How a Car Lease Payment is Calculated

Leasing a vehicle works differently from financing one. Instead of making payments toward owning the entire vehicle, you’re generally paying for the value the vehicle is expected to lose while you use it, plus finance charges, taxes and certain fees.

That can make lease payments appear lower than payments for financing the same vehicle—but the monthly payment doesn’t tell the whole story. The vehicle’s negotiated price, expected value at the end of the lease and financing terms all affect what you pay.

Understanding these key terms can help you evaluate a lease offer, negotiate where possible and compare the total cost with other options.

Capitalized Costs

The capitalized cost is the amount used to calculate the lease. It generally starts with the negotiated vehicle price and may include fees or other amounts rolled into the lease. Negotiate the vehicle price just as you would if you were buying it.

Residual Value

The residual value is the vehicle’s estimated value at the end of the lease, typically 45-60% of MSRP for a three year lease. Unlike the vehicle price, the residual value generally isn’t negotiable and is set by the leasing company.

Depreciation

Depreciation is the difference between the adjusted capitalized cost and the residual value. This is a major part of your lease payment.

Money Factor

The money factor is the rate used to calculate the lease’s finance charge, sometimes called the rent charge. Ask what money factor is being used and whether a lower rate is available. To estimate an equivalent APR, multiply the money factor by 2,400. For example, a money factor of 0.00125 would equal 3% APR.

Negotiate What You Can

Don’t negotiate a lease based only on the monthly payment. Focus on the vehicle’s selling price, money factor, fees and other negotiable terms. The residual value is typically set by the leasing company, but many of the other numbers that determine what you pay may be negotiable.

Trading In a Vehicle?

Negative equity doesn’t disappear when you lease. If you owe more on your trade-in than it’s worth, that difference may be rolled into the lease, increasing the capitalized cost and your monthly payment.

For example, if your vehicle is worth $20,000 but you owe $24,000, that $4,000 of negative equity still has to be paid. Rolling it into a 36-month lease could add more than $111 per month before considering the additional finance charge.

Smart Move: Negotiate the numbers that determine the payment—not just the payment itself. And know your trade-in value and loan payoff before you start negotiating.