How a lease payment is built
A lease payment has two parts. You pay for the value the car loses while you drive it, and you pay a finance charge on the money tied up in the car.
- Adjusted capitalized cost = negotiated price − down payment and trade-in
- Residual value = MSRP × residual percentage
- Depreciation part = (adjusted cap cost − residual) ÷ term in months
- Rent charge = (adjusted cap cost + residual) × money factor
- Monthly payment = (depreciation + rent charge) × (1 + sales tax rate)
The rent charge uses the sum of the two values because, on average over the lease, the lender has about half of that total at stake.
Worked example
A car has an MSRP of $37,000. You negotiate the price to $35,000, put $3,000 down, and get a 36-month lease with a 58% residual and a 0.0025 money factor. Sales tax is 7%.
- Adjusted cap cost: 35,000 − 3,000 = $32,000.
- Residual: 37,000 × 58% = $21,460.
- Depreciation: (32,000 − 21,460) ÷ 36 = $292.78.
- Rent charge: (32,000 + 21,460) × 0.0025 = $133.65.
- Payment before tax: $426.43; with 7% tax: $456.28.
- Total cost over 36 months, including the down payment: $19,426.
Money factor and APR
The money factor is the lease’s interest rate in a different form. Multiply it by 2,400 to get the approximate APR: 0.0025 equals 6%. Dealers can mark up the money factor set by the lender, so ask for the buy rate and compare it with current auto loan rates.
What you can negotiate
| Term | Negotiable? | Tip |
|---|---|---|
| Capitalized cost (price) | Yes | Negotiate it as if you were buying |
| Money factor | Often | Ask for the lender’s base rate |
| Residual value | Rarely | Set by the lender; high residuals mean lower payments |
| Fees | Sometimes | Acquisition and disposition fees vary |
| Mileage allowance | Yes | Buying miles upfront is cheaper than paying overage |
Lease or buy?
Leasing gives a lower monthly payment and a new car every few years, with repairs mostly under warranty. Buying costs more per month at first but usually less over the long run, since you keep driving the car after the loan is paid off. Leasing suits drivers who stay under the mileage cap (often 10,000 to 12,000 miles a year) and keep cars in good condition, since excess wear and extra miles, often 15 to 25 cents each, are charged at turn-in.
A large down payment lowers the payment but is usually lost if the car is totaled early, so keep it small and make sure gap coverage is included.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.