How a lease payment is calculated
When you lease, you pay for the part of the car's value you use up, plus a finance charge, plus tax:
Finance charge = (Adjusted cap cost + Residual value) × Money factor
Monthly payment = (Depreciation + Finance charge) × (1 + Sales tax)
- Capitalized (cap) cost — the price you negotiate plus fees rolled into the lease. Down payments, rebates and trade-in equity reduce it.
- Residual value — what the car is expected to be worth at the end, set by the lender as a percentage of MSRP. A higher residual means a lower payment.
- Money factor — the lease's interest rate in disguise. Multiply it by 2,400 to get the approximate APR (a money factor of 0.00250 ≈ 6% APR).
Tips for a better lease
- Negotiate the price, not just the monthly payment — the cap cost works exactly like the price of a purchase.
- Ask for the money factor and convert it to an APR; dealers sometimes mark it up.
- Be careful with big down payments. If the car is totaled or stolen early, that money is usually lost; many people prefer to put little or nothing down on a lease.
- Check the mileage allowance. Going over typically costs $0.15–$0.30 per mile at the end.
Sales tax on leases varies by state — most tax the monthly payment, as this calculator does, but some tax the full price up front. Thinking of buying instead? Compare with the Auto Loan Calculator.
Worked example
A car with a $40,000 MSRP, negotiated down to $37,500, with $995 in fees rolled in and $2,000 down, on a 36-month lease with a 58% residual and a 6% APR (money factor 0.0025), plus 7% sales tax:
- Adjusted cap cost: $37,500 + $995 − $2,000 = $36,495
- Residual value: 58% × $40,000 = $23,200
- Depreciation: ($36,495 − $23,200) ÷ 36 = $369.31 a month
- Finance charge: ($36,495 + $23,200) × 0.0025 = $149.24 a month
- Tax: 7% × ($369.31 + $149.24) = $36.30
- Monthly payment: $554.84
Why the residual value matters so much
The same car and price, before tax, at different residual values:
| Residual | Value at lease end | Monthly payment (before tax) |
|---|---|---|
| 52% | $20,800 | $579.21 |
| 58% | $23,200 | $518.54 |
| 64% | $25,600 | $457.88 |
Each 6-point increase in the residual cuts about $61 from the payment. That's why cars that hold their value well are often the cheapest to lease, even when they cost more to buy.
Frequently asked questions
What is a money factor?
It's how leasing companies express the interest rate. Multiply it by 2,400 to get an approximate APR: 0.0025 × 2,400 = 6%. A dealer may quote it as "2.5" — that means 0.0025.
Why is the finance charge calculated on cap cost plus residual?
It's a shortcut that produces the average balance you're borrowing over the lease. You start owing the full cap cost and end owing the residual; the sum multiplied by the money factor is equivalent to charging interest on the average of the two.
Can I negotiate a lease?
Yes. The selling price (cap cost), the money factor, fees and sometimes the mileage allowance are all negotiable. The residual value is set by the leasing company and generally is not.
What happens at the end of the lease?
You can return the car and pay any excess mileage or wear charges, buy it for the residual value stated in the contract, or trade it in. If the car is worth more than the residual, buying it or trading it in can capture that difference.
What fees should I expect?
Common ones are an acquisition fee at the start (often several hundred dollars), a disposition fee if you return the car at the end, and charges for exceeding the mileage limit or for wear beyond normal use.