I’ve written before on how to calculate payments on a car lease .  However, when I began reading Jorge Diaz’s book Car Leasing Done Right , I saw that he believes the interest calculation is different from what I’ve seen everywhere else. Update 2022-05-19: Jorge Diaz confirmed that his interest calculation was wrong and that he intends to fix it in the next version of his book. Diaz gives the following example: MSRP $27,799 + PDI $1825 = Vehicle cost of $29,624 Term: 48 months Residual Value: $14,561 Interest Rate: 3.99% HST: 13% Diaz calculates the total interest paid over the 4-year lease to be $1217.01.  This figure is consistent with taking the difference between vehicle cost and the residual value and calculating interest on this as it declines to zero.  We can estimate this by starting with cost minus residual ($29,624 - $14,561 = $15,603).  The average balance owing will be about half of this.  Then we multiply by 4 years and 3.99% to get $1202.  Thi...

A colleague of mine has seen me throwing away a lot of paper over the past couple of years, and I explained that I’m trying to live a life with fewer things. The way I see it, my possessions tend to own me rather than the other way around. This colleague recently told me that I inspired him to do the same thing, and he began by leasing instead of buying his most recent car. He sees leasing as like renting instead of owning. The social thing to do in this situation would be to say something like “that’s great – enjoy your new car.” But, I’m no good at saying things I don’t believe. I had to tell him that I didn’t agree that leasing a car is like renting it. For one thing you often end up paying for about half of the car. Further, the details of lease contracts push much of the risk back onto the consumer. This colleague really hasn’t significantly reduced his exposure to the risks of owning a car. Further, because lease contracts are complex, few people understand them enoug...

Let’s face it. Buying a house is way too expensive. A $500,000 mortgage amortized over 30 years at 4% costs $2378 per month. Who wants to pay that much? Car leases give us the answer. With a car lease we recognize that a car still has some value after the end of its lease. The customer only has to pay enough to cover the difference between the car’s starting price and its value after the lease runs out. This should work out even better for houses because they go up in value. Let’s be conservative and assume that houses will go up 10% over the next 3 years. Then a home buyer should only have to pay enough so that the amount owed on the house goes from $500,000 to $550,000 over 3 years. At 4% interest, this would only cost $343 per month! The rising debt isn’t a problem because you can always sell the house to pay it off. Compared to the old type of mortgage where the payments are $2378, this saves over $2000 each month. This is the kind of innovation we need to keep hou...

Most people cannot handle irregular pay and expenses very well. They have a strong need for smooth, predictable incoming and outgoing cash flow and they pay a high price for this predictability. This need is apparent with car purchases, once per year expenses, employer supplemental health insurance, and other areas. Cars The best way to buy a car in most cases is for cash, but few people do this. Even car loans don’t smooth out the costs enough for many car buyers because the monthly payments last for only the first 3-6 years of the car’s life. Car leases offer a way to reduce periodic payments now and defer part of the car’s cost until years later. Car leases are sufficiently complicated that few people really know how much they pay for a leased car. When the customer doesn’t understand the numbers, this gives dealerships a big negotiating edge. We pay a high price for low lease payments. Yearly Expenses For many types of yearly expenses like property taxes and car and...

Frugal Trader at Million Dollar Journey had an interesting post explaining how car lease payments are calculated . The formula is simple enough until it adds a lease fee that involves a mysterious “money factor”. It all seems like extra profit for the dealership, but the truth is less nefarious.  According to commenter Robert, this money factor is only used in the U.S.; Canadians use the exact calculation given at the end of this post. An Example I’ll use the same example that Frugal Trader used: – Honda CRV: MSRP + freight + PDI: $29,880 – Residual Value after 3 years: $15,276.60 – Depreciation (price minus residual): $14,603.40 – Depreciation per month: $405.65 So, if the interest rate were 0%, then the payments should be just this $405.65 per month. But interest is a fact of life and we need to figure that out too. The accurate way to calculate interest involves present value calculations. I’ll leave the details of this accurate method to the end of this post f...

As the Big Cajun Man at Canadian Personal Finance pointed out, car companies are shying away from leasing cars . This may seem puzzling, but will make sense after looking at the true nature of car leases. The term “car lease” was great marketing. It gives the illusion that the dealership takes the risk, and you just rent the car for a while and get a new one when it suits you. The truth is that with a car lease you take much the same risks as if you buy the car. If something happens during the term of a car lease that makes the car worth less than expected at the end of the lease, you’re on the hook and will have to make up the difference. The best way to think of it is that you own the car, but owe a lump sum at the end of the lease. If the car happens to be worth as much as this lump sum owed, then you’re okay. If not, dig into your wallet. When leasing a car you have lower payments than if you took out a loan, but this just means that you’re paying it off more slowly. In fac...

The invention of the car lease was a tremendous boon for the car industry. Few people can understand the financial implications of car leases, and at the same time, leases have lower payments than car loans. Many cars would not have been sold if the car lease didn’t exist. Even the word “lease” works well here. It gives the illusion that someone else is taking the financial risks of car ownership, and the driver is just leasing it. But, you are taking the risks whether you buy or lease. The idea behind a car lease is simple enough. With a 3-year car loan, the full car price is spread across 3 years at some interest rate. For a 3-year lease, the difference between the car price and its expected value after 3 years is spread across 3 years of payments at some interest rate. After the 3 years, you have to pay the residual amount (possibly by selling the car back to the car company). Naturally, a lease gives lower payments than a loan for those 3 years making the lease seem attractive. Car...