How to Calculate a Car Lease Payment

Leasing a car can be an attractive option, often offering lower monthly payments than financing a purchase. However, the calculation is more complex than a standard loan. Our calculator breaks it down for you, but understanding the components will empower you at the dealership.

A monthly lease payment is made up of three parts: the depreciation charge, the finance charge, and sales tax.

Key Terms in a Car Lease Explained

• MSRP (Manufacturer's Suggested Retail Price): The official "sticker price" of the car. The residual value is always based on this number.
• Negotiated Price (Capitalized Cost): This is the most important number you can negotiate. It's the sale price of the car you agree on with the dealer. A lower negotiated price directly lowers your payment.
• Capitalized Cost Reduction: This is anything that lowers the amount you're financing, such as a cash down payment or a trade-in with positive equity.
• Residual Value: The estimated value of the car at the end of the lease, determined by the lender. It's expressed as a percentage of the MSRP. You pay for the difference between the Capitalized Cost and the Residual Value (this is the depreciation).
• Money Factor: This is simply the interest rate in a different format. To convert an APR to a money factor, divide by 2400. To convert a money factor to an APR, multiply by 2400. Our calculator lets you enter the more familiar APR directly.
• Lease Term: The length of the lease, typically 24, 36, or 39 months.

The Lease Payment Calculation

1. Depreciation Charge: This is the total depreciation (Net Capitalized Cost - Residual Value) divided by the number of months in the term.
2. Finance Charge: This is calculated as (Net Capitalized Cost + Residual Value) * Money Factor.
3. Sales Tax: The local sales tax rate applied to the sum of the depreciation and finance charges.

Leasing vs. Buying: Key Differences

When you lease, you're essentially paying for the use of the car for a set period. When you buy, you're paying for the entire value of the car. This leads to key differences:

• Payments: Lease payments are typically lower because you're only paying for the depreciation, not the full purchase price.
• Ownership: At the end of a loan, you own the car. At the end of a lease, you return it (or have the option to buy it at its residual value).
• Mileage: Leases come with annual mileage limits (e.g., 10,000 or 12,000 miles per year), with penalties for exceeding them.

Use this calculator to run different scenarios. See how a larger down payment or a better-negotiated price can dramatically affect your monthly payment, and walk into the dealership prepared and confident.