Question 1

What is a money factor and how does it relate to APR?

Accepted Answer

The money factor is the leasing equivalent of an interest rate, expressed as a small decimal number like 0.00125. To convert a money factor to an approximate APR, multiply by 2,400. So a money factor of 0.00125 equals approximately 3% APR. To convert APR to money factor, divide by 2,400. Lower money factors mean lower finance charges. Some manufacturers offer subsidized (below-market) money factors as lease incentives.

Question 2

What is residual value and why does it matter?

Accepted Answer

Residual value is the projected value of the vehicle at the end of the lease, set by the leasing company and expressed as a percentage of MSRP. A higher residual means less depreciation during the lease, which directly lowers your monthly payment. For example, a $40,000 vehicle with a 55% residual ($22,000) depreciates $18,000 during a 36-month lease. With a 45% residual ($18,000), depreciation is $22,000. The $4,000 difference equals about $111/month more.

Question 3

Is leasing or buying a car cheaper?

Accepted Answer

Leasing typically has lower monthly payments than buying because you only pay for the depreciation during the lease term, not the full vehicle price. However, buying builds equity and is usually cheaper long-term if you keep the vehicle for many years. Leasing makes more financial sense if you prefer a new car every 2-3 years, drive less than 12,000-15,000 miles/year, and want lower monthly payments. Buying is better if you keep cars long-term and want to avoid perpetual payments.

Question 4

Should I make a down payment on a lease?

Accepted Answer

Many financial experts advise against large down payments on leases. If the car is totaled or stolen early in the lease, your gap insurance covers the lease payoff but you lose your down payment. Instead, negotiate a lower cap cost (vehicle price), which achieves the same lower payment without the risk. If you must reduce the payment, consider a small cap reduction of $1,000-$2,000 or make a security deposit if the lessor offers a money factor reduction for deposits.

Question 5

What happens at the end of a lease?

Accepted Answer

At lease end, you have three options: return the vehicle and walk away, purchase the vehicle at the predetermined residual value, or trade it in and lease/buy a new vehicle. If you return it, you may owe excess mileage charges ($0.15-$0.25/mile over the limit) and wear-and-tear fees. If the vehicle is worth more than the residual value, buying it can be a good deal. Always get a pre-inspection before turn-in to avoid surprise charges.

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