How a lease payment works
A lease payment is the sum of a depreciation fee, a finance fee, and tax:
Depreciation = (Adjusted cap cost − Residual) ÷ Term
Finance fee = (Adjusted cap cost + Residual) × Money factor
The adjusted capitalized cost is the negotiated price minus your down payment. The residual is the MSRP times the residual percentage. Sales tax is then applied to the base monthly payment.
For a $33,000 car (MSRP $35,000, 60% residual = $21,000), $2,000 down, a 0.0025 money factor, and a 36-month term: depreciation is ($31,000 − $21,000) ÷ 36 ≈ $277.78, finance is ($31,000 + $21,000) × 0.0025 = $130, and with 7% tax the payment is about $436 a month.
Money factor and APR
Multiply the money factor by 2,400 for an approximate APR — a 0.0025 money factor is about 6%. It's the clearest way to compare the financing cost of one lease against another.
Frequently asked questions
How is a car lease payment calculated?
A lease payment has three parts: a depreciation fee (the value the car loses, divided by the term), a finance fee (the money factor applied to the price plus residual), and sales tax on the payment. Add the depreciation and finance fees, then add tax.
What is the money factor?
The money factor is the lease equivalent of an interest rate, shown as a small decimal like 0.0025. Multiply it by 2,400 to convert to an approximate APR — so 0.0025 is about 6%. A lower money factor means a cheaper lease.
What is residual value?
Residual value is what the leasing company predicts the car will be worth at the end of the lease, usually given as a percentage of the MSRP. A higher residual means the car depreciates less during your lease, which lowers your monthly payment.
What is capitalized cost?
The capitalized cost is the negotiated price of the vehicle — the lease equivalent of the purchase price. Subtracting your down payment and any rebates gives the adjusted capitalized cost, which the payment is based on. Negotiating this lower reduces your payment.
Is leasing cheaper than buying?
Leasing usually has lower monthly payments because you only pay for the depreciation during the lease, not the whole car. But you own nothing at the end and face mileage limits. Buying costs more per month but builds equity, so the better choice depends on how long you keep a car.
Disclaimer: Lease tax rules vary by state — some tax the full price rather than the monthly payment. This is an estimate for educational purposes only and is not financial advice.