April 7, 2009

971 words 5 mins read

The Math Behind a Car Lease

You too can have one of these shiny new critters.

Recently, I learned a lot more about what it takes to acquire a new lease, at least through Subaru.

For the purposes of this discussion we will assume you are looking to purchase a vehicle for approximately $20,000 (the formulas should be adjustable to your target vehicle’s price).

The first thing you need to understand is that if you are trying to leave (to go to dinner, for instance), they will throw all kinds of crazy numbers at you. None of it will be promises, only “what ifs”. Such as “What if I could get you the car you want for $200 a month with $0 down and $2500 for your trade?” The thing you have to understand is, this is a pipe dream, they are just looking to get you to start the car purchase/lease process. Only once they have all your info can they give you more realistic information.

Now, this next part may seem a little math heavy; I realize most people aren’t so good at the mathing, so I will try to use easy numbers. A couple of disclaimers before we go forward:

  1. I am not, and never have been a car salesman, nor have I worked in an affiliated industry.
  • At no point do I discuss credit scores and how that affects your lease, but obviously a higher credit score will make things better for you, while a lower credit score may make it tougher.
  • 3 years/36 Months is one of the most typical lease periods; I will be assuming that throughout the calculations. If you are interested in a different lease term, adjust accordingly. Basically, when you want to do a lease, you are getting a loan for half the price of the car. So, in the example above, we are really negotiating for a $10,000 loan, if we put nothing down and have no trade-in. Of course, if you are trading in another vehicle or putting some money down, that price decreases.

Let’s pretend you have a trade in worth $2,000, that means you’re total new car value is $18,000. Pairing that with what I mentioned previously, you are financing $9,000.

Next question, how long of a lease are you interested in? The typical lease is 3 years, or 36 months. This means you need to take your total finance price and divide it by 36, in our case that provides a $250 a month payment.

Now for the more technical version:

(Total Car Price — (Down Payment + Trade-In Value))/(Years of Lease * Months in a Year * 2) = Monthly Payment

(20,000 — (2000 + 0))/(3 * 12 * 2) = 18,000/72 = 250

Let’s look at it another way… say you have a monthly payment of $300 in mind. Using a different version of the formula above:

Monthly Payment * (Years of Lease * Months in a Year * 2) + Down Payment + Trade-In Value = Total Car Price

If we once again assume a 36 month lease, then we are multiplying our monthly payment by 72, giving us $21,600, before we add in any down payment or trade-in value.

What’s this number good for? Well, it gives you a good place to start. If you know that you can’t afford to go over $300, then if you want a car that costs over $21,600 you will need to come up with some cash, or have a really nice trade-in. Let’s say your dream car is $25,000 and you can only afford a $300 a month payment, so that leaves you with a $3,400 shortfall. Cash or trade (and by cash, I mean a credit card or a check, as dealers hate cash, it really is a problem for them as they have to account for every bill you hand them), one way or another you have to make it up.

Getting a decent value on your trade-in these days is tough. Your best bet, just like when you want to sell your textbooks at the end of the semester, is to do a private party sale. You’ll get more for the car, and they’ll spend less. However, most people (myself included) don’t like the hassle involved in dealing with other people, which is why most people will go the dealer route and get screwed on their trade-in, which brings me to my next point…

It’s called the internet people. You’re using it right now. Keep using and look for somewhere to sell your car. Don’t know where? Here’s two really quick and easy ones:

  1. Craigslist

  2. eBay

#1 won’t cost you anything, but you have to rely on yourself for protection from scammers. With #2 you can get some semblance of protection by using all their services, but they will take a decent chunk of your car when you sell it (though likely much less than what the dealer would be stealing). Personally, I think I do a better job of keeping scammers away than eBay and PayPal do, so I recommend #1.

In closing, I’ll leave you with two pieces of advice:

Figure out what you can afford without any changes to your current lifestyle; you are going to have this vehicle for the next few years, you don’t want it to be the reason you can’t go on vacation, and you really don’t want it to be the reason you can’t put cheese on your cheeseburger (as our friend Dr. Jones would say).

Armed with this number, start shopping around. Use the internet to price out what your new vehicle costs and then use the math I mentioned to see what you need to do to afford it.

Simple versions of the formulas (assuming a 36 month lease):

Monthly * 72 = Total Price

Total Price/72 = Monthly