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 .​
(Word count: 248)

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