How the Lease Calculator Works
How the Lease Calculator Works
A car lease is not a loan. With a loan, you borrow the whole price of the car and pay it back with interest, and the car is yours. With a lease, you pay only for the part of the car's value that you use up while you drive it, plus a finance charge. At the end, you return the car, or you can buy it. That is why lease payments are usually lower than loan payments on the same car. The Lease Calculator shows how the payment is built.
What you enter
- Agreed price: the price you negotiated for the car. It is called the capitalized cost, or cap cost.
- Sticker price (MSRP): the manufacturer's suggested price. The residual value is a share of it.
- Paid up front: a down payment, trade-in credit or rebate that lowers the cap cost.
- Residual value: what the car is expected to be worth at the end of the lease, as a percentage of the sticker price. The leasing company sets it.
- Lease length: the number of months.
- Money factor or APR: the finance rate. Dealers quote a small decimal called the money factor. Multiplying it by 2,400 gives the equivalent yearly interest rate. You can enter either one.
- Sales tax and fees: tax on the payment, and fees due at signing, such as acquisition and registration fees.
The formulas
A lease payment has two parts. The depreciation is the amount the car loses in value over the lease, spread over the months. The finance charge is the cost of the money tied up in the car:
cap cost = agreed price - amount paid up front residual value = sticker price x residual percentage depreciation each month = (cap cost - residual value) / months finance charge each month = (cap cost + residual value) x money factor monthly payment = depreciation + finance charge, plus sales tax
The finance charge uses the cap cost plus the residual value, because on average you are financing the car's value halfway between the start and the end. The two are added and multiplied by the money factor, which already includes the division by 2. That is why the money factor is the APR divided by 2,400.
A worked example
You lease a car with a sticker price of $36,000. You negotiate the price down to $35,000 and pay $2,000 up front. The residual value is 60%, the lease is 36 months, the rate is 6% APR (a money factor of 0.0025), and the sales tax is 7%. Fees due at signing are $800.
| Step | Amount |
|---|---|
| Cap cost ($35,000 - $2,000) | $33,000 |
| Residual value (60% of $36,000) | $21,600 |
| Depreciation ($11,400 / 36) | $316.67 |
| Finance charge ($54,600 x 0.0025) | $136.50 |
| Payment before tax | $453.17 |
| Sales tax at 7% | $31.72 |
| Monthly payment | $484.89 |
| Due at signing ($2,000 + first payment + $800 fees) | $3,284.89 |
Over 36 months, you pay about $20,256 in total, including the up-front amounts. That is a real cost of about $562.67 a month, which is more than the $484.89 payment shown in the ad.
Chart: what each payment is made of
The same lease. Most of the payment is depreciation, the value the car loses:
Depreciation ████████████████████████████████████████ 65% $316.67 Finance █████████████████ 28% $136.50 Tax ████ 7% $31.72
How the rate changes the payment
On the same lease:
| APR | Money factor | Monthly payment |
|---|---|---|
| 4% | 0.001667 | $436.20 |
| 5% | 0.002083 | $460.55 |
| 6% | 0.0025 | $484.89 |
| 7% | 0.002917 | $509.23 |
| 8% | 0.003333 | $533.57 |
What a bigger up-front payment does
Paying more up front lowers the monthly payment. With nothing up front, the example payment would be $549.68. With $5,000 up front, it would be $387.70. But be careful: if the car is stolen or totaled early in the lease, the up-front money is usually not returned. Many people choose to pay as little as they can up front and keep the money.
Tips for a better lease
- Negotiate the price, not just the payment. A lower cap cost lowers everything.
- Ask for the money factor and the residual value. Then check the payment yourself.
- A higher residual value is good for you, because you pay for less depreciation.
- Check the mileage limit and the end-of-lease charges. Extra miles and wear can be expensive.
- Compare with buying. Leasing costs less each month, but you own nothing at the end.
What this calculator does not include
- Mileage limits, extra-mile charges and wear-and-tear charges.
- The disposition fee at the end, or the fee to buy the car.
- State rules on how leases are taxed. Some states tax the whole price up front, or the up-front payment too. Enter what applies to you.
- Insurance, which is usually higher on a leased car.
This tool gives an estimate for general information only. It is not financial advice. Your dealer's lease quote and contract have the exact figures.