The Lease Payment Formula
A car lease payment consists of two components: the depreciation fee and the rent charge (finance fee). Understanding both is key to evaluating any lease offer.
The depreciation fee covers the vehicle's loss in value over the lease term. The rent charge is essentially the interest you pay for using the leasing company's money. Together with sales tax, they form your total monthly payment.
Quick Reference
Money Factor Explained
The money factor (also called lease factor or lease rate) is the lease equivalent of an interest rate. It is expressed as a small decimal number, typically between 0.0005 and 0.0035.
The constant 2400 comes from multiplying 12 months by 2 (since the rent charge formula adds cap cost and residual, effectively doubling the base). A money factor of 0.00125 equals 0.00125 × 2400 = 3.0% APR.
| Money Factor | APR Equivalent | Rating |
|---|---|---|
| 0.0005 | 1.2% | Excellent (subvented) |
| 0.0010 | 2.4% | Very good |
| 0.0015 | 3.6% | Good |
| 0.0020 | 4.8% | Average |
| 0.0030 | 7.2% | Below average |
Watch for Dealer Money Factor Markup
Residual Value Guide
Residual value is the projected worth of the vehicle at lease end, set by the leasing company (not the dealer). It is expressed as a percentage of MSRP and directly affects your payment.
A higher residual means you pay for less depreciation, resulting in a lower monthly payment. Vehicles that hold their value well (Toyota, Lexus, Honda) tend to have higher residuals.
| Lease Term | Typical Residual | Notes |
|---|---|---|
| 24 months | 60-68% | Shortest term, highest residual |
| 36 months | 50-60% | Most common lease term |
| 39 months | 48-56% | Common promotional term |
| 48 months | 42-50% | Longer term, lower residual |
Brands That Hold Value Best
Capitalized Cost Breakdown
The capitalized cost (cap cost) is the total amount being financed in the lease. It starts with the negotiated vehicle price and adds fees, then subtracts any cap cost reductions.
Gross Cap Cost = Negotiated Price + Acquisition Fee + Dealer Fees
Adjusted Cap Cost = Gross Cap Cost - Down Payment - Trade-in - Rebates
The negotiated price is the most impactful number you can control. The difference between MSRP and your negotiated price directly reduces every monthly payment.
The Most Important Number to Negotiate
Lease vs Buy Comparison
When deciding between leasing and buying, consider these key differences:
| Factor | Lease | Buy (Finance) |
|---|---|---|
| Monthly payment | Lower (20-40% less) | Higher |
| Ownership at end | Return the car | You own it |
| Mileage limits | 10,000-15,000/year | Unlimited |
| Customization | Not allowed | No restrictions |
| Wear and tear | Fees for excess | Your choice |
| Long-term cost (7+ yr) | Higher | Lower |
When Each Option Wins
Lease Negotiation Tips
Most people do not realize that several parts of a lease are negotiable. Here is what you can negotiate:
Negotiable: Vehicle selling price (cap cost), dealer fees, down payment amount, mileage allowance, and sometimes the acquisition fee.
Not negotiable: Residual value (set by the leasing company), money factor (set by the bank, though dealers can mark it up), and disposition fee.
Always negotiate the selling price first, just like buying. Then ask the dealer what money factor they are using and check if they marked it up. The "buy rate" is the base money factor from the bank - anything above that is dealer profit.
Common Lease Traps to Avoid
Frequently Asked Questions
A car lease payment has two parts: depreciation and rent charge. Depreciation is (Adjusted Cap Cost - Residual Value) / Lease Term. The rent charge (interest) is (Adjusted Cap Cost + Residual Value) x Money Factor. Add these together plus sales tax for the total monthly payment.
A money factor is the lease equivalent of an interest rate. To convert a money factor to APR, multiply by 2400. For example, a money factor of 0.00125 equals 3.0% APR (0.00125 x 2400 = 3.0). To convert APR to money factor, divide by 2400.
Residual value is the estimated worth of the vehicle at the end of the lease term, expressed as a percentage of MSRP. A 36-month lease typically has a 50-60% residual. Higher residual values mean lower monthly payments because you are paying for less depreciation. The residual is set by the leasing company, not the dealer.
Due at signing includes the down payment (cap cost reduction), first month payment, dealer fees (acquisition fee, documentation fee), and sometimes a security deposit. A common advertised lease might show $2,000-$3,000 due at signing. Zero-down leases exist but result in higher monthly payments.
A good money factor is below 0.0020 (equivalent to 4.8% APR). Excellent credit scores (720+) can qualify for money factors around 0.0005-0.0015 (1.2-3.6% APR). Manufacturer-subsidized leases sometimes offer 0.00001 or even zero money factor as promotions. Always compare the APR equivalent to current auto loan rates.
Common lease fees include the acquisition fee ($500-$1,000, charged by the leasing company), disposition fee ($300-$500, charged at lease end), documentation fee ($100-$500), and registration fees. The acquisition fee is typically rolled into the capitalized cost. Some fees are negotiable, while others are set by the leasing company.
Leasing is better if you want lower monthly payments, drive fewer than 10,000-15,000 miles per year, and prefer a new car every 2-3 years. Buying is better if you drive a lot, want to build equity, plan to keep the car long-term, or want to customize it. Total cost of ownership is usually lower when buying and keeping a car for 7+ years.