For drivers and consumers, crunching numbers is certainly one of the hardest aspects of leasing. Consider the car lease financing charge for instance. Many of them just cannot comprehend that this calculated on residual value and capitalized cost and not just on the former. For most people, it seems that when buying a car, they believe that the charge must be levied on the automobile’s capitalized cost.

This is not quite the case. When you go through auto leasing, you are simply utilized the vehicle over a specific period of time given the choice of purchasing the car in the end.

How to arrive at car lease financing charge

The loan balance is actually represented by the residual value at the lease end. If it is added to the capitalized cost and you divide it by two, you will arrive at the average capitalized cost which is outstanding over the term of the lease.

Let us say you are leasing a vehicle with a 25,000 dollar capitalized cost and 15,000 dollar residual value. The average balance that you will arrive over the term of the lease, regardless of how long the term is, is 20,000 dollars, which is actually the sum of the two amounts divided by two.
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Utilizing such sum does work as the money factor is considered the yearly rate of interest divided by 24, instead of 12. Let us continue with the example and assume that interest rate is 6 percent APR. 30000 dollars multiplied by 6%/24 equals 75 dollars. The formula used is “capitalized cost plus residual value multiplied by the “interest rate over 24” (months). The result is the monthly car lease financing charge.

Finally, in order to calculate the lease monthly payments, the car lease finance charge is added to existing depreciation charge.
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