It’s important that you know how the lease payment is calculated, both so you can better compare available deals, and also so that you know what will fit your budget.
Key Elements Of A Lease
- Capitalized Cost: This is the total amount financed by the lease, and includes the selling price of the vehicle and any additional fees. If you trade-in a car, or offer any down payments, these are subtracted from the cap cost. Security deposits do not affect this figure.
- Residual Value: After the adjusted capitalized cost has been calculated, the residual value of the car at the end of your lease will be determined. This figure is always decided by the lessor, and takes into account the estimated number of miles you will drive the car during your term, as well as the make and model of the car. The residual value is then subtracted from the capitalized cost, and we are left the estimated depreciation of the vehicle which will occur throughout your lease.
- Money Factor: Finally, the lessor will determine the money factor, or rate of interest, for your lease. This figure will vary from lease to lease depending on the lessee. To put this into a more relatable figure, multiply the money factor by 2400 and add a percent sign. This will give the annual percentage rate. Example: Money Factor of 0.00125 x 2400 = 3.00% APR
Once you have these three figures, the only other items needed to determine your monthly payment is the term of the lease (in months), and your local sales tax rate (in the majority of states where tax is paid each month). There are three components to your monthly payment: the depreciation, the rent charge, and the sales tax. Figure out each and add them together, and then you’ll know the payment. Here’s how:
- Depreciation Component: (Capitalized Cost – Residual Value) / Term. All leases use the methodology that the depreciation will be a straight-line from start to finish, so you just take the total depreciation and divide by the term to make the same each month.
- Rent Charge Component: (Capitalized Cost + Residual Value) * Money Factor. Yes, it is correct that it adds together the cap cost and residual value. This is because the lessor paid the dealer the entire cap cost when you signed the lease and will collect the residual value when someone buys the car at the end of the lease. It’s also why the Money Factor is rate divided by 2400 – think of it as 2 * 12 months per year * 100 percent – because it’s averaging the amount of money the lessor has outstanding each month on which to charge interest or rent.
- Sales Tax: (Depreciation Component + Rent Charge Component) * (1+ Sales Tax Rate). Once you have the pre-tax payment, just apply the sales tax rate, like you would on any other taxable item in your state.
Here’s an example: 36 month lease, with a Cap Cost of $35,000 and a Residual Value of $20,000, with a money factor of 0.00150 (3.60% APR), and a local sales tax rate of 7.5%:
- The Depreciation component is ($35,000 – $20,000) / 36 = $15,000 / 36 = $416.67
- The Rent Charge component is ($35,000 + $20,000) x 0.00150 = $55,000 x 0.00150 = $82.50
- The Sales Tax component is (416.67 + 82.50) x 0.075 = $37.43
So the total monthly payment would be $416.67 + $82.50 + $37.43 = $536.60
Be sure to check out the interactive calculators here.
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