Understanding Auto Leases
Leasing a car can be an attractive alternative to buying, often resulting in lower monthly payments and the ability to drive a new car every few years. However, the calculation behind a lease payment is different from a traditional auto loan. An auto lease calculator is an invaluable tool for demystifying these costs and understanding exactly what you're paying for.
Key Terms in a Car Lease
To understand your lease payment, you need to know these key terms:
- Capitalized Cost (Cap Cost): This is essentially the negotiated price of the vehicle, plus any fees, minus your down payment or trade-in credit. A lower cap cost means a lower monthly payment.
- Residual Value: This is the estimated value of the car at the end of the lease term. Your main payment is based on the difference between the cap cost and the residual value (the depreciation).
- Money Factor: This is the interest rate on the lease, expressed as a small decimal. To convert it to an equivalent APR, multiply the money factor by 2,400.
Leasing vs. Buying: Which is Right for You?
The choice between leasing and buying depends on your priorities. Leasing is often better if you prefer lower monthly payments and want to drive a new car every few years without worrying about long-term maintenance. Buying is better if you drive a lot (leases have mileage limits) and want to build equity in an asset you'll eventually own free and clear. To compare the costs of traditional financing, you can use our Auto Loan Calculator. For more information on the pros and cons, consumer resources like the Consumer Financial Protection Bureau offer excellent guidance.