Auto lease payment
A lease payment is depreciation plus rent, and the rent is quoted as a money factor that hides its true cost. This splits the payment into the two charges, converts the factor to an APR, and prices the lease against buying the same car over the same term.
| Line | Per month | Note |
|---|---|---|
| Depreciation | $360.56 | $36,500 capitalised cost less $23,520 residual, over 36 months |
| Rent charge | $75.03 | money factor 0.00125 on the average balance |
| Base payment | $435.58 | before tax |
| Sales tax | $30.49 | 7.00% on the monthly payment |
| Monthly payment | $466.07 | the number on the contract |
| Due at signing | $4,095 | down payment plus fees |
| Payments over the term | $16,779 | 36 × $466.07 |
| Total lease cost | $21,269 | everything you will never see again |
| Loan payment instead | $1,119 | 6.50% over the same 36 months |
| Equity if you buy | $23,520 | $23,520 resale less $0.00 owed |
| Buy net cost | $20,848 | payments plus fees less the equity you keep |
A lease is priced on the residual, so the lessor’s forecast of resale value is the biggest single number in the deal. Ask for it as a percentage of MSRP, not as a monthly payment.
(cap cost − residual) / months · Capitalised cost is the negotiated price less any down payment.
(cap cost + residual) × MF · The average of the two balances, times the money factor.
APR = MF × 2400 · The 2400 is 12 months × 2 (the average balance) × 100 for percent.
payments + fees − (residual − balance) · Uses the lessor’s own residual as the resale forecast.
A clear path from inputs to results.
A lease payment is two charges stacked together: the depreciation the car is expected to lose over the term, and the rent the lessor charges on the capital tied up in it. The rent is quoted as a money factor, which is an APR divided by 2400 — so a factor of 0.00125 is 3% a year. This splits the payment, converts the factor, and prices the lease against buying the same car.
How to use
- Enter the MSRP and the negotiated selling price — they are different numbers and only the second is negotiable.
- Add any cash down and the residual percentage the dealer has quoted.
- Enter the money factor exactly as quoted, then read the APR it converts to.
- Set the term, sales tax and fees.
- Compare the total lease cost against buying the same car over the same term.
The formula
Reference: Standard lease algebra as used by the Federal Reserve's leasing disclosure (Reg M) and by ALG residual guides.
Worked example
$42,000 car, 56% residual, 36 months
- MSRP $42,000, negotiated price $39,500, $3,000 down.
- Residual 56% of MSRP, money factor 0.00125.
- 36 months, 7% sales tax, $695 acquisition and $395 disposition fee.
- 1
The residual is 56% × $42,000 = $23,520.
- 2
Capitalised cost after the down payment is $39,500 − $3,000 = $36,500.
- 3
Depreciation is ($36,500 − $23,520) / 36 = $360.56 a month.
- 4
The rent charge is ($36,500 + $23,520) × 0.00125 = $75.03 a month.
- 5
Base payment $435.58, plus 7% tax of $30.49, gives $466.07.
- 6
Over 36 months that is $21,269 in total, including the down payment and both fees — and no asset at the end.
$466.07 a month, 3.00% APR, $21,269 total cost.
Interpreting the result
The money factor is the number to attack first. Multiply it by 2400 and compare the result with a loan rate: at 3% the financing is cheap and the deal turns on the residual and the selling price. Above about 6% the rent charge is doing more work than the depreciation, and the lease is financing the lessor rather than the car.
Assumptions & limitations
- Sales tax is applied to the monthly payment, which is the rule in most US states; a few tax the full vehicle price up front.
- The residual is the lessor's forecast of resale value, and it is used as the resale value in the buy comparison so the two are priced off the same depreciation.
- The buy comparison finances the same capitalised cost at the stated loan rate over the same term.
- Excess mileage, wear-and-tear charges, early termination and gap insurance are not modelled.
- Fees are paid up front and are not financed into the capitalised cost.
Frequently asked questions
What is a money factor?
It is the lease's interest rate expressed in a form that looks small. Multiply by 2400 to get the APR: 0.00125 becomes 3%, 0.00250 becomes 6%. Dealers use it because a four-digit decimal reads as a fee rather than a rate.
Does a down payment reduce the total cost?
Barely. It reduces the monthly payment and the rent charge slightly, but it is money you will never see again, and if the car is written off early you lose it. The model shows the total cost curve flattening as the down payment rises.
What should I negotiate first?
The selling price, before the monthly payment is ever mentioned. Then the residual, then the money factor. A dealer who quotes a payment first has already decided which of the three is carrying the profit.
Is a higher residual better for me?
For the monthly payment, yes — a higher residual means less depreciation to cover. But it also means the buyout at the end is higher, so if you intend to keep the car, a high residual quietly costs you more. It is only unambiguously good if you hand the car back.
Why does buying sometimes come out cheaper?
Because the buyer keeps the residual value. A lease pays for the same depreciation and then hands the asset back, so unless the lease is subsidised — a low money factor and an inflated residual — buying the same car over the same term usually costs less in total.
Methodology last reviewed 2026-10-21. Results are informational and not financial or engineering advice — see our disclaimer.