Since a dealer’s “captive” finance company controls how leases are handled, it’s not normally negotiable as to which method is used to calculate pre-paid leases.

With this method, your monthly payment is calculated in the normal way (see Monthly Lease Payments), including sales tax, and assuming $0 cap cost reduction. That payment is then multiplied by the number of months in your lease (lease term), which gives you the amount of your single up-front payment. See our example below.

You save no money with this method, either on finance charges or sales tax, although you might get a discounted money factor (because of your large “down payment”), which does provide savings.

Examples – Compute a pre-paid lease using both methods

Method 1 Example: Let’s say the negotiated net capitalized cost (cap cost) of your new car is $40,000 and the lease-end residual value is $21,000 for a 36 month lease. The “depreciation value” on this car is $40,000 minus $21,000 = $19,000. As part of your single-pay lease, you pay the $19,000. You may also have to pay sales tax on that $19,000 depending on the state/county in which you live. If the rate is 6%, for example, the tax amount would be $19,000 x .06 = $1140.

Now, you’re left with the interest on the residual value, which is computed as Residual Value times 2 (see this article for explanation of lease formula) multiplied by Money Factor. With a Money Factor of .00238 (5.7% APR) this comes out to be $100/month. In most states, you must add sales tax to this amount (yes, we know it doesn’t make sense to tax finance charges but that’s the way state laws work). If your local tax rate is 6%, then the total computed monthly payment would be $106. Since you want to pre-pay this amount, multiply $106 by 36 months to get $3816.

So, your total lease pre-payment using Method 1 is $19,000 (depreciation payoff) plus $1140 (sales tax payoff) plus $3816 (residual finance charge payoff) = $23,956.

Method 2 Example: Same car as above, same price, same residual, and same money factor. In this example, the lease payment is computed (see Lease Calculator) assuming $0 cap cost reduction to be $673 + $32 tax = $705. Multiply by the lease term (36 months) to get $705 x 36 = $25,380 as your single lease payment.

Conclusions
The savings difference between Method 1 and Method 2 above is $25,380 minus $23,956 = $1424. For a $40,000 car, this savings difference is not very significant.

There is a possible disadvantage to single-pay car leases that should be considered.

If your car should be stolen or destroyed in an accident, your insurance would pay only the current market value of the vehicle, not the total amount you have invested in your lease. You would stand to lose a large chunk of your up front cash payment — the same loss you would incur if you had paid cash to purchase your car.

Contrast the above total-loss situation with a normal monthly payment lease. If you total your car, the lease company picks up financial responsibility for the difference between what you still owe on the lease and your insurance settlement. This is known as “gap” insurance and is automatically included in most leases. You would lose nothing except your insurance deductible. This is one of the benefits of leasing a car using little or no down payment cash.

Gap coverage, even if included in your pre-paid lease, provides no benefit to you. It does not cover your cash losses — exactly the same as if you purchased your car with cash. This risk is greatest in the early months of a pre-paid lease, and lessens as the lease nears its completion.