Chapter 23 — Quiz: Leasing

Answer each item, then open the <details> block to check yourself and read the short explanation. Scoring guide at the end.

Multiple Choice (choose the best answer)

1. A lease primarily pays for: a) the entire value of the car b) the depreciation you use, plus a finance charge c) the residual value only d) the manufacturer's profit margin

Answer **b.** The threshold idea: a lease pays for the depreciation you use up (the slice between cap cost and residual) plus a rent/finance charge. You hand the residual back; you never pay for the whole car. (a) is buying; (c) is what you'd pay to *buy out* the car at the end.

2. The residual value on a lease is usually expressed as a percentage of: a) the negotiated selling price b) the cap cost reduction c) the MSRP d) the money factor

Answer **c.** Residual is a percentage of **MSRP**, set by the lender — not of your negotiated price. This is a quiet advantage for the customer: you negotiate the cap cost *down* from MSRP, but the residual stays figured off the full sticker.

3. A money factor of 0.00200 is approximately what APR? a) 0.2% b) 2.0% c) 4.8% d) 8.0%

Answer **c.** Money factor × 2400 ≈ APR: 0.00200 × 2400 = **4.8%.** Memorize the ×2400 rule — it's the single fastest way to unmask a lease rate.

4. The depreciation portion of a lease payment equals: a) (cap cost + residual) × money factor b) (cap cost − residual) ÷ term c) cap cost ÷ term d) residual ÷ term

Answer **b.** Depreciation charge = (adjusted cap cost − residual) ÷ term — the slice of value you use up, spread evenly across the months. (a) is the *rent* charge.

5. The rent (finance) charge on a lease equals: a) (cap cost − residual) ÷ term b) cap cost × money factor c) (cap cost + residual) × money factor d) (cap cost + residual) ÷ 2400

Answer **c.** Rent = (cap cost + residual) × money factor. The *plus* trips people up — you pay interest on the *average* of cap cost and residual (the average amount of the lender's money you're using), and that averaging is baked into both the +residual and the factor-of-2 in the ×2400 conversion.

6. All else equal, a higher residual value produces: a) a higher monthly payment b) a lower monthly payment c) no change to the payment d) a higher money factor

Answer **b.** Higher residual = smaller depreciation slice (cap cost − residual is smaller) = lower payment. A car the lender expects to hold its value leases cheaply.

7. The lease analog of "dealer reserve" (from Chapter 22) is: a) the disposition fee b) the acquisition fee c) the money-factor markup (buy vs. sell money factor) d) the residual

Answer **c.** The dealer can mark up the lender's *buy* money factor to a *sell* money factor and keep the spread — exactly the broker mechanic from Ch 22, just expressed as a money factor instead of an APR.

8. Putting a large down payment on a lease is generally discouraged because: a) it raises the money factor b) it's prepaid depreciation that is largely unrecoverable if the car is totaled early c) lenders forbid it d) it increases the residual

Answer **b.** A lease down payment doesn't build equity (you own nothing) — it prepays depreciation. If the car is totaled or stolen early, that money is largely gone. This is the *opposite* of the down-payment advice for buying.

9. The fee charged at lease-end if the customer returns the car (rather than buying it) is the: a) acquisition fee b) disposition fee c) doc fee d) origination fee

Answer **b.** The disposition (turn-in) fee, typically $300–$500, covers the lender's cost of cleaning and reselling the returned car — and is often *waived* if the customer leases or buys another vehicle of the same brand (loyalty).

10. A customer's lease ends; the contract residual is $18,000 and the car's market value is $21,000. The $3,000 difference is: a) owed by the customer to the lender b) lease-end equity that can belong to the customer c) the disposition fee d) the acquisition fee

Answer **b.** Market value above the residual is the customer's equity — they hold a contract to buy at the lower $18,000, so the $3,000 gap is theirs to capture (buy and sell, or apply as a trade toward the next car). The professional checks this *every* lease-end.

11. Excess mileage charges are typically: a) free up to any amount b) $0.15–$0.30 per mile over the contracted allowance c) a flat $500 regardless of overage d) refunded if you drive under the allowance

Answer **b.** Per-mile, usually $0.15–$0.30, on miles over the allowance. Unused miles are generally *not* refunded, which is why a low-mileage driver shouldn't overbuy miles and a high-mileage driver shouldn't lease at all.

12. If a leased car at lease-end is worth less than its residual, the customer can: a) be forced to pay the difference no matter what b) hand the car back and let the lender absorb the shortfall c) only buy it at the inflated residual d) never return it

Answer **b.** The lender set the residual, so the lender bears the downside if the car is worth less. The customer's right to simply return the car caps their downside — part of what the rent charge buys. (Contrast: on a *loan,* the underwater customer eats the negative equity themselves — Ch 11.)

True / False (give a one-line justification)

13. The cap cost on a lease is fixed by the manufacturer and cannot be negotiated.

Answer **False.** The cap cost is the lease's *selling price* and is negotiable exactly like a purchase price. Treating it as fixed is how customers overpay on leases.

14. Money factor × 2400 gives you the approximate APR.

Answer **True.** That's the conversion rule. (Reverse: APR ÷ 2400 = money factor.)

15. A 36-month lease that allows 12,000 miles per year permits a total of 36,000 miles.

Answer **True.** 12,000 × 3 = 36,000 miles over the term; miles beyond that are charged per the contract rate.

16. Leasing is always cheaper than buying because the monthly payment is lower.

Answer **False.** A lower monthly payment is not the same as lower total cost. Over a long horizon, buying-and-keeping almost always wins, because a leaser is permanently living in the most expensive (early, fast-depreciating) years of one car after another.

17. GAP coverage on a lease typically reimburses the customer for a large cash down payment lost when a car is totaled early.

Answer **False.** GAP typically covers the *lender's* gap (between what's owed and the insurance payout), not the customer's lost cap-cost reduction. That's a core reason not to put big money down on a lease.

18. Conquest incentives target customers who currently drive a competing brand.

Answer **True.** Conquest cash lures a rival's customer over; loyalty cash keeps the brand's existing (usually current-lease) customers. Both are "found money" worth asking about.

Short Answer

19. State the full pre-tax monthly lease payment formula (both parts), in your own words.

Answer Pre-tax payment = depreciation charge + rent charge = **[(adjusted cap cost − residual) ÷ term]** + **[(adjusted cap cost + residual) × money factor].** In words: pay off the used-up slice of the car in equal monthly pieces, and add interest on the average of the cap cost and residual.

20. Explain in two or three sentences why the rent charge uses cap cost plus residual.

Answer Over the lease, the lender's money tied up in the car starts near the cap cost and ends near the residual, so on average their money at risk is roughly the *average* of the two. Charging the money factor on (cap cost + residual) is the clean way to charge interest on that average balance — which is also why the money factor is so small and why the ×2400 conversion contains a factor of 2.

21. Name the three "doors" at lease-end and one situation in which each is the right choice.

Answer (1) **Return** — right when the car is worth at or below the residual and the customer wants something different. (2) **Buy at the residual** — right when the car is worth *more* than the residual (capture the equity) or the customer loves the car. (3) **Re-lease / lease new** — right when the customer (low miles, wants something new) still pencils, often with loyalty cash and a waived disposition fee.

22. Give the ethical line on a money-factor markup: when is it fair, and when does it cross into exploitation?

Answer Fair when it's a *reasonable, disclosed* spread that compensates the dealer for arranging the financing. Exploitative when it's *maxed out and hidden* — especially on a customer who would qualify for the (much lower) buy money factor and is never told. Same ethics as dealer reserve in Ch 22; the gut-check is whether you'd be comfortable if the customer could hear your thoughts.

Applied Scenario

23. Build this lease, every step, then answer the follow-up. MSRP $40,000 · negotiated selling price $37,000 · acquisition fee $800 (capitalized) · cap cost reduction $0 · residual 56% of MSRP · money factor 0.00125 · term 36 months · tax 6% on the payment. (a) What is the monthly payment? (b) The dealer's buy money factor was 0.00100 — how much markup is baked into the rent over the 36 months?

Answer - Adjusted cap cost = 37,000 + 800 = **$37,800.** - Residual = 0.56 × 40,000 = **$22,400.** - Depreciation = (37,800 − 22,400) ÷ 36 = 15,400 ÷ 36 = **$427.78.** - Rent = (37,800 + 22,400) × 0.00125 = 60,200 × 0.00125 = **$75.25.** - Pre-tax payment = 427.78 + 75.25 = **$503.03.** - Tax = 503.03 × 0.06 = $30.18 → **(a) monthly payment = $533.21.** - (b) Markup = 0.00125 − 0.00100 = 0.00025. Extra rent/month = 60,200 × 0.00025 = $15.05 × 36 = **~$542** of money-factor markup over the lease.

24. A customer says, "My friend leased and at the end the car was worth way more than the buyout number — he made a few thousand dollars. Is that for real, or did he get lucky?" Answer the customer.

Answer It's real, not just luck. The buyout (residual) is locked in the contract years ahead; the car's *market value* at the end is whatever the used market says that day. When used values run high, a leased car can be worth thousands more than its residual — that gap is the lessee's equity, because they hold the right to buy at the lower locked number and could resell at the higher market number. (It can also go the other way — worth less than residual — in which case the customer just hands it back and the lender absorbs it.) The lesson: always check market value against the residual at lease-end.

Scoring guide

  • 22–24 correct: Excellent — you can teach a lease and spot a packed one. Move on to Chapter 24.
  • 18–21: Solid. Re-read §23.3–23.4 (the two-part payment and the worked lease) to lock the math.
  • 14–17: Shaky on the mechanics. Re-work the §23.4 example by hand and redo Exercises C1–C2.
  • Below 14: Re-read the chapter, focusing on the threshold idea (§23.1), the four numbers (§23.2), and the two-part payment (§23.3). The math is just arithmetic once the concepts are clear.

70%+ (about 17/24) = ready to proceed.