How a lease payment is calculated
A lease payment has two parts: the value the car loses while you drive it, and a finance charge for the money tied up in the car. Sales tax is then added in most states.
Adjusted cap cost = Negotiated price + Fees − Down payment
Depreciation fee = (Adjusted cap cost − Residual value) ÷ Months
Finance fee = (Adjusted cap cost + Residual value) × Money factor
Payment = (Depreciation fee + Finance fee) × (1 + Sales tax rate)
Example
A car with a $40,000 MSRP negotiated to $38,000, with $2,000 down, $695 in fees, a 58% residual, a money factor of 0.0025 and 6% sales tax on a 36-month lease:
- Adjusted cap cost: $38,000 + $695 − $2,000 = $36,695
- Residual value: $40,000 × 58% = $23,200
- Depreciation fee: ($36,695 − $23,200) ÷ 36 = $374.86
- Finance fee: ($36,695 + $23,200) × 0.0025 = $149.74
- Tax: ($374.86 + $149.74) × 6% = $31.48
- Monthly payment: $556.07
Over 36 months you pay about $22,019 including the down payment, and you return the car at the end.
What the money factor means
The money factor is the lease's interest rate written as a small decimal. Multiply it by 2,400 to get the approximate APR: 0.0025 × 2,400 = 6%. Ask the dealer for the money factor and compare it with the rate the leasing company advertises; dealers are sometimes allowed to mark it up.
How to get a better lease
- Negotiate the price, just as you would when buying. Every $1,000 off the price cuts the payment by about $30 on a 36-month lease.
- Choose cars with high residual values. They lose less value, so you pay less depreciation.
- Keep the down payment small. If the car is stolen or totaled early, a large down payment is usually lost.
- Pick a mileage allowance that matches how much you drive. Extra miles are charged at the end, often 15 to 30 cents a mile.
Frequently asked questions
Is it better to lease or buy a car?
Buying usually costs less over the long run if you keep the car for many years. Leasing makes sense if you want a new car every few years, drive a predictable number of miles, and value a lower payment over ownership.
How do I convert a money factor to an interest rate?
Multiply the money factor by 2,400. For example, 0.00200 × 2,400 = 4.8% APR. To go the other way, divide the APR by 2,400.
What is a good residual value?
For a 36-month lease, residual values are often around 50% to 60% of MSRP. A higher residual means lower depreciation and a lower payment.
Is sales tax charged on the whole car when you lease?
In most states, tax is charged on each monthly payment, as this calculator assumes. Some states tax the full price or the total of payments up front. Check your state's rules.
Last reviewed: 2026-10-31