Auto leasing fundas

Leasing cars, especially luxury ones, can be more cost effective than buying provided one knows how leasing works and negotiates a better deal.

This is how leasing works...

Here are some terms:

MSRP: Sticker price
Cap Cost: Lease price (price of the car after negotiations. This can be negotiated up from the dealer invoice price or down from the MSRP)
Adjusted Cap Cost: Lease price - (downpayment + trade in value, if applicable)
Residual Value: Value of the car at the end of the lease. This is usually provided by the manufacturer based on the number of miles driven per year. For BMW X3, the residual is 78% of MSRP for 2 years and 68% for 3 years for 10K miles per year. For 15K miles for 3 years, the residual is 65%.
Term of the lease: Number of months.
MoneyFactor: This is a slightly tricky concept. Its is actually the interest rate that the leasing company charges you for financing. However, it is not represented in percentage (%). It is usually represented in decimals (for e.g., .0025 or .0030 etc). To convert it to an APR, multiply it with 2400. It is always 2400 irrespective of the term of the lease.

Here is the formula:

Monthly payment = Depreciation cost + Finance Cost

where
Depreciation cost = (adjusted cap cost - residual value)/term of the lease
Finance Cost=(adjusted cap cost + residual value) * money factor

The finance cost formula is actually derived from the area of a trapezoid. For more information check this web page...

Lease Money Factor

Local Sales tax is added to the monthy lease payment to get the overall monthly payments.

Apart from the monthly payments, there is also upfront payment when you sign the lease. This includes the downpayment (also called Cap cost reduction), 1st month payment, security deposit, vehicle registration and licence fee, acquisition fee etc.