Tax rules vary: some US states tax the full price or the down payment instead of each payment.
You pay $451.00 a month for 36 months: $297.22 covers the car's loss in value, $128.25 is the finance charge (about 6% APR) and $25.53 is tax. Buying the car at the end would cost the residual of $20,300.00.
What each payment covers
Depreciation65.9%Finance charge28.4%Sales tax5.7%
Over the whole lease
How it's calculated S
APR from money factor
APR=0.0025×2400=6%
Net capitalized cost
C=33,000.00−2,000.00=31,000.00
Residual value
R=58%×35,000.00=20,300.00
Depreciation charge
nC−R=3631,000.00−20,300.00=297.22
Finance charge
(C+R)×MF=51,300.00×0.0025=128.25
Adding C and R (rather than averaging them) is why the money factor is APR ÷ 2400 instead of ÷ 1200.
Payment with tax
(297.22+128.25)×(1+6%)=451.00
About the car lease payment calculator
A lease payment has two parts. The depreciation charge spreads the car's expected loss in value, the net capitalized cost minus the residual value, evenly over the term. The finance (rent) charge is the money factor times the sum of the net capitalized cost and the residual. Sales tax, where it is charged on each payment, is added on top.
With the defaults, a 35,000 car negotiated to 33,000 with 2,000 down, a 58% residual of 20,300, a money factor of 0.0025 and a 36-month term, the payment is 297.22 of depreciation plus 128.25 of finance charge: 425.47 before tax and 451.00 with 6% tax.
Multiplying the money factor by 2,400 gives an approximate APR, 6% here. That conversion is an industry rule of thumb; no federal rule defines it. Acquisition and disposition fees, mileage overage and wear charges are not included unless you add them to the price.
How to calculate a car lease payment
A lease payment is a depreciation charge, (net capitalized cost − residual) ÷ months, plus a rent charge, (net capitalized cost + residual) × money factor. With a 31,000 net cost, a 20,300 residual, 36 months and a 0.0025 money factor, that is 297.22 + 128.25 = 425.47 a month, or 451.00 with 6% tax.
Depreciation pays for the value the car is expected to lose while you drive it. The rent charge is the lease's interest, and sales tax, where it applies to each payment, goes on top.
Lease payment worked step by step
Take a car with a 35,000 MSRP, negotiated to 33,000, with 2,000 down, a 58% residual, a 0.0025 money factor and a 36-month term.
Net capitalized cost: 33,000 − 2,000 = 31,000.
Residual: 58% of the 35,000 MSRP = 20,300. Lease residuals are normally quoted as a percentage of MSRP, not of the negotiated price.
Tax at 6% of the payment: 25.53, for a payment of 451.00.
The total cost is the 36 payments plus the 2,000 down: 18,236.02. It comes from the unrounded payment, so 36 × 451.00 + 2,000 = 18,236.00 is 0.02 short.
Money factor to APR
Multiply the money factor by 2,400 for an approximate APR: 0.0025 × 2,400 = 6%. To go the other way, divide the APR by 2,400, so 4.8% is a money factor of 0.002.
The conversion is an industry rule of thumb, not a federally standardized lease rate. The rent charge and the disclosures in the contract are the figures that count.
The Federal Reserve's leasing guide shows the same rent-charge arithmetic: 0.00354 × (18,800 + 12,350) is about 110.27 a month. By the rule of thumb, 0.00354 is about 8.5% APR.
Negotiate the price or put more money down?
Default is the worked example above. Price reduction lowers the negotiated price to 32,000, and Extra down payment raises the 2,000 down to 3,000:
Scenario
Monthly payment
Modeled total cost
Default
451.00
18236.02
Price reduction
418.91
17080.62
Extra down payment
418.91
18080.62
Both cut the payment by 32.09 with tax, but only the price cut keeps the 1,000 in your pocket. It lowers the total cost by 1,155.40, while 1,000 more down saves only 155.40, the rent charge and tax on that money.
How the residual changes the payment
A higher residual lowers the payment, because you pay only for the value the car loses during the lease. On the 35,000 car, a 55% residual (19,250) gives 479.13 a month with tax, 58% gives 451.00 and 62% gives 413.49.
The residual can depend on the term and the mileage allowance, so keep it matched to the offer you are pricing. It is also typically the price to buy the car at the end, before any purchase-option fee.
Common lease mistakes
The residual taken from the negotiated price. 58% of 33,000 is 19,140, not 20,300, and that wrong residual raises the payment to 482.08 with tax.
A money factor written as a percentage. A factor is a small decimal such as 0.0025; reading it as 0.25 multiplies the rent charge by 100.
Judging a lease by the payment alone. A larger down payment lowers the payment exactly as much as an equal price cut but barely changes the total cost, so negotiate the price first.
What the payment leaves out
Fees. Acquisition and other fees count only if they are rolled into the negotiated price.
End-of-lease charges. Disposition, excess-wear and excess-mileage charges, or the residual plus any purchase fee if you buy the car.
Other tax rules. The model taxes each payment at one rate. Where tax falls on the full price or on amounts paid upfront, the total differs.
Your trade-in and rebates. These count with the down payment as one reduction, so the total cost is not a full cash schedule.
A zero money factor removes the rent charge, leaving only depreciation and tax. To compare leasing with buying on credit, price the same car with the auto loan calculator over a matching term.
Checked against: Hand calculation: only depreciation, 10700 / 36
Questions
How is a car lease payment calculated?
Add the depreciation charge, (net capitalized cost − residual) ÷ months, to the finance charge, (net capitalized cost + residual) × money factor, then add any tax. For a net cost of 31,000, a residual of 20,300 and 36 months, depreciation is 10,700 ÷ 36 = 297.22 and the finance charge is 51,300 × 0.0025 = 128.25, so the payment is 425.47 before tax.
How do you convert a money factor to an APR?
Multiply the money factor by 2,400: 0.0025 × 2,400 = 6%. To go the other way, divide the APR by 2,400, so 4.8% is a money factor of 0.002. The Federal Reserve notes that no federal standard defines this conversion; it is an industry rule of thumb, and the lease contract's rent charge is the figure that counts.
How does the residual value affect a lease payment?
A higher residual lowers the payment, because you pay only for the value the car loses during the lease. On the default 35,000 car, a 55% residual (19,250) gives a payment of 479.13 with tax, 58% gives 451.00 and 62% gives 413.49. The residual is usually also the buyout price at the end of the lease, before any purchase-option fee.
Is it better to negotiate the price or put more money down on a lease?
Negotiate the price first. Cutting the price by 1,000 and putting 1,000 more down both lower the payment by 32.09 a month with 6% tax (30.28 before tax), but only the price cut keeps the 1,000 in your pocket: the total cost of the default lease falls to 17,080.62 against 18,080.62 with the extra down payment.
For planning only. Lenders, tax authorities and markets apply their own rounding, fees and rules; confirm figures with them before you commit.
Checked against references
This calculator includes 5 worked examples with independently sourced answers. They run in the test suite, and you can run them here too.
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