Why is residual value included when calculating the rent charge?

Ask the Hackrs
1

I’m considering leasing a Volvo XC90 and received a breakdown of the monthly payments from a dealer, which includes depreciation, rent charge, and taxes. I have a question about the rent charge calculation. The dealer’s formula includes the residual value: rent charge = (capitalized cost + residual value) * money factor (MF). Since the rent charge compensates the leasing company for the use of their car over the lease term, shouldn’t the correct calculation be (capitalized cost + residual value) / 2 * MF? This would represent the average cost of the car over the lease term. Otherwise, it seems like the MSRP is being somewhat double-counted.

For example, assuming the sales price equals the MSRP with no additional capitalized costs or rebates:

Rent charge = (capitalized cost + residual value) * MF
Rent charge = (MSRP + MSRP * residual value %) * MF
Rent charge = (1 + residual value %) * MSRP * MF

This way, the formula would fairly represent the leasing company’s actual risk.

2

That is not “the dealers formula” That is the formula for calculating ANY lease. As for why? IDK ask the bank

1 Like
4

Correct, and the /2 part is included in the MF. That’s why MF*2400 (= 2 * 12 * 100) = APR.

2 Likes
5

The conversion of interest to MF takes into account the division by 2.

2 Likes
6

Thanks all. You also answered why the MF is multiplied by 2400.

1 Like
7

This topic was automatically closed 60 days after the last reply. New replies are no longer allowed.