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vehicle_leases [2025/02/04 16:28] – [Things about leases] qlyoungvehicle_leases [2025/02/15 19:11] (current) – add title qlyoung
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 +=== vehicle leases ===
 +
 The other option to buying a car is to lease it. Leasing a car is basically renting it for a period of time (the **term**), usually 2 or 3 years (24 or 36 months). The other option to buying a car is to lease it. Leasing a car is basically renting it for a period of time (the **term**), usually 2 or 3 years (24 or 36 months).
  
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 Once you understand that, calculating how much you pay in depreciation is easy. It's ''(**adjusted capitalized cost** - **residual**)''. In the graph this is represented as "depreciation cost." Note that this is not equal to the //actual// depreciation of the vehicle! That would be ''(**MSRP** - **residual**)''. The incentives & down payment are working in your favor here. Once you understand that, calculating how much you pay in depreciation is easy. It's ''(**adjusted capitalized cost** - **residual**)''. In the graph this is represented as "depreciation cost." Note that this is not equal to the //actual// depreciation of the vehicle! That would be ''(**MSRP** - **residual**)''. The incentives & down payment are working in your favor here.
  
-The other part is the rent charge. This is charged to compensate the lessor for the privilege of using the vehicle. Basically this is the profit for the lessor. Calculating this quantity is where people usually get tripped up in lease math because it's not obvious why it is calculated the way that it is. To calculate how much you pay in rent in total, it's ''(**adjusted cap cost** + **residual**) x **money factor** x **term**''. It's calculated this way because the money factor itself is defined as ''APR/(12*2)''. The 2 in the denominator of the money factor divides the sum of adjusted cap cost and residual to get the **midpoint** shown in the bar chart (the average between the residual and adjusted cap cost). Why is the money factor defined this way? Because the "principal" (to use loan terms - this is not a loan) of the asset - ie the car's value currently being held by the lessor - decreases from the adjusted cap cost down to the residual over the lifetime of the lease, and the intention is to charge rent on the total value of the asset currently being leased at any given time. That ends up being the same as the average of the residual and adjusted cap cost. But returns are usually defined in percent. So they decided it was easier to take the APY they wanted, divide it by 12 to get monthly, then divide it again by 2 to account for you paying the depreciation. The upshot of this is that the **midpoint** defines how much rent you pay - anything that lowers the midpoint will reduce the rent charges. Also the APR is the money factor * 2400, I have to say that because it's how every website "explains" what the money factor "is". If you write anything about car leases you have to say that.+The other part is the rent charge. This is charged to compensate the lessor for the privilege of using the vehicle. Basically this is the profit for the lessor. Calculating this quantity is where people usually get tripped up in lease math because it's not obvious why it is calculated the way that it is. To calculate how much you pay in rent in total, it's ''(**adjusted cap cost** + **residual**) x **money factor** x **term**''. It's calculated this way because the money factor itself is defined as ''APR/(12*2)''. The 2 in the denominator of the money factor divides the sum of adjusted cap cost and residual to get the **midpoint** shown in the bar chart (the average between the residual and adjusted cap cost). Why is the money factor defined this way? Because the "principal" (to use loan terms - this is not a loan) of the asset - ie the car's value currently being held by the lessor - decreases from the adjusted cap cost down to the residual over the lifetime of the lease, and the intention is to charge rent on the total value of the asset currently being leased at any given time. That value is constantly changing over the term, but ends up being roughly the same as the midpoint. But returns are usually defined in percent. So they decided it was easier to take the APY they wanted, divide it by 12 to get monthly, then divide it again by 2 for reasons unknown to anyone. They could have clearly explained that rent is charged on the average of the adjusted cap cost and the residual, but instead they included the 1/2 factor in the definition of the money factor. The upshot of this is that the **midpoint** defines how much rent you pay - anything that lowers the midpoint will reduce the rent charges. Also the APR is the money factor * 2400, I have to say that because it's how every website "explains" what the money factor "is". If you write anything about car leases you have to say that.
  
 Obviously to get the total amount you pay over the lifetime of the lease, add the depreciation cost and rent charge. To get it monthly divide by the term (in months). Obviously to get the total amount you pay over the lifetime of the lease, add the depreciation cost and rent charge. To get it monthly divide by the term (in months).
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 As an example of such a situation, if there is a high risk of the vehicle being worth very significantly less than a normal car over a 2-3y time frame, it can make sense to lease that vehicle and pay a premium to the lessor in exchange for them shouldering the depreciation risk. Vehicles produced by new companies that could go out of business during the term, or using new and unproven technologies, are illustrative examples.  As an example of such a situation, if there is a high risk of the vehicle being worth very significantly less than a normal car over a 2-3y time frame, it can make sense to lease that vehicle and pay a premium to the lessor in exchange for them shouldering the depreciation risk. Vehicles produced by new companies that could go out of business during the term, or using new and unproven technologies, are illustrative examples. 
  
-Another thing to consider about leasing is that the lease period usually is within the manufacturer warranty period of the vehicle. By repeatedly leasing vehicles the lessee has a car that is always under warranty. This can free them up to drive cars that they may not otherwise buy for reliability reasons.+Another consideration is that car is usually covered by the manufacturer warranty during all or most of the term. By repeatedly leasing vehicles the lessee has a car that is always under warranty. This can free them up to drive cars that they may not otherwise buy for reliability reasons.
  
 The final major thing to consider about leases is that they always have mileage limits. These are expressed in miles/year but they aren't evaluated on a yearly basis, just at the end of the term. Any overage on the allowed mileage is usually charged at a relatively high rate, commonly $.30/mile, although this is sometimes negotiable. These mileage allowances are always factored into the residual, since mileage is one of the factors affecting the value of a car. There's usually stipulations about excess wear and tear as well. The final major thing to consider about leases is that they always have mileage limits. These are expressed in miles/year but they aren't evaluated on a yearly basis, just at the end of the term. Any overage on the allowed mileage is usually charged at a relatively high rate, commonly $.30/mile, although this is sometimes negotiable. These mileage allowances are always factored into the residual, since mileage is one of the factors affecting the value of a car. There's usually stipulations about excess wear and tear as well.
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vehicle_leases.1738686512.txt.gz · Last modified: 2025/02/04 16:28 by qlyoung
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