Brian Kramer
EVP @ Cars Commerce | GM of AccuTrade
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Ever wonder how an auto lease is calculated? To calculate the finance charge for a lease, the following formula is used:Finance charge = (Net cap cost + Residual value) x Money factorThe net cap cost is the negotiated price of the car minus any down payment or trade-in value. The residual value is the estimated value of the vehicle at the end of the lease term. The money factor represents the interest rate on the remaining balance. Using this formula, the cost of financing a lease can be calculated and compared across different options.Now, let's dive into why 2,400 is used as the multiplier to convert the money factor into an interest rate. To understand this, we first need to understand how interest is compounded. Compounding is the process by which interest is calculated and added to the principal balance. The more frequently interest is compounded, the more interest is earned on interest. In the case of a lease, interest is typically compounded monthly.To convert the money factor into an interest rate, the following formula is used:(Money factor x 2400) / (1 - Residual value / Net cap cost)The reason for using 2400 as the multiplier has to do with the fact that interest is compounded monthly. To get the equivalent interest rate, the monthly interest rate must be multiplied by the number of months in a year. There are 12 months in a year, so the monthly interest rate is multiplied by 12 to get the annual interest rate. However, to convert the money factor into a percentage, it must be multiplied by 100. This gives us the formula:(Money factor x 12) x 100= Equivalent interest rateThis formula would provide us with the correct annual interest rate if the interest rate were compounded annually. However, interest on a car lease is typically compounded monthly, which means that interest is being charged on interest. To account for this, we must adjust the formula to include the number of compounding periods per year.There are 12 months in a year, and interest is compounded monthly. Therefore, the number of compounding periods per year is 12. We can adjust the formula accordingly to get:(Money factor x 12 x 100) / 12 = Equivalent interest rateSimplifying this formula gives us:Money factor x 1200 = Equivalent interest rateHowever, we still need to convert the annual interest rate to a monthly rate to calculate the finance charge correctly. To do this, we divide the annual interest rate by 12:Equivalent interest rate / 12 = Monthly interest rateFinally, to calculate the finance charge, we multiply the monthly interest rate by the remaining balance.Why is it so complicated? I have no idea. But if you want to know why leases are more now, than they were three years ago, it's because the money factors are higher and the residuals are not as high as they once were.
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Paul Meijer
Performance Coach / Trainer / Speaker / Entrepreneur
1y
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You’d be shocked how many salespeople today can’t figure a lease manually. Back in the day, this was predominantly how it was done Brian Kramer. I also had each model programmed into an excel spreadsheet so that when the phone rang, I was able to desk the deal right on the phone. The $299 Saab 9-3 lease was crazy! We sold out every month!Now…, while we are on trivia, can you tell me the origination date of the fabled “four square”? No one seems to have documentation on that… 🤔🤔🤔
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Aaron Bickart
General Manager @ OfferLogix | Business Development, Process Improvement
1y
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We at OfferLogix call this Penny Perfect Payments
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Tony Owens
Fixed Operations/Mr. postitivity
1y
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I leaned something here Brian. I did not know it was compounded monthly. Leasing works well for a lot of people. And it's a great way for dealers to get pristine preowned vehicles. More dealers need to do leases. Honda still has great leases.
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Leonard Person
Person & Partners Automotive Advertisng, Inc.
1y
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Good read, exercise etc. ".. .it's because the money factors are higher and the residuals are not as high as they once were."hmmm while residuals are not as high as they once were, aren't they still high enough to bring leasing back? I get that rates are problematic but coupled with higher than typical used car prices, wouldn't that encouage leasing programs? Thanks for taking the time to educate us Mr. Kramer
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Robert Cornwell
Automotive Variable Operations
1y
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It's not that complicated. It's math. I recall using a simple worksheet and calculator to desk a lease, "back in the day". Took all but a minute. The best part back then was no cap cost disclosure.
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Brian Jordan
Sales Director|iPacket|Experienced Automotive Professional
1y
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You must have went to Jerry Plummer lease training! Lol
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Tony Ramirez
Loan Department Officer at State Highway Patrol Federal Credit Union NMLS ID# 1852710 SHPFCU NMLS 602817 Notary Public for State of Ohio
1y
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I remember being able to do one by hand with a calculator back in the TG Oldsmobile days LOL!
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Ryan H.
Changing the car business one customer at a time
1y
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Why are leases more expensive now? The answer is much simpler. Supply and demand and more expensive money.Residuals are no longer incentivized. ALG hasn’t adjusted for the market. Money is more expensive. And there are less rebates. Basically the manufacturer is making much much more money than they did before on a lease.
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Chris Morano ✝️
Pre Owned Director Morgan auto group
1y
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Sitting at the desk 20 years ago I would be able to figure out a monthly payment within $20 per month on a regular adding machine(calculator).
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James Boening
ULTRA MAGA - I FULLY SUPPORT & ENDORSE JESUS AS MY LORD & SAVIOR!🇺🇸🇺🇸🇺🇸🇺🇸I didn’t get here alone!It’s a temptation that exists for everyone — for talk and hype to replace action. "Ego is the Enemy"
1y
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Brian I think that what you spelled out is complicated, when you talk to people that don’t do this but 5-6 times in a lifetime. You and I can run this out, but most can’t. But who cares. If a lease, pre pandemic, is cheaper than financing and as whole I also trade in 2-3 years; who cares about the calculation. If I can walk away if the market got out of wack in a bad way or the market got crazy in a good way, I’m protected on both sides, why wouldn’t I lease for monthly lower payment that protects me on either side? I’m in the business and I’ve leased my wife’s car for 25 years and I always won!!I think this calculation or diagram is irrelevant. 😉
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