You pay for the part of the car you use
When you buy a car with a loan, you pay off the whole price. With a lease, you pay for the drop in value while you have it, plus a finance charge, plus tax. The leasing company keeps the rest of the value and gets the car back at the end.
That's why lease payments are often lower than loan payments on the same car. It's also why the price you negotiate and the value the lender expects the car to keep matter so much.
Step 1: find the adjusted cap cost
The capitalized cost, or cap cost, is the lease version of the price. Start with the price you negotiated, add any fees or extras rolled into the lease, then subtract cash down, rebates and trade-in equity.
Say the agreed price is $42,000, $1,200 of fees are rolled in, and you put $3,000 down with a $1,000 rebate. The adjusted cap cost is $42,000 + $1,200 - $3,000 - $1,000 = $39,200.
Step 2: work out the residual and depreciation
The residual is what the lender expects the car to be worth at the end of the lease. It's set as a percentage of MSRP, not of your negotiated price. At 58% of a $45,000 MSRP, the residual is $26,100.
Depreciation is the gap between the cap cost and the residual, spread over the term. ($39,200 - $26,100) / 36 months = $363.89 a month. This is usually the biggest piece of the payment.
Step 3: add the rent charge
The rent charge is the lease's finance cost. The common method, described by the Federal Reserve, adds the cap cost and the residual and multiplies by the money factor. ($39,200 + $26,100) x 0.00250 = $163.25 a month.
Adding the two numbers can look odd. It works because you're borrowing against the car's full value on average over the lease, which sits between the starting cap cost and the ending residual. To read a money factor as a rough interest rate, multiply by 2,400. 0.00250 is about 6%.
Formula notes
Depreciation = (cap cost - residual) / monthsRent charge = (cap cost + residual) x money factorPayment = (depreciation + rent charge) x (1 + tax rate)
Step 4: add tax and check the total
Depreciation plus rent charge gives a base payment of $527.14. With an 8% tax charged on each payment, the monthly payment is $569.31. Some places tax the lease differently, for example upfront, so use the method your paperwork shows.
The payment isn't the whole cost. Add what you paid at signing and any lease-end fees. In this example the full lease costs about $24,390 if you return the car, or $677.50 a month all in. Our auto lease calculator does every step and shows where each dollar goes.
What moves the payment the most
Using the same example, here's how much the payment with tax changes when one thing changes.
- Price $2,000 lower ($40,000): $503.91 a month
- Money factor 0.00150 instead of 0.00250: $498.79 a month
- Money factor 0.00350 instead of 0.00250: $639.83 a month
- No $3,000 down payment: $667.41 a month, but $2,902 less due at signing
- Driving 15,000 miles a year on a 12,000-mile lease: same payment, but $2,250 due at turn-in at $0.25 a mile
Frequently asked questions
Why is the residual based on MSRP and not my price?
The residual is a percentage of MSRP for that car, term and mileage. So negotiating a lower price lowers your cap cost and depreciation without changing the residual.
Can I negotiate the money factor?
Sometimes. Dealers may mark up the lender's base money factor, so ask for the rate in writing and compare offers from more than one dealer.
Is leasing cheaper than buying?
Monthly payments are often lower, but you don't own the car at the end. Which costs less over time depends on how long you keep cars and how much you drive.
What is an acquisition fee?
It's a fee the leasing company charges to set up the lease. You can usually pay it at signing or roll it into the cap cost, where it also adds rent charge.
What happens at the end of a lease?
You can usually return the car and pay any mileage, wear and disposition charges, or buy it for the residual plus any purchase-option fee.
References
These sources support the method or guidance used for Auto Lease Calculator. Verify time-sensitive rules at the source.
Try the calculator
Open Auto Lease Calculator, enter your scenario, and compare its supporting rows with this guide's method and checks.