Because I have learned a lot on The board over the years, and before I leave the auto industry at some point, I thought I would contribute something back by going through auto leasing the best I can. I’ve spent nearly 10 years writing loans and leases. I’ve probably handled over 3,000 sets of paperwork on deals. Some were loans, some were cash deals and many were leases. Here is a post that is an unnecessarily long and detailed break-down that includes the actual lease formula. If somehow you get to the end you will have a dang good understanding when leasing makes sense and what makes a good lease. Hopefully this will be of help to a few people.

Disclaimer 1) This is a really long and boring post. Hurry and click away if you don’t like boring things or math.

Disclaimer 2) The way to own a car for the least amount of money is to buy a slightly used one and then drive it for a long time.

Cars depreciate in a downward sloping curve so each year you will pay less in depreciation than you did the previous year. After 4 to 5 years or longer you will be paying much less in depreciation than you would in monthly lease payments. I’m not going to argue that leasing is better than paying cash or getting a loan. I will try to argue that in certain situations leasing isn’t a bad way to buy a car. A lease is just another way to pay for the depreciation of a vehicle, which you will pay no matter how you buy a vehicle. I will walk through the actual lease calculation so you will know what to look for in a good lease.

When you lease a car the dealership sells the car to a financial institution, which checks the credit of the customer and then decides to let them drive the car for a prescribed amount of time and miles. The bank calculates the lease using the future value of the vehicle which they predict. Essentially the bank looks into its crystal ball and takes a guess as to what the value will be on that vehicle at the end of the lease. The payment the customer makes to the bank is designed to cover the depreciation to a point, after which the bank takes the car back, runs it through the auction and tries to get the rest of their money back.

In my opinion the biggest advantage to a lease is this...by leasing you are transferring the risk of the car's depreciation to the bank. If it depreciates more than what the bank expected, that’s not your problem. The bank will recoup what they can at auction. Leasing might be a good idea for someone who knows their situation is going to change in a few years and wants a lower payment then they would have had if they had done a loan on that same new car. For example if you have a couple kids and in a few years think you may have a third, you may end up needing a car with 3 rows. So you might decide to lease a two row vehicle and then buy the more expensive 3 row vehicle later. Or if you are about to lose a few kids to college, marriage (or intentionally lose a teenager in the forest) then consider leasing the big family mover and then downsize when you don’t need the big car any more. You are going to pay for the depreciation however you buy the car. You might as well have the bank worry about how much the car will depreciate and then walk away and buy something else.

With a lease you have a built in exit strategy if that’s what you want. If you know your needs aren’t going to change and you are going to drive it for 10 years, don’t lease. If you know that you will want a new car every 2 to 4 years, strongly consider leasing. If you buy a brand new car and then trade it in three years later, you would have been better off leasing 9 times out of 10. Mathematically the lease payments often end up being comparable to a 72 or 84 month loan. If you did that loan and traded the car in 3 years later you would have negative equity in the car almost every time.

Misconception #1: Miles are too restrictive. This usually isn’t true. You can structure a lease to give you 10K, 12K, 15K a year or ANY number of miles above 15K a year by pre-paying the additional miles. One bank I work with will lease a car as long as the miles on the lease will end up less than 100K. So a 33K mile a year lease for 3 years would be ok. Where people have a problem with this is they contract at a lower amount of miles than what they are actually going to drive. I have seen people get stuck with really big bills from banks where they went 18K miles over and then had to pay .25 cents per mile over what they were contracted at. You don’t get miles refunded if you don’t use them so carefully calculate how many miles you need and if you go over a little bit just be prepared to pay for the miles when you terminate the lease.

Misconception #2: Leasing isn’t a good idea if you are hard on a car. OK this one is actually kind of true. The bank wants the car back in good condition and can charge you if your tires are worn below a certain point or if you have scratches, dents or have curbed the wheels. You have to know what the bank expects and then if needed do some reconditioning before you return the car. Most dealerships offer a kind of insurance policy that is meant to protect customers from excess wear and tear charges.

We leased a car to a former BYU football coach because his wife HAD to have the shiny red car we had on the lot. They HAD to have the lowest payment so they chose to contract it at 10K miles per year. I remember trying to talk them into more miles. Later they brought back the car way over miles and trashed. The bank inspected the car before picking it up. When the coach and his wife saw the bill they came right back down to the dealership and drove it away. I think they ended up getting a loan to buy out the lease rather than paying the bill.

That leads to my next point. If the residual value at the end of the lease (predetermined and printed on the lease contract) looks like a fair value then you can buyout the lease at the end. If not, walk away. Leasing is kind of having-your-cake-and-eating-it-too in that regard. Buying out the lease is the way you get out of mileage fees or reconditioning fees if there are any.

To sum up before we get to the real boring stuff: Consider leasing if you can set up the miles correctly and take care of the car. Also consider leasing if you know you will want a new car every few years or if you know your needs will be changing in a few years. For many reading this that’s all you will want to know. But if you want to go further down the rabbit hole keep reading.

You can categorize leases into two general categories, supported and non-supported. The supported leases are offered by the bank that is owned by the auto manufacturer, such as Ford Motor Credit on a Ford, Toyota Financial on a Toyota, ect. These leases are “supported” because the bank is manipulating the three R’s of the lease to effect the payment. The three Rs, are Residual, Rebates, and Rate. Think of a supported lease as similar to a subsidy from the manufacturer. The bank can manipulate the residual, rebates and rates to help the payment be lower and as a result the dealerships sell more cars and the factories can keep building them. I’ll get to the NON-supported leases shortly when I talk about rebates.
Here’s a rundown of how the 3 Rs are used to manipulate the lease.

Residual: If the bank thinks the vehicle will be worth 50% of its original MRSP at the end of 36 months and 45K miles, they are essentially asking the customer to pay for 50% of the depreciation and then will take the car through the auction to get the other 50%. If however, they set the residual value at 60%, then the customer will only pay for 40% of the depreciation, which will lower the payment causing more of that model to sell. This is a gamble because then the bank will need to re-coupe the remaining 60% at auction and if the market is only supporting a 50% residual the bank will take the last 10% as a loss.

This happened in 2007 when the gas jumped to 4 bucks a gallon and GM and Ford were taking big V8 SUVs off-lease. People were scared to death to buy them off-lease knowing how much they would be paying in gas. The market soon corrected but there was a 6 month to a year period where the banks were loosing 10K or more per big SUV that went through the auction. I was told by a banker that the banks lost “millions,” during a span, although I can’t support that figure with any real data. For a while leases went away before the auto manufactures slowly started offering supported leases again, but with more realistic residual values. I started working in the auto industry shortly after the 4 bucks a gallon fiasco when the banks were easing back into leasing.

You can see how tempting it would be for auto manufacturers to push up residual values thinking it would make sales look good. It’s a good short term plan. Leasing has always been kind of cyclical because of it. There are times that leasing is strong and times that the auto manufacturers aren’t doing a lot to support the leases. The national residual average for all vehicles for 36 months, 15K miles per year is 55%. That’s a good first question to the salesman when you are starting to shop for a lease. He won’t know the answer and will have to ask the desk manager but you will sound like you know what you’re talking about. If the residual is less than 55% it doesn’t mean it’s a bad lease. The rebates and rate can often more than offset a weaker residual, say 51% for example. Keep in mind that a lower residual value means the buy-out option at the end will be less. Most people that lease a lot aren’t concerned about how cheap the car is to buy out. They want the high residual and low payment.

Here is a real example from a few years back that sticks out. It was a supported lease through GM Financial: 2016 Sierra Denali. MSRP of 55,635, customer had trade with 7K in equity, rebates were 2000. 36 Month lease, 18K miles per year. The payment including tax ended up being $263. The reason this was a killer deal was the combination of equity in the trade and a 67% residual. With the equity in his trade if he had done a loan his payment would have landed around 750 - 850 a month. There was a downside and a big upside to him doing this lease. The downside was that he used up the equity in his trade by doing the lease. The upside was that he had a crazy low payment and when the customer brought back the truck at the end of the lease it wasn’t worth near what the residual value was. That wasn’t his problem, it was the banks.The customer made a depreciation bet against the bank and won.

Rebates: Non-supported leases can be really good or really bad based on the rebates. Lease rebates are NOT the same as loan rebates. A situation can arise where the dealer can take really big retail (non-lease) rebates offered by the manufacturer and apply them to a non-supported lease. For example, Dodge taking a big purchase rebate on a Ram 1500 and run the lease through US Bank. In this case US Bank isn’t “supporting” the sales of that vehicle by manipulating the rebates. This is what is meant by a non-supported lease. In these situations the bank can’t afford to have a residual value set incorrectly because they need to make sure they collect enough in payments to match the actual depreciation of the vehicle so they aren’t hosed when they run the car through the auction. The non-supporting (3rd party bank), will choose what residual to assign and what rate to charge, but won’t offer any rebates. Rebates if any will come from the manufacturer. As a general rule the supported leases give you lower lease payments, but sometimes there is an outlier where the retail rebates are good causing the non-supported leases to be better.

An unusual situation comes up when supported lease rebates are bigger than the retail rebates. In this situation it’s possible for someone to lease the vehicle, buy out the vehicle at the end for the residual value and end up paying less to own the car outright than they would have by doing a conventional 60 or 72 month loan. Obviously there are other factors, such as interest rate on the lease or loan to consider when doing this comparison.

I had a customer that would have saved 4,000 on an escalade by doing a single pay lease, which is where you make all your payments in one lump sum, and then buyout the lease. She declined to purchase it that way because it sounded like too much of a hassle. She wanted to write a check and have the title. Nothing wrong with that. Rebates can make it hard for consumers to know how good a lease is or isn’t. This is because when negotiating a lease dealerships often quote the sale price net of the rebates and don’t do a good job telling the consumer whether or not the lease rebates are more or less than the retail rebates. If you’re shopping for a lease you may ask the dealership what the sale price is before rebates, and then ask what the retail rebates are compared to the lease rebates. They might be the same, but it’s good to ask.

Rate: Similar to interest on a loan, you will be paying a premium for borrowing money except on a lease it’s calculated differently and it has a different name. It’s called a money factor. A money factor can be converted to an equivalent interest rate by multiplying it by 2400. So a money factor of .00188 is equivalent to a 4.512% interest rate. It’s also good to ask the dealership what the money factor is for two reasons. 1) You will know how much interest you are paying and 2) you will seem smart, even if you aren’t.
Money factors vary wildly. I have seen money factors from close to 0% up to 15%. They can be based on credit. The dealership can “mark up” or increase the rate to generate profit for the dealership. They might do this if they are selling you the vehicle at cost but still want to be profitable on the deal. Don’t get hung up on the rate. Strong rebates and a high residual will often more than make up for a higher rate.

Be mindful of all of the R’s when looking at a lease. If one of the R’s looks bad, it may still be a good lease if the other two look good. I would consider a lease with a lower than average residual or higher than average rate if the rebates were killer. I’d also consider a lease if the residual was high but the rate and rebates weren’t good. Small pickup trucks like the Tacoma, Canyon and Colorado consistently have high residual values. Luxury sedans traditionally have bad residuals and good money factors, yet they are often leased. People leasing them want the bank to be on the hook for the depreciation. You don’t want to know what you paid in depreciation the moment you drove that 7 series, S Class, G Wagon or Escalade of the lot.

Wow you’re still reading. If you aren’t bored out of your mind and want the actual lease calculation here it is. At the end I’ll go through a few interesting lease situations to emphasize how wild leasing can be.

There are three steps to the lease calculation that need to be summed to get the actual lease payment. They are Depreciation, Interest and Tax.

Step 1: Depreciation: (Capitalized cost - Residual Value) / Term of lease in months

The capitalized cost should be the negotiated selling price before rebates, minus lease rebates, minus or plus positive or negative equity in the trade, any accessories added to the deal and the lease acquisition fee. The residual VALUE is the MSRP multiplied by the residual PERCENT.

Step 2: Interest: (Capitalized cost + Residual Value) * Money Factor

Step 3: Tax: (Step 1 Depreciation + Step 2 Interest) * tax rate WHERE YOU LIVE.

When you lease a vehicle you only pay taxes on the payment and it’s calculated where you live or where the vehicle will be “garaged” and not where the dealership is located. You would also pay tax on the residual value if you chose to buy out the lease. Some states require all the taxes for the whole lease to be collected upfront. I don’t know how dealerships handle this in states where this is required. Most states are happy to get the taxes paid monthly by the banks administering the lease.

Skip this paragraph. It’s boring. One important part missing to the formula is if you choose to drive excess miles and have those miles built into the lease payment. You will need to ask what the upfront mileage cost per mile is and then calculate the number of miles total you will be driving over 15K a year. Then you will subtract that amount from the residual value in step one and two. For example if you are going to do a 18K mile per year lease for 36 months, you would calculate: 3K miles per year over the standard 15K, for 3 years = 9000 miles. Then multiply that by the mileage cost, usually .20 cents. That comes out to 1,800. You would need to subtract that amount from the residual value in the first two steps. So if a 50,000 MSRP vehicle has a 50% residual, you would take 25,000 and then subtract the 1,800 mileage fee to further reduce the residual to 23,200 and use that as your residual value in the lease calculation in the first two steps.

Skip this paragraph also. For low and ultra low mileage leases the residual gets increased. That's logical because if you drive fewer miles the car should bring more at auction. For a standard 36 month lease you add 2 percent to the residual for a 12K per year "low mileage" lease. For that same term you add 3 percent for a 10K per year "ultra low mileage" lease. This is important to know when you are attempting to calculate your own lease. A Chevy Colorado, for example, that started with a 67% residual would be calculated with a 70% residual if you contract at 10K miles per year.

You can skip all of this nonsense and just download an app or google “lease calculator.”
The due at signing amount on the lease usually is equal to the registration fees, doc fee, tax on the doc fee and first payment. This might vary a little from dealer to dealer. If you’re broke you can ask the dealership to roll all those fees into the price of the vehicle and take a higher payment. Also if you’re that broke, maybe you shouldn’t be leasing at all. Maybe you should save up and buy a cheap car with cash.

Cash down above the Due at Signing: You can put more money down to reduce your payment but that makes the lease calculation a little weirder. Cash down reduces the capitalized cost in step one, but then you pay tax on that cash down and that tax gets included in the Due at Signing amount. You might be wondering why that is. Well if you could put cash down and reduce your payment you would be skirting tax because you are only taxed on the payment. If you have learned anything about government it should be that they take collecting taxes kind of seriously. To keep people from avoiding tax on the payment they tax any additional money down, which effectively transfers the taxes from the payment to the due at signing amount. Stupid government always wanting to take our money. Equity in a trade is not considered cash down even though it works to reduce the capitalized cost when calculating the lease.

A few more words of caution about leases before we look at actual lease examples. If you are trading in a vehicle make sure the dealer isn’t stealing it. Lease payments can be hundreds less than a loan payment. If you trade in a cheap old car they can basically give you nothing for it and you wouldn’t even know. The lease contract is long and messy. Know how to calculate a lease and when signing make sure they point out to you where you are getting the equity in your trade, how many miles they are contracting you at and how much they are expecting for the Due at Signing amount.

One quick way to decipher if a lease is a good lease or bad lease is to look at how much the lease payment is in comparison to a 60 or 72 month loan. If the lease payment is the same as a 60 or 72 month loan, you should probably just buy the car. If the lease payment is 50 or 200 less than a 72 or 84 month loan then it might be a good lease. In some situations lease payments can even be less than an 84 month loan on the same car.

Lastly if you are considering leasing a new car, a very similar car exists at another dealership. Call the other dealership and ask them to calculate a lease payment on the one they have on their lot. Be sure any dealerships you talk to are calculating the payments the same, with the same term, number of miles, taxes included, with the same due at signing amount. Make a couple dealerships compete for your business, particularly if you feel like one dealership's lease payment is off.

I hope I have saved the best for last. Let’s do a ridiculous but real calculation on a supported and non-supported lease and compare them both to a loan and see how wildly the payments differ. I know you all make millions and can easily afford this car. The car is a CTS-V. MRSP IS 105,810. Invoice is 100,167. For simplicity I will calculate the lease for 36 months, 15K miles per year and assume we have negotiated the price down to invoice. Here are the numbers as of the month I'm writing.

GM Financial Supported Lease: 53% residual, 2.78% rate, no rebates. Payment with taxes at 6.85% would be 1,523.

US Bank Non Supported Lease: 29% residual, 5.76% rate, no rebates. Payment with taxes at 6.85% would be 2,419

A 60 month loan on that car at 4.99% interest including tax, title and license would be 2,054.

How would you buy this car if you could afford it? Personally, I think I would lease it. This is an extreme case but which bank is closer to what the value of this Sedan would be at the end of 36 months? It's anyone's guess, but from my perspective it would be less than what GMF is setting it at. That's why leasing is a depreciation gamble you often win. 
Some of you are thinking, dude, I don’t make millions, I only make a cool six figures. Here is a more down to earth situation: This is a 2019 GMC All Terrain Canyon with a Diesel.

Numbers reflect time of writing. MRSP 47,010, Negotiated price of 43,770. 36 Month lease, 15K miles per year.

GM Financial Supported Lease: 65% residual, 7.8% rate, rebate of 1,250. Payment with taxes at 7.25% would be $633.

US Bank Non Supported Lease: 61% residual, 6.24% rate, rebate of 2,060. Payment with taxes at 7.25% would be $607.

This is one of the cases where taking more rebates due to it being a non-supported lease caused the payment to be less than the supported lease would have been. The lower rate helps too. A 60 month loan with that same 1,200 out of pocket to make it comparable to the lease would be around $835 at 4.99% with a 2,060 rebate.

As I look at these numbers I’m indifferent. I think you would find that most people would say they would try to buy this vehicle 2-5 years used, some would say they would do a loan and some would see a lease payment that is over $200 lower than a 60 month loan and decide to do that. I don’t think there is a right way or wrong way to buy that truck. A residual value over 60% is high enough that if you bet against the bank on the depreciation you might win that bet. Personally, if offered a bet on the 65% residual, I’d take the under, meaning I think that at auction that truck would bring less than 65% of the MSRP at the end of 3 years and 45K miles.

I thought about doing one more example on a cheap vehicle but I don’t want to put in the time. The post has already been too long. But basically if you look at each manufacturer's cheapest cars and what a realistic lease would be for 15K miles, 36 months, you would find that they lease between 200 and 400 a month. To put that into perspective if you finance 10K for 60 months your payment is around $200. What kind of a car are you buying where, including taxes and registration, you are only financing 10K?

I have done a handful of leases over the years to someone that had a couple kids almost graduated and going to go on missions. A $250 lease payment for their transportation to and from sports and other high school events was not a bad way to go. The car would be under warranty and reliable. The lease if timed right would finish when the kid was leaving on his mission. Would I do that? Probably not. I’d be the Dad that makes his kid drive a 2001 Buick Century that I paid 1,800 for. Poor kid would have to actually turn a key to start the car, learn to look behind him when he backed up, rather than being able to use a backup camera. He’d have to suffer listening to FM radio (gasp) or have a conversation with someone in the car.

Leasing isn’t for everyone. But sometimes, it’s not a bad option if the numbers are right. Hopefully this has been helpful. In the future when someone asks you if you would ever lease I hope you respond, “It depends.”