhaust - it would come down to the discretion of the employee doing your end of lease inspection. If it's not noticably louder, then I think an exhaust mod could be turned in.

Cosmetic stuff that you purchase from BMW can be turned in. It is OEM equipment, designed for your car. I'm talking about shift knobs from BMW, blacklines, euro light switch, etc.

Don't know if that helps. That's what you can turn back in. As far as voiding the warranty, that's between you and the dealer, and they are all different.

[TurboFan]

Originally Posted by flush01

hey Turbo good post... I got a question tho, even if you put $0 down there's ganna be $1k security, first month, pdi, freigh, etc .... is it a good idea to roll all that into the payments or better to pay that 3k or so upfront?

Security deposit on a BMW lease is your lease payment rounded up to an even $50. So a lease payment of $849 would have a security deposit of $850, but a lease payment of $851 would have a security deposit of $900.

I've never looked at a lease where I could roll the security deposit and first month lease payment back into the lease. From a lease perspective, destination / freight is part of the MSRP figure, even though it's a sep. item on the window sticker, so it's already in the payments. Tax, title and license should be paid up front. It's ususally only a couple hundred dollars tops, and if someone is struggling with that, they probably shouldn't lease the car in the first place.

[flush01]

Originally Posted by TurboFan

Security deposit on a BMW lease is your lease payment rounded up to an even $50. So a lease payment of $849 would have a security deposit of $850, but a lease payment of $851 would have a security deposit of $900.

I've never looked at a lease where I could roll the security deposit and first month lease payment back into the lease. From a lease perspective, destination / freight is part of the MSRP figure, even though it's a sep. item on the window sticker, so it's already in the payments. Tax, title and license should be paid up front. It's ususally only a couple hundred dollars tops, and if someone is struggling with that, they probably shouldn't lease the car in the first place.

hmmm maybe in canada it's different.... but i had like $2k (security and first month not included int hat) in all the fees and I could roll them into the payment for $60 or so extra on monthly payment or pay upfront, I payed that upfront.... so you telling me they hassled me on that $2k ?