# Lease Financing 248

Lease Financing

For auto-consumers, crunching the numbers is one of the most difficult and

confusing aspects of leasing.

Take the finance charge on a lease for instance .

Most people just don’t

understand how this is calculated on capitalised cost AND residual value

instead of just the capitalised cost .

For most, it seems plainly obvious,

just as is the case when purchasing, that a charge should be levied on the

capitalised cost of the vehicle.

Well, no quite! When you lease a car, you’re only using the car over a

specified period of time with the option of buying the car .

The residual

value represents the loan balance at the end of the lease .

If you add it

to the capitalized cost and divide by two, you’ll get the average

capitalized cost outstanding over the lease term .

Let us suppose you’re

leasing a car with a capitalized cost of $25,000 and a residual value of

$15,000 .

You average balance over the lease term, irrespective of how long

it is, is $20,000 – the sum of the two divided by two - .

Using this sum works because the money factor is the annual interest rate

devided by 24, rather than 12 .

Continuing with our example and assuming an

interest rate of 6% APR:

$30,000 X (6 per cent / 24) = $75

(Capitalized cost + residual value) X (interest rate / 24) = Monthly

finance charge

This finance charge is added to the depreciation charge to calculate the

monthly payments on your lease .

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