Leasing Benefits and Payment Calculation | CTFA Exam Preparation

Leasing Benefits and Payment Calculation

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A commonly sited benefit of leasing is absence of down payment. However, today most leases require a "capital cost reduction" which is the down payment that lowers the potential depreciation and therefore your monthly lease payments. You may be able to negotiate a lower capital cost reduction or find a lease that doesn't require one. The lease payment calculation is based on four variables. Which one of the following:

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A. B. C. D.

D

The correct answer is A. Capitalized cost.

Leasing is a popular alternative to buying a car or other equipment because it often allows individuals and businesses to acquire assets with lower upfront costs and lower monthly payments than purchasing would require. When you lease an asset, you essentially rent it from the lessor for a set period of time, typically 2-4 years, and agree to make monthly payments in exchange for the right to use the asset during that time period.

The calculation of the monthly lease payment is based on four main factors: the capitalized cost, forecast residual value, money factor, and lease term.

The capitalized cost is the total cost of the asset being leased, which includes any fees or taxes associated with acquiring the asset, minus any discounts or rebates. This amount is then divided over the lease term to determine the monthly payment.

The forecast residual value is the estimated value of the asset at the end of the lease term. The lessor calculates this based on factors such as the type of asset, its expected condition at the end of the lease, and anticipated market demand for similar assets at that time. A higher residual value will result in lower monthly lease payments.

The money factor is the interest rate charged on the lease, expressed as a decimal rather than a percentage. This factor is multiplied by the capitalized cost and added to the residual value to determine the total cost of the lease, which is then divided by the number of months in the lease term to calculate the monthly payment.

The lease term is the length of the lease, typically expressed in months. Longer lease terms will result in lower monthly payments, but may also result in higher overall costs due to the additional months of payments.

It is important to note that while a down payment or capital cost reduction can lower monthly lease payments, it is not a requirement for all leases. Additionally, negotiating the terms of a lease, including the capitalized cost and other factors, may be possible to achieve more favorable terms.

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