How to Calculate Your Monthly Lease Payment

Leasing is confusing to the average car shopper, but once you learn the basics of calculating a lease payment, it's actually pretty simple and straightforward.

Your monthly lease payment is calculated by adding up the following 3 things:

• Depreciation
• Interest
• Tax

When you lease a car, a leasing company actually buys the vehicle from the dealer before leasing it out to you.

The leasing company expects to earn interest on the money they used to buy the car (just like a loan). They also know the car will be worth a lot less at the end of your lease and expect to be compensated for the depreciation.

Here are some terms you should be familiar with in order to calculate the lease:

• Capitalized Cost - The cost of the vehicle after subtracting any down payment or trade-in allowance.
• Residual - The amount the vehicle is worth at the end of the lease.
• Depreciation - The amount the vehicle has lost in value during the lease.
• Term of Lease - The number of months you will be leasing (usually 24, 36, 39, or 48 months)
• Money Factor - The finance charge, usually expressed as a fraction. (To calculate the interest rate, simply multiply the money factor by 2400)

An Example

We're going to assume the car you will be leasing has an MSRP of $27,000 and you managed to negotiate the purchase price down to $25,000. To keep things simple, there is no down payment and you don't have a trade-in. You will be leasing the car for 36 months. The money factor is .0029, and the leasing company has predicted the residual value to be $12,500 at the end of 36 months.

• Capitalized Cost - $25,000
• Residual Value - $12,500
• Money Factor - .0029
• Term - 36 Months

Basically, all you need to know in order to calculate your monthly lease payment is the price of the car, the residual value, the money factor, and the lenght of the lease. Dealers should provide you with all of these numbers if you call them up and ask.

Now let's take a look at how each part of the lease payment is calculated

1. Depreciation

The depreciation cost is actually the largest portion of your lease payment. It's easy to calculate:

(Capitalized Cost - Residual) ÷ Term of Lease

Remember, Capitalized Cost is the negotiated selling price of the car. The leasing company doesn't care if you get ripped off or not, it's up to you to get the best deal possible to ensure the lowest possible depreciation cost.

($25,000 - $12,500) ÷ 36 = $347

$347 is your monthly depreciation cost

2. Interest

The next part of the lease payment is interest. This is where the leasing company makes a good portion of its profit. The other way it makes money is through a "lease acquisition fee" and a "disposition fee" at the end of the lease. The interest payment is calculated differently than what you would expect. The calculation is:

(Capitalized Cost + Residual Value) × Money Factor

You read that right, it's the Cap Cost PLUS residual value. It doesn't seem to make sense but it's actually an accounting method the leasing companies use to simplify things on their end.

($25,000 + $12,500) × .0029 = $109

$109 is your monthly interest payment

3. Taxes

The last part of your monthly lease payment is tax. In most states, you will need to pay taxes on both the depreciation AND interest payment. Here's the calculation:

(Monthly Depreciation Cost + Interest) × Local Sales Tax Rate

($109 + $347) × 7% = $32

$31 is your monthly tax payment

Add it All Together

Now that we have all 3 factors that make up your lease payment, we can add it all together to come up with the final:

See, it's not that hard to figure out the total monthly lease payment.

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Question & Answer

Q: I used this formula and it matched what I was quoted as a monthly payment, but the offer also included about $1,500 due at inception. Why do I have to pay an extra amount up front?

When it comes to leasing, many people think "no down payment" means zero payment due at inception. Unfortunately, that is not the case. In addition to the first month's payment, most leases require you to pay an acquisition fee, dealer doc fee, tag, title, registration, and license fees - all due up front. Some leases also require you to pay a security deposit (which is refundable as long as there is no damage to the vehicle)

Paying $1,500 upfront is typical in a lease - even when you have zero down payment. Learn more: Leasing Fees Due Up Front.