Lease vs Buy with LR Finance
#41
09-12-2022, 04:10 PM
Mudding
Posted the above in a hurry and later realized it probably wasn't clear. Here's another attempt.
With a lease, as with any other rational financial transaction, you're paying interest on the loan balance. In the case of a lease, the principal balance varies between the full purchase amount and the residual at the end of the loan. To calculate the average interest payment, one can therefore use the average principal balance over the term and apply the interest rate to that. Now, the sum of the purchase cost and residual, divided by two, gives you the average principle balance. However, the "money factor" represents half the monthly interest rate (APR / 100 / 12 / 2), so instead of finding the average principle balance, one just multiplies this money factor by the sum of capitalized amount and residual value, without a need to divide by two.
I hope that makes more sense and resolves the "what am I paying interest on" debate!
With a lease, as with any other rational financial transaction, you're paying interest on the loan balance. In the case of a lease, the principal balance varies between the full purchase amount and the residual at the end of the loan. To calculate the average interest payment, one can therefore use the average principal balance over the term and apply the interest rate to that. Now, the sum of the purchase cost and residual, divided by two, gives you the average principle balance. However, the "money factor" represents half the monthly interest rate (APR / 100 / 12 / 2), so instead of finding the average principle balance, one just multiplies this money factor by the sum of capitalized amount and residual value, without a need to divide by two.
I hope that makes more sense and resolves the "what am I paying interest on" debate!
I understand it’s a little more nuanced since after the first payment there is less principle each month and that the interest rate is essentially charged to the average principle over the term of the loan. But for simplicity sake you’re paying interest on the depreciation + residual = purchase price of the vehicle?
#42
09-12-2022, 05:09 PM
so bottom line: you’re paying interest on the price of the vehicle (so if I lease $65,000 Defender I’m paying interest on $65,000)?
I understand it’s a little more nuanced since after the first payment there is less principle each month and that the interest rate is essentially charged to the average principle over the term of the loan. But for simplicity sake you’re paying interest on the depreciation + residual = purchase price of the vehicle?
I understand it’s a little more nuanced since after the first payment there is less principle each month and that the interest rate is essentially charged to the average principle over the term of the loan. But for simplicity sake you’re paying interest on the depreciation + residual = purchase price of the vehicle?
That's because this reflects what you've borrowed. With an amortized loan, you're paying towards the principal because you're paying it down while also paying the interest. With a lease, you're just borrowing the funds to cover the car's value while you depreciate it. At the end you don't own anything because you've just paid interest.
Edit: key words here are "borrowing the funds to cover the value while you depreciate it." You of course still need to pay that depreciation. A loan to buy differs in that the entire purchase cost of the car is amortized in the loan, so at the end you own it outright. The last sentence above also should have read "...you don't own anything because you've just paid interest and depreciation."
Last edited by mzeee; 09-12-2022 at 08:59 PM.
#43
09-12-2022, 07:56 PM
Thanks for a much clearer way to describe a lease! I've never even entertained leasing because I have dogs that terrorize my cargo areas, but if I ever get a non-pet family car, I can conceptualize the process much easier now.
You are paying for the anticipated depreciation of the vehicle using an interest only loan for the duration of the term you choose to keep it and the principle amount for interest purposes is simply the average amount between the negotiated/financed and the residual figures. It's actually quite simple!
You are paying for the anticipated depreciation of the vehicle using an interest only loan for the duration of the term you choose to keep it and the principle amount for interest purposes is simply the average amount between the negotiated/financed and the residual figures. It's actually quite simple!
#44
09-12-2022, 08:21 PM
Mudding
Thanks for a much clearer way to describe a lease! I've never even entertained leasing because I have dogs that terrorize my cargo areas, but if I ever get a non-pet family car, I can conceptualize the process much easier now.
You are paying for the anticipated depreciation of the vehicle using an interest only loan for the duration of the term you choose to keep it and the principle amount for interest purposes is simply the average amount between the negotiated/financed and the residual figures. It's actually quite simple!
You are paying for the anticipated depreciation of the vehicle using an interest only loan for the duration of the term you choose to keep it and the principle amount for interest purposes is simply the average amount between the negotiated/financed and the residual figures. It's actually quite simple!
#45
09-12-2022, 08:53 PM
I don’t think it’s an interest only loan, the monthly payment is everything he said PLUS the monthly depreciation (total depreciation over your lease term divided months of the lease). Still, the interest is the really the complicated part, it’s easy to calculate the depreciation cost so their explanation is still quite helpful.
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#46
05-14-2023, 05:47 PM
Rock Crawling
Your call, you'd have to have them run the numbers. When I bought mine it was two years ago, it was like $950 to lease and $1080 to buy, needless to say I bought it. It was 3.49% at 72 months and my FICO at the time was 830ish-850. Very high. Interest rates are up a bit though now and there was a time when my mom was car shopping last spring where nobody had leased anything for months. You'll just have to go in and have them run the numbers, things may be back to normal finally with leasing but yea I didn't think the lease prices back then were worth it for my Defender. In retrospect it was a good idea to buy because I was able to trade it in early. I traded it like 6 months ago.
Last edited by Chief65; 05-14-2023 at 06:04 PM.
#47
05-14-2023, 06:39 PM
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