Step 3 of 5 · Negotiate · 6 min read
How Car Lease Payments Are Calculated (With a Worked Example)
Work out a lease payment yourself from cap cost, residual, and money factor, convert the money factor to an APR, and check a dealer's quote.
Listen to this guide10 min
The short version
- A lease payment is depreciation plus a rent charge, plus tax.
- Depreciation is the adjusted cap cost minus the residual value, divided by the number of months.
- The rent charge is the adjusted cap cost plus the residual, multiplied by the money factor.
- Multiply the money factor by 2,400 to get an approximate APR. A money factor of 0.0025 is about 6%.
- You can negotiate the price of the car and question the money factor and fees. The residual is set by the leasing company.
In this guide
A lease payment has two parts: the value the car is expected to lose while you have it, and a charge for the money tied up in it. Add tax and you have the monthly number. Once you know the five inputs, you can reproduce any dealer's quote on a phone calculator and see exactly which input is off.
The formula
Monthly depreciation = (adjusted cap cost − residual value) ÷ months
Monthly rent charge = (adjusted cap cost + residual value) × money factor
Base payment = depreciation + rent charge
Monthly payment = base payment + tax, where your state taxes the payment
The inputs
Federal leasing rules (Regulation M) require a consumer lease to disclose most of these by name, so you will find them on the contract.
| Term | What it is | Negotiable? |
|---|---|---|
| Gross capitalized cost | The agreed price of the car plus anything rolled into the lease: fees, add-ons, a prior loan balance | Yes. The price is negotiable like any purchase |
| Capitalized cost reduction | Anything that lowers the gross cap cost: cash down, rebates, trade-in equity | Your choice |
| Adjusted capitalized cost | Gross cap cost minus cap cost reduction. The number the payment is built on | Follows from the two above |
| Residual value | The car's estimated value at lease end, usually a percentage of MSRP | No. Set by the leasing company |
| Money factor | The financing rate, written as a small decimal | Sometimes. Dealers may be able to mark it up |
| Term | Number of months | Your choice among offered terms |
| Rent charge | The total finance cost over the lease | Follows from the money factor |
Notice that the residual is based on MSRP, not on the price you negotiate. That is why a discount helps so much on a lease: it lowers the cap cost while the residual stays put.
A fully worked example
Example only. Round numbers chosen to make the arithmetic easy to follow.
| Input | Amount |
|---|---|
| MSRP | $40,000 |
| Negotiated price | $36,000 |
| Acquisition fee, rolled in | $900 |
| Gross capitalized cost | $36,900 |
| Cap cost reduction (cash down plus rebate) | $2,900 |
| Adjusted capitalized cost | $34,000 |
| Residual: 55% of MSRP | $22,000 |
| Term | 36 months |
| Money factor | 0.0025 |
Step 1: depreciation. $34,000 − $22,000 = $12,000. Divided by 36 months = $333.33 a month.
Step 2: rent charge. $34,000 + $22,000 = $56,000. Multiplied by 0.0025 = $140.00 a month.
Step 3: base payment. $333.33 + $140.00 = $473.33.
Step 4: tax. If your state taxes the monthly payment at 6%, that adds $28.40, for $501.73 a month.
Over 36 months the rent charge totals $140 × 36 = $5,040. That is what the financing costs.
Why you add the two numbers in the rent charge
It looks odd to add the cap cost and the residual. The reason: over the lease, the amount you effectively owe falls from the adjusted cap cost to the residual, so the average balance is the two added together and divided by two. The money factor has that division, and the conversion from a yearly rate to a monthly one, already built in.
Converting money factor to APR
Approximate APR = money factor × 2,400
- 0.0025 × 2,400 = 6.0%
- 0.0010 × 2,400 = 2.4%
- 0.0035 × 2,400 = 8.4%
To go the other way, divide the APR by 2,400. This is an approximation, but a close one, and it lets you compare a lease's financing cost with loan rates you have been quoted.
Lease contracts are not required to show a money factor or an APR. Regulation M requires the rent charge in dollars instead, and it restricts how lessors can present percentage rates. So ask the dealer for the money factor directly. If they will not give it, you can back it out:
Money factor = monthly rent charge ÷ (adjusted cap cost + residual)
Or take the total rent charge from the contract, divide by the number of months, and then apply the formula.
What each lever does
Using the example above, change one input at a time:
| Change | New base payment | Difference |
|---|---|---|
| Negotiate another $1,000 off the price | $443.05 | −$30.28 |
| Money factor 0.0020 instead of 0.0025 | $445.33 | −$28.00 |
| Residual 58% instead of 55% ($23,200) | $443.00 | −$30.33 |
| No cap cost reduction ($0 down, no rebate) | $561.14 | +$87.81 |
A rough rule for 36-month leases: every $1,000 of price moves the payment by about $30.
About putting money down
In the example, the $2,900 cap cost reduction lowers the payment by about $88 a month, or roughly $3,161 over the lease. The saving beyond the $2,900 itself is the rent charge you avoid.
The catch is risk. If a leased car is totaled or stolen early, money you paid up front is generally not returned to you. Many people prefer to put little or nothing down on a lease for that reason and accept the higher payment. Rebates are different: they are not your cash, so applying them costs you nothing.
Fees to look for
| Fee | When | Notes |
|---|---|---|
| Acquisition fee | At signing, or rolled into the cap cost | Charged by the leasing company; dealers can sometimes add to it |
| First month's payment | At signing | |
| Security deposit | At signing | Not always required; refundable |
| Dealer doc fee, title, registration | At signing | See dealer fees explained |
| Disposition fee | At return | Often waived if you lease again with the same brand or buy the car |
| Excess mileage and wear | At return | Per-mile rate and wear standard are stated in the lease |
| Purchase option fee | If you buy at the end | See the lease buyout guide |
The "amount due at signing" must be itemized on the lease. Ask for that itemization with any quote, because a low advertised payment often assumes a large amount due at signing.
Tax varies by state
States tax leases differently. Depending on where you register the car, tax may be charged on each monthly payment, on up-front amounts such as the cap cost reduction, or on the vehicle's full price. Some states also charge personal property tax on leased vehicles, billed through the leasing company. Check your state revenue department's guidance on leased motor vehicles, and ask the dealer to show the tax as its own line. More in sales tax, title, and registration.
Checking a dealer's quote
Ask for these in writing:
Please send the lease worksheet with MSRP, selling price, gross and adjusted cap cost, residual value and percentage, money factor, term, miles per year, itemized amount due at signing, and the monthly payment with tax.
Then:
- Run the formula. Your base payment should match theirs within a dollar or two.
- If it does not, look for items in the gross cap cost you did not ask for. See dealer add-ons.
- Compare the selling price to what dealers are advertising on The Motor Standard.
- Compare the money factor, converted to APR, with current loan rates and with the manufacturer's published lease offer for that model, if there is one.
- Get quotes from two or three dealers with the same term, mileage, and amount due at signing so the payments are comparable.
If you have not yet decided whether leasing fits you at all, start with lease vs. buy.
Read next · Step 3: Negotiate
Out-the-Door Price: What It Includes and How to Get It in Writing
6 min