How a lease payment is calculated
When you lease, you pay for the part of the car's value you use up during the lease, plus a finance charge, plus tax. Three numbers decide almost everything: the capitalized cost (the price you negotiate, plus capitalized fees, minus your down payment), the residual value (what the leasing company expects the car to be worth at the end, set as a percentage of the MSRP) and the money factor (the lease's interest rate).
Adjusted cap cost = negotiated price + capitalized fees − down payment − trade-in equity − rebates
Residual value = MSRP × residual %
Depreciation fee = (adjusted cap cost − residual) ÷ months
Rent charge = (adjusted cap cost + residual) × money factor
Monthly payment = (depreciation fee + rent charge) × (1 + tax rate)
The rent charge looks odd because it adds the two values together, but it is a standard shortcut: multiplied by the money factor, it gives the same average monthly interest as charging interest on a balance that falls from the cap cost to the residual.
Money factor and APR
Dealers often quote the lease rate as a money factor, a small decimal like 0.00250. To compare it with a loan APR, multiply by 2,400:
APR ≈ money factor × 2,400 money factor = APR ÷ 2,400
So 0.00250 is about 6% APR, and 0.00125 is about 3%. Switch the rate box to "APR %" if you only know the equivalent rate.
Worked example
A car has an MSRP of $40,000 and you negotiate it to $37,500. The $995 acquisition fee is added to the lease, you put $2,000 down, the residual is 58% after 36 months, the money factor is 0.00250 and your state charges 7% tax on lease payments.
- Adjusted cap cost: 37,500 + 995 − 2,000 = $36,495
- Residual value: 40,000 × 0.58 = $23,200
- Depreciation fee: (36,495 − 23,200) ÷ 36 = $369.31
- Rent charge: (36,495 + 23,200) × 0.0025 = $149.24
- Payment before tax: $518.54; tax $36.30; monthly payment $554.84
Over 36 months you pay $19,974.28 in lease payments on top of the $2,000 down: $13,295 of depreciation, $5,372.55 of rent charge, plus tax.
What lowers a lease payment
- Negotiate the price, not the payment. The cap cost is negotiable just like a purchase price; every $1,000 off saves about $30 a month on a 36-month lease at a 0.0025 money factor ($27.78 less depreciation plus $2.50 less rent charge), before tax.
- A higher residual. Cars that hold their value have higher residuals and cheaper leases. The residual is set by the leasing company, not the dealer.
- A lower money factor. Ask for the "buy rate" and check whether the dealer has marked it up. Good credit usually qualifies for the lowest tier.
- Be careful with big down payments. A down payment lowers the monthly cost, but if the car is stolen or written off early, the insurance pays the leasing company and that money is usually lost. Many people prefer to put little or nothing down on a lease.
Lease or buy?
A lease gives you a newer car for a lower monthly payment, but at the end you own nothing. Buying costs more per month while the loan runs, but once it is paid off you keep a car with value left in it. Leases also come with a mileage allowance, typically 10,000 to 15,000 miles a year, and charge per extra mile and for wear beyond normal use. Compare the total of all lease payments and fees with the car loan calculator result minus the car's expected value when you would sell it.
Common mistakes
- Entering the money factor as a percent. 0.0025 is the money factor; 2.5 would be wildly wrong. Use the APR option for percentages.
- Using the negotiated price for the residual. Residuals are a percentage of the MSRP, not of the price you pay.
- Forgetting fees due at signing. The first month's payment, registration, and sometimes a security deposit are due on day one even with "zero down".
- Assuming tax works the same everywhere. Most states tax each monthly payment, but some tax the full price or the total of payments upfront.
This is the standard US lease calculation for estimating offers. Your lease contract shows the exact capitalized cost, residual, rent charge and fees; check the figures against it.
Frequently asked questions
How do you calculate a car lease payment?
Depreciation fee = (adjusted cap cost − residual) ÷ months; rent charge = (adjusted cap cost + residual) × money factor; add them and add sales tax. A $36,495 cap cost, $23,200 residual, 0.0025 money factor and 36 months gives $518.54 before tax.
How do I convert a money factor to APR?
Multiply the money factor by 2,400. A money factor of 0.0025 is about 6% APR; to go the other way, divide the APR by 2,400.
What is a good residual value on a lease?
Higher is better for the lessee, because you pay for less depreciation. For a 36-month lease, residuals of around 50 to 60% of MSRP are common; the leasing company sets them for each model and term.
Should I put money down on a lease?
It lowers the monthly payment but not the total cost much, and if the car is totaled early the down payment is usually lost. Many buyers put down only the first payment and fees.
Sources
- Federal Reserve Board. Keys to Vehicle Leasing: a consumer guide (capitalized cost, residual value, rent charge).
- Federal Trade Commission (US). Financing or leasing a car, consumer advice.
- Consumer Leasing Act and Regulation M (12 CFR Part 1013): required lease disclosures.
Last reviewed 20 October 2026. Results are estimates; see our disclaimer.