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one of the most complicated financial decisions that a recent college grad might face is the question of whether to buy or lease a new car because the vocabulary of leasing is different from buying I'm gonna in this video take you through the terms that apply to vehicle leasing and compare those to the analogies in vehicle purchase so that you can understand the mathematics and the vocabulary of a typical lease agreement your lease agreement might be different than this one but the terms are going to be very similar were the first things that you need to notice that differentiates leasing from buying is in this one in box 7 the other charges most of the terms up until then are pretty familiar the amount to do at lease signing that's the check that you need to write when you take delivery of the car and there's a breakdown on what the 1035 dollars in this example amounts to then there's the monthly payments this is a 42 month lease and the first payment is due upon delivery of the car so that leaves 41 more payments and box 6 computes the total number of payments that the lease holder is going to make to rent the car but what's this other charges at the end of the 42 months the driver has the option of purchasing the car and the amount the purchase price is specified in the lease we'll get to that on page 2 but the important thing right now is the driver can choose to buy or to give the car back to the leasing company if they give the car back to the leasing company at the end of the lease then the leasing company is going to charge them this $300 you might say why are they charging me $300 just to take their own car back it's their property why isn't that their problem well they incur some real costs when you put the car back on the leasing company those are the costs of inspecting the vehicle and assigning it to an auction where we sold probably to a used car dealer when you purchase the car at the end of 42 months then the leasing company doesn't incur those costs and they don't charge you they'll charge you a different fees they charge you what's called the purchase option at end of lease term fee but that's only 50 dollars and that's to cover their costs they'll tell you of doing some paperwork let's not worry about that one for right now the most important thing to notice here is what a lot of people overlook about leasing automobiles the fact that you purchase an option to buy the car at the end of the lease assuming you like the car you might want to stay in it but what if the car depreciates more quickly what if it loses market value more quickly than you thought then you still might even if you like the car choose to put it back on the leasing company if however the car keeps its value at a pace that is better if it's worth more than the agreed-upon value called the residual value at the end of the lease you might choose to buy it and that includes saving yourself this $300 so we're gonna try to finish up here with the simple things in page 1 drawing attention almost exclusively to this other charges some of these other things I don't know what they are the dealer document processing fee I've never got a good explanation of these title fees typically go to your local government to register your vehicle and here you see the first monthly payment when you add up the amount that is due at signing and the amount that you're gonna pay over the lease term it tells you the total that leasing the car will cost that's the end of page 1 the really interesting things happen on page 2 the first term to notice is called gross capitalized cost gross capitalized cost sounds like a really big term for what we used to be called the price of the car but here the agreed-upon value of the vehicle is the term that the we'll use and that's because there is no sale you're not buying the car so instead of having a price there's an agreed-upon value of the vehicle and in this case that agreed-upon value is 19 thousand 72 . 26 cents that's not necessarily amount that is capitalized in a purchase this would be called the amount of the loan so the analog for growth's capitalized cost would be loan amount in a purchase and the analog for agreed-upon value would be price in a purchase now you understand how to interpret agreed-upon value that's what you agree that the car is worth and the gross capitalized cost that's the amount that they're going to determine that seemed out that they're going to use to determine your payments that is your monthly payments that happen after you take delivery of the vehicle capitalized cost reduction the difference between the agreed-upon value of the vehicle and in this case there is no capitalized cost reduction and the amount used to compute your monthly payments could be the rebate of trade-in allowance there was no trade-in on this lease or any amount that the dealer is willing to sacrifice from their end any amount any sort of credit or discount that they're willing to give you that you're able to negotiate to reduce your monthly payments so the adjusted capitalized cost is agreed-upon value of the vehicle - any of these things manufacturers rebates trade-ins or allowances from the dealer that would reduce the amount on which they calculate your monthly payments terrific this residual value is the next most interesting thing on the lease this is going to be the value at which you may buy at the end of the lease term after 42 months the lease agreement specifies that the car may be purchased for this twelve thousand three hundred and twenty-five dollars and twenty cents and this is the option price at which you can decide either to purchase the car or just put the car back think about it this way if the car is worth more than twelve thousand three hundred and twenty five at the end of the lease term then you may choose to buy the car because you're still going to get it for the twelve thousand three hundred and twenty five even if used-car prices stayed high in 42 months you still pay this price and that would be a good deal but if for some reason the car loses its value more quickly and it's worth less then you just put the car back pay the $300 to the dealer and you avoid the losses of market value in the car this amount the difference between the agreed-upon value of the vehicle and the residual value is called depreciation the depreciation in this case is the loss in market value of the car and it's listed here by subtracting the agreed-upon value of the vehicle from the residual value the depreciation is analogous to the principle payments in alone if you were purchasing the car then you would borrow money from a bank from the dealer from the manufacturer of whomever and you would pay down the amount that you owe but in the lease you're not paying what you owe because you haven't borrowed any money instead you're compensating the leasing company for the loss in value of the vehicle so you can think of depreciation as analogous to the principal on a loan then there's this other amount here and that's the rent the rent that you pay for the vehicle and the rent is computed based upon the gross capitalized cost there is a leasing company and they recognize that you are benefiting from this $19,000 asset that you get to drive around it it costs them money to to own that asset and rent it to you so now we're going to get a sense of how much you're paying in rent if you were to create the analog of rent to the interest on a loan there's a calculation that you can do to figure this out the rent is eleven eight six seventy eight the agreed-upon value of the vehicle is nineteen thousand and seventy two twenty six when we divide one of these by the other we'll get what is going to look like an interest rate I'm gonna get my calculator out and I'm going to calculate that interest rate for you right now it turns out to be zero point zero six two over the forty two month period well no one expresses interest rates over forty two months it would be much more interesting if we could have a monthly interest rate and to calculate the monthly we need to add one to that figure and raise it to the power of one over forty two you need to have a calculator that will do exponentiation to do this and when you get there you get two one zero zero one four three eight subtract one from that and you get essentially the monthly interest rate the monthly interest rate isn't all that interesting we're accustomed to seeing annual interest rates so we're gonna raise this to the power of 12 and get to one point zero one seven for the rent paid for this vehicle which is analogous to the interest on alone amounts to a loan rate of one point seven four percent this is the rent divided by the value of the asset that you're renting one point seven four percent is a pretty good comparative interest rate since i'm saying the rent is analogous to the interest on a loan you can think of this rent as being calculated at a analogous interest rate of one point seven four percent per year this is another interesting calculation that you can do to see if you're getting a good deal from your leasing company and that is to take the residual value twelve three to five point two oh and divided by the agreed-upon value of the vehicle and see how much value the lease is saying the car is expected to retain at the end of the 42 months in this case Subaru is an all-wheel drive car they tend to hold their value very well and the lease is estimating it says you can buy this car for 65 percent of its value when it's brand new with only 15 miles on the odometer 65 percent is a very high residual value compared to new value Subaru the leasing company here is saying the Subaru is going to keep its value typical values might be 60 percent or even in the mid 50% for reliable automobiles not necessarily all-wheel-drive 65 percent means that the amount of depreciation this 6752 is very low that you have to pay for compared to the agreed-upon value of the vehicle these two numbers the percent of value retained if you want to be high and the rent expressed as an analogous interest rate which you want to be low I give you some indication of whether you're getting a good deal on your lease let's take a short walk through the rest of the lease so that we can understand some of the less important aspects even though we've covered the most important by now the lease term 42 months the lease payments and now the last second to last really important thing are the tax implications of leasing when you lease in most states you don't pay tax on the entire agreed upon value of the vehicle because you're not purchasing the vehicle and you don't pay it up front because you're paying for the rent and the depreciation of the vehicle on a monthly basis so in this case the tax is computed as a percentage of the lease payment not as a percentage of the purchase price one of the advantages of leasing is that you pay less and that that tax again in most states is deferred until later the taxes worked into the monthly payment instead of financed as part of your loan upfront this means you pay less interest on the tax and less tax total because you will not be paying tax on the residual value at the time that you lease the car you're only paying tax on the depreciation and the rent lastly we have to talk about this depreciation you know that cars depreciate that is they lose value both on the basis of their age and their use so in this lease it specifies that the car will be 42 months old at the end of the lease but it also specifies how many miles you're allowed to drive the car without penalty in this case the example is 15,000 miles a year and if you drive it further than 15,000 miles a year then we can expect the car to depreciate more than the residual value would represent those additional miles if you do not purchase the car at 42 months are going to cost you 15 cents per mile and that's to compensate the leasing company for the additional depreciation the additional miles that you've driven the car these are all of the important terms now on your lease the other ones are sort of miscellaneous the postage tire air cap five dollars no idea why that's in there but you might observe that it's this difference between the agreed-upon value of the vehicle and the gross capitalized cost which means that this five dollars is worked into your monthly payment there are some other disclosures a little further down the lease that um will help you understand where the money that you're paying is going but for right now I think you're able to translate the vocabulary of the motor vehicle isse which is sort of odd agreed-upon value of the vehicle into those terms that you're more familiar with like price interest rate principal used-car value compared to residual agreed-upon value and the terms that the lease users