How a car lease payment is calculated
When you lease, you pay for the part of the car’s value you use up, plus a finance charge for the money tied up in the car. You do not pay off the whole price. That is why a lease payment is lower than a loan payment on the same car.
Every US closed-end lease is built the same way. The Federal Reserve’s guide Keys to Vehicle Leasing and the disclosures required by Regulation M use these terms:
Depreciation fee = (adjusted cap cost − residual value) ÷ number of months
Rent charge = (adjusted cap cost + residual value) × money factor
Monthly payment = (depreciation fee + rent charge) × (1 + sales tax rate)
- Gross capitalized cost is the price you negotiate plus fees rolled into the lease, such as the acquisition fee.
- Cap cost reductions are anything that lowers it: cash down, trade-in equity and rebates.
- Residual value is what the leasing company expects the car to be worth at the end. It is set by the lender as a percentage of MSRP, not of the price you negotiate.
- Money factor is the lease’s interest rate in another form. Multiply by 2,400 for an approximate APR.
The rent charge adds the cap cost and the residual because, on average over the lease, you are borrowing roughly the midpoint of the two values. Multiplying that sum by the money factor is the same as charging the APR on the average balance.
Worked example 1: a $40,000 SUV for 36 months
The sticker price (MSRP) is $40,000 and you negotiate it down to $38,000. The acquisition fee of $695 is added to the lease, you put $2,000 down, and pay $400 of registration fees at signing. The residual is 58% and the money factor is 0.00250 (about 6% APR). Your state charges 7% tax on each payment.
- Adjusted cap cost: $38,000 + $695 − $2,000 = $36,695
- Residual value: 58% × $40,000 = $23,200
- Depreciation fee: ($36,695 − $23,200) ÷ 36 = $374.86
- Rent charge: ($36,695 + $23,200) × 0.0025 = $149.74
- Base payment: $524.60, plus 7% tax of $36.72 = $561.32 a month
- Due at signing: $2,000 down + $400 fees + first payment = $2,961.32
- Total cost over the lease: 36 × $561.32 + $2,400 = $22,607.54
Of that, $5,390.55 is rent charge, the lease equivalent of interest.
Worked example 2: does a bigger down payment help?
Keep everything else the same and change only the cash down:
| Down payment | Monthly payment | Due at signing | Total lease cost |
|---|---|---|---|
| $0 | $626.11 | $1,026.11 | $22,940.14 |
| $2,000 | $561.32 | $2,961.32 | $22,607.54 |
| $4,000 | $496.53 | $4,896.53 | $22,274.94 |
Each $2,000 down cuts the payment by about $65 and lowers the total by about $333, because you pay less rent charge and less tax. The saving is real but small, and the risk is not: if the car is stolen or written off early, your insurer and gap coverage settle the lease, but the money you put down is usually gone. Many buyers prefer a small amount due at signing for that reason.
Worked example 3: residual value and money factor
The residual has a large effect, because it decides how much depreciation you pay for. Same deal, different residuals:
| Residual | Residual value | Monthly payment | Total lease cost |
|---|---|---|---|
| 50% | $20,000 | $647.87 | $25,723.38 |
| 58% | $23,200 | $561.32 | $22,607.54 |
| 62% | $24,800 | $518.04 | $21,049.62 |
Cars that hold their value lease well. The money factor matters too: raising it from 0.00250 to 0.00350 (about 6% to 8.4% APR) lifts the payment from $561.32 to $625.41 and the total rent charge from $5,390.55 to $7,546.77. The table under the calculator shows your own deal at a range of money factors.
Money factor to APR
| Money factor | Approximate APR |
|---|---|
| 0.00100 | 2.4% |
| 0.00150 | 3.6% |
| 0.00200 | 4.8% |
| 0.00250 | 6.0% |
| 0.00300 | 7.2% |
| 0.00350 | 8.4% |
| 0.00400 | 9.6% |
The ×2,400 rule is a convention: 24 = 2 × 12 months, and the extra 100 turns a decimal into a percent. Dealers sometimes quote a money factor without saying it is a rate, so convert it and compare it with car loan APRs. If the number looks high, ask what the lender’s base (“buy”) rate is.
Lease vs buy
The calculator also finances the same car for the same term at the lease’s APR, so you can see both sides. In example 1, buying means a loan of $39,355 (price plus tax on the full price, plus the fee, minus the down payment) and a payment of about $1,197 a month. You pay far more each month, $45,501 over three years, but you then own a car worth around $23,200. Net of that value, buying costs about $22,301, slightly less than the $22,608 lease.
That comparison assumes the car really is worth the residual when you are done. Leasing tends to win if you like a new car every few years, drive within the mileage limit, and value the low payment. Buying tends to win if you keep cars for a long time, drive a lot, or want no restrictions.
What the calculator does not include
- Mileage and wear charges. Most leases allow 10,000 to 15,000 miles a year and charge per mile over that at the end. Estimate your miles honestly.
- Disposition fee. Many leases charge a fee when you return the car.
- Tax rules that differ by state. Most states tax each monthly payment, which is what this calculator does. Some tax the down payment too, and a few tax the whole lease upfront. Check your state’s rules or the dealer’s worksheet.
- Early termination. Ending a lease early can cost thousands. Read the early termination section of your contract.
Tips
- Negotiate the price, not the payment. The cap cost is fully negotiable, just as when you buy. Every $1,000 off the price saves about $32 a month on a 36-month lease here, plus rent charge and tax.
- Ask for the numbers on paper. Regulation M requires the lessor to disclose the gross and adjusted cap cost, residual value, rent charge and total of payments. Plug them into this calculator to check the payment.
- Compare offers by total cost. One dealer may show a lower payment with more due at signing. Total lease cost puts both on the same footing.
- Check the APR. Use the APR calculator to compare the lease rate with a loan offer.
Common mistakes
- Using the residual on the selling price. It is a percentage of MSRP.
- Entering the APR in the money factor box. 6 is an APR; 0.0025 is a money factor. The calculator warns you if the number looks wrong.
- Forgetting that a lease ends with nothing. At the end you either return the car or buy it for the residual (plus any purchase fee).
Related calculators
To see what buying would cost with your own loan rate, tax and trade-in, use the auto loan calculator. For a standard payment table on any loan, try the loan calculator, and to check sales tax on a purchase, the sales tax calculator.