How Lease Payments Work
A lease payment is based on the depreciation of the vehicle over the lease term plus a finance charge. The key factors are the capitalized cost (negotiated price minus down payment), residual value (what the car is worth at lease end), and the money factor (equivalent to interest rate).
Lease Payment Formula
Depreciation Fee = (Net Cap Cost − Residual Value) / Months
Finance Fee = (Net Cap Cost + Residual Value) × Money Factor
Monthly Payment = Depreciation Fee + Finance Fee + Tax
Lease Negotiation Tips
- Money factor: Multiply by 2,400 to get equivalent APR. A money factor of 0.00125 = 3% APR.
- Residual value: Higher residual = lower payment. It is set by the manufacturer and is non-negotiable.
- Cap cost: This IS negotiable. Negotiate the selling price just like a purchase.
- Down payment: Avoid large down payments on leases -- if the car is totaled, you lose that money.
Frequently Asked Questions
What is a good money factor?
A money factor below 0.0015 (3.6% APR) is good. Exceptional credit can get 0.0005-0.001 (1.2-2.4% APR). Multiply any money factor by 2,400 to convert to an approximate APR for easy comparison.
What is residual value?
Residual value is the projected value of the vehicle at the end of the lease, expressed as a percentage of MSRP. A 55% residual on a $40,000 car means it is projected to be worth $22,000 at lease end. Higher residuals mean lower payments.