How to Calculate Car Lease Payments

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November 9, 2016

Calculating car lease payments is a simple 5-step process. Learn how to calculate payments, how your credit score affects them, and how to reduce them.

When you consider the purchase of a car on a lease, knowing what your car lease payments are is important. Calculating your car lease payments is easy to do and can be accomplished using a calculator.

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Step 1: Gather Lease Information
You need to know the manufacturer suggested retail price (MSRP), negotiated price, residual value, term of the lease and interest rate/money factor in order to estimate your lease payment. This information can be obtained by going to the dealer's website or contacting a car finance company.

Step 2: Calculate the Vehicle's Value
Since a lease is for a period of up to 36 months, the full value of the car will not be used by the leaser. To determine what the car's value is, take the MSRP and the residual value to calculate the car value. For example, if the MSRP is $25,000, the residual value is around 50 percent (this number can be obtained from the car finance expert). If you negotiate the lease value for $24,000, the car value is $11,500 ($25,000 / 50 percent - $1,000 = $11,500).

Step 3: Calculate the Principal Amount
Take the car value and divide it by the term of the lease. For example, if the car value is $11,500 and the lease term is 36 months, the principal amount of the lease payment would be $319.44 ($11,500 / 36 = $319.44).

Step 4: Calculate the Interest Amount
To determine the interest amount, take the purchase price, add the negotiated price and multiply it by the money factor or interest rate. For example, take $25,000 plus $24,000 and using a money factor of .003, your interest would be $147 ($25,000 + $24,000 x .003 = $147).

Step 5: Add the Principal and Interest Payments
Add the principal and interest payments together to come up with the estimated payment. For example, $319.44 plus $147 = $466.44. This is the estimated lease payment. Understand that this amount does not include taxes, fees and other costs but is a good rough estimate of what you will pay.

Does My Credit Score Affect My Car Lease Payments?

Yes, it absolutely does. Knowing more about how companies use your credit score for a variety of consumer situations can help you manage your finances better and get more leverage out of your particular credit situation.

Your Credit Score: A Prime Factor
Your credit score is used for more and more financial transactions every day in America. Did you know your credit score can now affect whether or not you get a job? It also affects routine things like cell phone plans, car loans, mortgage applications, and much more. In terms of car lease payments, your credit score can affect not only the payments you make on your lease, but how you get evaluated for your insurance needs.

Credit Score and Car Lease Payments
If you break down your car lease into the categories of interest and principal, it becomes clear that your credit score has a huge impact on what you pay over time. A vehicle lease is a specific financial agreement over a specific time period for a specific amount of money. However, because the car or truck is essentially on loan, the lease payments come with interest. That's where your credit score comes in. A lower credit score means you will not qualify for better interest rates. As a result, you'll see that total figure jump up when an additional interest percentage is added.

Manage Your Credit Score: Don't get fooled
There is a common story going around that new or used car dealerships are pursuing what some call a "credit scam." This practice involves telling a consumer that their credit score is lower than it actually is. The only way for you to know if a lender is lying is to routinely check your own credit scores. A score above 640 is generally okay. Below 640, you may have a problem getting good interest rates. You can pull your current credit scores from local credit bureaus, often for a small fee. Know what your credit score is and stay on top of your credit status. If a dealer offers you a lease at high interest rates, you can just say no, and move on to a more honest shop.

A consumer with a good, manageable lease is also building good credit for the next deal. Always keep an eye on your credit, and don't allow it to slide down into financial liability, where you may find you are getting denied for all sorts of transactions.

How Do Interest Rates Affect My Car Lease Payments?

Whenever money is borrowed from an outside source, be it a credit card, a mortgage, car loan, lease, student loan, etc., there is usually an interest rate (although there are temporary offers of 0 percent APR by some lenders for special promotions). This means you have to pay them an additional percentage on top of what you are borrowing. Essentially you are paying them to let you borrow their money. Lending companies look at your credit score and determine what kind of a risk they are taking by lending that money out. The lower the credit score-the higher the risk. That is why low credit score holders have the experience of having high interest rates.

But what exactly do high interest rates mean? This means that a car originally thought to be, say, $8,000 could end up costing the lessee about $13,000 in the long run. This is figured into monthly payments. Since the APR is based off the outstanding balance, for the first part or the lease period, a large majority of the car payment is going towards interest and then in the end it goes towards principle. The way to figure how much would be going to interest is to use the formula (Amount owed x APR x amount of time). This decreases with time as the principle is decreased. Looking at a credit card statement is a good way to see an illustration of this. The statement will show the interest rate that is applied to the balance, transfers, etc., and how much that equates to.

Overall, the higher the interest rate, the higher the monthly payment and the more you pay in the end.

That is why it is important to shop around and look for lease deals. Dealers use a special number called a "money factor" instead of APR. However, the two numbers can be easily converted back and forth. The money factor is simply the APR divided by 2400. If a dealer offers a lease with a money factor of .00175, a quick calculation will find that the APR is 4.2 percent--lower than the national average, and hence a good deal. Likewise, if an offer of .00395 is offered, that equates to 9.48 percent APR, and is obviously not a good choice. These money factors should not strictly be known to dealers. Consumers need to be well-educated about them as well so they can avoid getting a bad deal.

Car leasing is a good option for many people. If you are not qualified for a car loan, leasing may be an option, but it may come with a high interest rate. However, if you were to be a "prime-lender", that is, someone with a credit score higher than a 680-700 range, then interest rates will be lower and special incentives may apply.

How to Reduce Car Lease Payments

Some of the average lease amounts that drivers pay each month could strain any budget. Here are some quick ways that shoppers limit their payment amounts at the outset of the deal, or afterward.

  • Get a lower interest rate - shop around to lenders and find out which ones will work with you for a result you can feel good about, and something that won't break the bank. Always know where you stand with your credit score.
  • Put money down - a bigger down payment means less payment in interest. That is the key to bringing down those large lease payments. Get a big chunk of money up front for down payment, and enjoy less stress over the term of the lease.
  • Use a cosigner - A cosigner can be a good solution for getting more competitive lease terms for someone with less than great credit, but beware: some shops try to make the cosigner into the primary borrower. Check the paperwork thoroughly at deal time.
  • Refinance debt - debt refinancing or consolidation are other ways to change car lease payments after the fact. If your lease is tearing a hole in your wallet, ask about refinancing with other lenders to help ease the burden.

The above are some options for making sure your lease doesn't become too much of a liability.


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