Does Cap Cost Reduction Really Save On Interest?

Based on the article “How To Calculate Lease Payments By Hand”, the monthly interest can be determined by:
(Capitalized Cost + Residual)*Money Factor

Based on that formula and nearly everything else I’ve read (but perhaps misunderstood), it would seem that anything that reduces the capitalized cost (such as a trade-in) should reduce the interest amount. But then I came across this article that says otherwise. Here is a paragraph from the article.

A cap cost reduction (via trade-in or otherwise) on a lease won’t save you any money on interest, the way a down payment does when you finance a car. Interest charges on a typical contract are locked in, regardless of whether or not you put any cash up front. However, the fact that it can lower your payments at least seems helpful to many consumers.

It seems that this company originates auto loans and has an interest in encouraging people not to lease. Are they incorrect? Or am i missing something basic about lease calculations?

That website is wrong.


Maybe they mean the rate won’t change.

Appreciate the responses.

Jon, thanks for the confirmation. Just needed to make sure I wasn’t missing anything obvious.

JamesBond, I’m going to send them an email and ask what they meant. If they respond back, I’ll post the response here.

The formula is correct. You are paying interest on the average capital (the vehicle) that you are borrowing from the mfr. In theory you can lend the car co. money and bring the net amount borrowed down to zero. In practice they won’t let you shrink it below the residual, so you always have to pay interest on the residual over the term of the lease. But a cap cost reduction will reduce the amount of interest over the lifetime of the lease, just as a higher down payment reduces the interest paid over the term of a home mortgage.

The other component of the payment is the depreciation. Any cap cost reduction will reduce the depreciation dollar for dollar, so you can bring this component down to zero.

I am not sure of this but I think this the reason why states will still tax you on cap cost reduction payments.

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Appreciate the response. True, states do tax the CCR payments made by the lessee. Some states (TX being one) go even farther and tax based on the entire capitalized cost (plus lessee ccr payments?) rather than on (capitalized cost - depreciation.)