How a lease payment is calculated
A closed-end lease payment has two parts: the depreciation you use up, spread over the months, and a rent charge, which is the lease's version of interest. Gross capitalized cost minus any capitalized cost reduction gives the adjusted capitalized cost; subtract the residual value and divide by the lease term for the depreciation part. The Federal Reserve's leasing guide explains the rent charge: the money factor is multiplied by the sum of the adjusted capitalized cost and the residual value.[1] Taxes are added on top.
| Step | How | Amount |
|---|---|---|
| Gross capitalized cost | $36,000 price + $650 acquisition fee | $36,650 |
| Cap cost reduction | Cash down | −$2,000 |
| Adjusted capitalized cost | $34,650 | |
| Residual value | $38,000 × 58% | $22,040 |
| Depreciation fee | ($34,650 − $22,040) ÷ 36 | $350.28 |
| Rent charge | ($34,650 + $22,040) × 0.0025 | $141.73 |
| Base payment | $492.00 | |
| Sales tax at 6% | On each payment | $29.52 |
| Monthly payment | $521.52 |
Federal Regulation M requires the lessor to disclose these amounts in a set form before you sign, including the gross capitalized cost, the capitalized cost reduction, the residual value, the rent charge and the total of base monthly payments, so every figure above should appear on your lease contract.[3]
Money factor to APR
To convert a money factor to an approximate APR, multiply it by 2,400; to go the other way, divide the APR by 2,400. A 0.0025 money factor is about 6% APR, and 0.00125 is about 3%. The 2,400 comes from the rent-charge formula: the cap cost plus the residual times the money factor equals interest on the average balance, which is half their sum, at a monthly rate of APR ÷ 1,200. It is standard arithmetic, not an official rate: the Federal Reserve notes that the money factor is not a lease rate and typically is not disclosed to you,[1] and there is no federal requirement for lessors to disclose a lease rate.[2] Ask for the money factor, or the total rent charge in dollars, which Regulation M does require on the contract.[3]
| Money factor | Approximate APR | Rent charge per month (this example) |
|---|---|---|
| 0.001 | 2.4% | $56.69 |
| 0.00125 | 3.0% | $70.86 |
| 0.0015 | 3.6% | $85.04 |
| 0.002 | 4.8% | $113.38 |
| 0.0025 | 6.0% | $141.73 |
| 0.003 | 7.2% | $170.07 |
| 0.0035 | 8.4% | $198.42 |
What the residual value does to the payment
A higher residual value lowers the payment, because you pay only for the value the car loses during the lease. The residual is set by the lessor as a percentage of MSRP and is usually not negotiable, while the selling price is. On this example, each 5 points of residual moves the payment by about $51 a month:
| Residual | Residual value | Monthly payment (tax included) |
|---|---|---|
| 48% | $18,240 | $623.34 |
| 53% | $20,140 | $572.43 |
| 58% | $22,040 | $521.52 |
| 63% | $23,940 | $470.61 |
| 68% | $25,840 | $419.70 |
Negotiating the price is the most direct lever: every $1,000 off the capitalized cost lowers this payment by about $32.09 a month.
Due at signing and the total cost of the lease
Due at signing is usually the first monthly payment plus any cash down and any fees you do not roll into the lease. Here that is $2,522. Over 36 months the lease costs $20,775 in all, of which $5,102 is rent charge. At the end you return the car, or buy it at the purchase-option price stated in the contract, which is often based on the residual.[3]
End-of-lease chargesThe CFPB notes that most leases restrict mileage to 10,000 to 15,000 miles a year;[4] miles over the allowance and wear beyond normal use are charged at the end. Regulation M requires the contract to warn that you may have to pay a substantial charge if you end the lease early.[3]
Lease vs buy: the same car financed
Buying usually costs more per month but leaves you with a car. Financing the same $36,000 price with $2,000 down at 6% for 60 months costs $711.64 a month, against $521.52 for the lease. After 36 months the lease is over; the buyer still owes about $16,057 but owns a car worth roughly the $22,040 residual. Use the car affordability calculator to test the loan side and the car depreciation calculator to see what the car might be worth when the lease ends.
Taxes work differently on leases, which is why the calculator has three tax settings. California measures the tax by the monthly rentals, collected by the lessor from you;[7] New York taxes all the lease payments for the whole term at the start of the lease;[6] and in Texas no tax is due on your lease payments because the leasing company pays motor vehicle tax on its own purchase price.[5] The car sales tax calculator lists each state's rate. The CFPB also points out that lease terms are negotiable, including the rent charge or money factor,[4] so compare the capitalized cost and money factor, not only the payment.
Frequently asked questions
How do you calculate a car lease payment?
Depreciation fee = (adjusted cap cost − residual) ÷ months. Rent charge = (adjusted cap cost + residual) × money factor. Add them, then add sales tax. With $34,650 cap cost, $22,040 residual, 0.0025 and 36 months, that is $350.28 + $141.73 = $492.00 before tax.
How do I convert a money factor to APR?
Multiply by 2,400. A money factor of 0.0025 ≈ 6% APR; 0.0018 ≈ 4.3% APR. Divide an APR by 2,400 to get the money factor.
Is it better to put money down on a lease?
A cap cost reduction lowers the payment dollar for dollar over the term, but if the car is totaled or stolen early, the down payment is usually lost. Many buyers keep the cash and accept a slightly higher payment.
Can you negotiate the residual value?
Usually not; the lessor sets it. You can negotiate the selling price (cap cost), fees and sometimes the money factor.
Sources
- Vehicle Leasing: More Information about the Rent Charge
- Vehicle Leasing: Frequently Asked Questions
- 12 CFR 1013.4, Content of disclosures (Regulation M, Consumer Leasing)
- What should I know about leasing versus buying a car?
- Motor Vehicle Tax Guide (96-254): Leases
- Publication 839, Sales Tax Information for Motor Vehicle Leases
- Regulation 1660, Leases of Tangible Personal Property