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Topic: Be careful, when leasing and financing...
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 faruq.as-salafi
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Member
Posts: 259
Joined: Sep 2002
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As-Salaamu' Alaikum wa' Rahmantu'lahi wa' Berta'khatu.
A salafi brother of ours and myself ran in this "money factor" attempting to sign a short-term lease on a car and was quite noided by the outcome! Read below and ya' people who fear the punishment of indulging in ribeh (usery) from the kabaa'ir, beware!
Monthly Lease Payments
We've already discussed the separate factors that contribute to the cost of car leasing: net cap cost, cap cost reductions, residual, money factor, and term (see How Leasing Works). Now, let's put it all together and see exactly how your monthly lease payment is determined.
The "secret" lease payment formula described below is used by dealers and leasing companies, who would prefer that you not know about it. Even federal leasing regulations do not require that leasing companies actually disclose how your payment is calculated.
The net result is that the vast majority of people who lease do not know how to check the math on their lease contract and cannot detect the existence of simple errors, intentional "mistakes", or out-and-out fraud. Lack of knowledge of how lease payments are calculated is one of the key reasons that consumers overpay on car leases today.
Let's establish why it's so important to know how to calculate monthly payments. Consider the following:
If the dealer figures your lease payment based on full sticker price rather than the discounted price you negotiated with him, how will you know?
If the dealer doesn't give you proper credit in his calculation for your trade-in, even though it's in your contract, how will you know?
If the dealer adds hidden charges and fees to your lease without mentioning them or showing them in your contract, how will you know?
If the dealer mistakenly "drops" a zero and gives you credit for only $100 of a $1000 rebate, even though your contract shows the $1000 rebate, how will you know?
Remember, all you see is a "bottom-line" monthly payment figure, after the calculations have been done by the dealer. Therefore, you must be able to check your dealer's payment figures against your own to make sure there are no "mistakes," intentional or otherwise. If your payment figures and the dealer's don't agree, the only possible reason is that he's using a different set of numbers for cap cost, residual, money factor, or term than the numbers he's given you. Ask him to give you exactly the numbers he's using.
Let's now look at the formula. If you don't particularly like math, our Lease Kit provides easy to use payment tables that can be printed and used in place of the formula. The printed tables can be carried with you to the dealer's showroom so that you don't need to remember how to do the math there.
Monthly Lease Payment Formula
A lease payment is made up of three parts: a depreciation fee, a finance fee, and sales tax ? all added together. We'll look at each of the parts of the formula below. Sales tax is covered a little later.
Depreciation Fee
The depreciation fee portion of your payment simply pays the leasing company for the loss in value of its car, spread over the term (number of months) of the lease. You pay off an equal portion of the total expected depreciation each month. This is calculated as follows:
Depreciation Fee = ( Net Cap Cost ? Residual ) ÷ Term
Remember, Net Cap Cost is the Cap Cost, or selling price you negotiate with the dealer, plus any add-on fees, prior loan balances, and luxury taxes, minus any Cap Cost Reductions (down payment, trade-in, or rebates). A good lease deal is when you have the lowest possible Net Cap Cost with the highest possible Residual.
Finance Fee
The finance fee portion of your monthly lease payment is like interest on a loan and pays the leasing company for the use of their money. It's calculated as follows:
Finance Fee = ( Net Cap Cost + Residual ) × Money Factor
Yes, you add Net Cap Cost and Residual ? this is not a mistake. It's not double-counting as it may appear. It's simply a way of calculating the average amount financed without using complicated constant-yield annuity business formulas (for more details, click here).
Also be aware that you're paying finance charges on both the depreciation and residual (since you're tying up this amount of the leasing company's money while you're driving their car).
You won't find your monthly Finance Fee shown in your lease contract. Rather, they only show you a total "Lease Charge" or "Rent Charge," which is the sum of all your monthly Finance Fees over the entire term of your lease. So, to find your monthly Finance Fee:
Monthly Finance Fee = Lease Charge ÷ Term
Total Monthly Payment
Now, add the Depreciation Fee and the Finance Fee that you calculated above to get your Total Monthly Payment.
Sales tax must also be added in most states, but we'll hold that discussion until later.
Total Monthly Payment = Depreciation Fee + Finance Fee
Note: Ford Motor Credit (FMC) uses a slightly different, more complex formula than the rest of the world, which results in slightly higher payments ? typically 2%-3% higher than the figure you get using the conventional formula above.
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Example Calculation Using the Leasing Formula
Visible Lease Formula Plug in your own numbers and see the formula work.
So now that we've looked at the formula, let's see how it actually works.
Let's assume you've decided on 3-year (36 month term) lease of a Toyota Camry XLE that has a sticker price of $24,600 (MSRP).
You've managed to negotiate the price down to $23,000 (Cap Cost). You decide not to make a down payment, but you have a trade-in worth $5000. Your Net Cap Cost is therefore $23,000 - $5000 = $18,000.
Now, the dealer tells you (because you asked) that the Money Factor is .00375 (.00375 x 2400 = 9.0%) and the Residual Percentage is 60% of MSRP. So your Residual amount, in dollars, is .60 x $24,600 = $14,760.
Now let's do the math:
Depreciation Fee = ( $18,000 ? $14,760 ) ÷ 36 = $90.00
Finance Fee = ( $18,000 + $14,760 ) × .00375 = $122.85
Monthly Lease Payment = $90.00 + $122.85 = $212.85
(sales tax not included)
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If you're not comfortable with performing this math, especially in the heat of a dealer's showroom, you can use the easy Payment Tables contained in our optional Lease Kit. Or if you've already leased and need to know if your deal was fair and honest, use the Lease Inspector in the Lease Kit.
How Leasing Works - Taxes and Fees
Comments and questions should be directed to support@leaseguide.com.
Baarak-Allaahu Feekum - wa sal-Allaahu wa-sallam 'alaa Nabiyyinaa Muhammad,
was-Salaam 'alaykum wa-Rahmatullaahe wa-Barakaatuh.
Abu' Salafi'ayn
-From As-Salafiyoon in Columbus-
This message was edited by faruq.as-salafi on 12-21-02 @ 6:06 PM
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| faruq.as-salafi
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Member
Posts: 259
Joined: Sep 2002
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As-Salaamu' Alaikum wa' Rahman tu'Llahi wa berta khatu ya'salafiyoon,
I wanted to repost this information for the people who are not aware of this and who are not knowledgeable of the ill-affects of ar-ribaa'aa!
Baarak-Allaahu Feekum - wa sal-Allaahu wa-sallam 'alaa Nabiyyinaa Muhammad,
was-Salaam 'alaykum wa-Rahmatullaahe wa-Barakaatuh.
Abu' Salafi'ayn Faruq Al-Fauzani Rabee'us-Sunnah As-Salafi 'ibn Saja As-Salafiyyah
-From As-Salafiyoon in Columbus-
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21-12-2002 @ 12:00 AM
19-02-2003 @ 12:00 AM