Lesson 18 of 25 · 6 min

Leasing: residual, capitalized cost, money factor

Someone else names the future mark, and the monthly figure is only the path from today's price to that number.

A lease payment is not an installment that retires a principal. It is the path from a capitalized cost, the amount the lease treats as today's price of the car, to a residual, the mark the contract assigns at the end of the term. Someone else names that future mark. The monthly figure is the scheduled fall plus a rent charge.

Marlow Street Garage writes a capitalized cost of $31,200. The residual is $16,848, which is 54 percent of $31,200. Term 36 months. The money factor, the monthly rate used to compute the rent charge, is 0.00215. Multiplying by 2,400 restates that factor as an approximate annual rate: 0.00215 × 2,400 = 5.16 percent, illustrative.

payment = (capitalized cost − residual) / n + (capitalized cost + residual) × money factor

capitalized cost − residual: The scheduled fall in the mark over the term. The depreciation charge.
n: The number of months.
capitalized cost + residual: The sum the money factor is applied to. The rent base.
money factor: The monthly rate used for the rent charge. Times 2,400 is an approximate annual rate.

Depreciation charge is ($31,200 − $16,848) ÷ 36 = $398.67. Rent charge is ($31,200 + $16,848) × 0.00215 = $103.30. Payment is $398.67 + $103.30 = $501.97. Track 5 lesson 3 is a lender-set collateral value: the figure the facility uses is not the market print, it is a determination. A residual is that determination, pointed at a future date. The lease payment is the path the contract writes between today and that date.

The residual is not a prediction you made. It is a number the contract assigned. The payment is how the scheduled fall and the rent get from here to there.

Key terms

Capitalized cost: The amount the lease treats as today's price of the car. The starting mark for the path.
Residual: The mark the contract assigns at the end of the term. A scheduled future value, named by someone else.
Money factor: The monthly rate used to compute the rent charge. Times 2,400 restates it as an approximate annual rate.

Worked example

Two charges, one $501.97 payment

Marlow Street Garage. Capitalized cost $31,200, residual $16,848 (54 percent), 36 months, money factor 0.00215.

Depreciation charge: $398.67
Rent charge: $103.30
Payment: $501.97
Money factor as a year: 5.16%

The $501.97 is not retiring $31,200. It is walking from $31,200 to a $16,848 residual that someone else named, plus rent.

Check yourself

Capitalized cost $28,600, residual $15,730, money factor 0.00200, 36 months. What is the depreciation charge, the rent charge, and the payment?

A residual is a scheduled future mark, the everyday version of a lender-set collateral value Track 5 lesson 3 describes: someone else names what the asset will be worth. Open Term three: the lender sets collateral value →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.