Car Lease
Estimate monthly lease payments.
About the Car Lease
A lease payment is not a loan payment. You are paying for the value the car loses while you have it, plus interest on the whole car's value the whole time.
How to use it
- Enter the vehicle price and the residual value at lease end.
- Enter the rate and the lease term in months.
- Compare the total against simply buying.
The formula
A lease payment is two separate charges added together, and separating them is the only way to see where the money goes.
Depreciation = (Capitalised cost − Residual value) ÷ Months
Rent charge = (Capitalised cost + Residual value) × Money factor
Payment = Depreciation + Rent charge
The first part pays for the value the car loses while you have it. The second is interest, disguised. The money factor is an interest rate divided by 2,400 — multiply it by 2,400 to see the APR you are actually being charged. A money factor of 0.00250 is 6%; 0.00375 is 9%.
Note that the rent charge is calculated on the capitalised cost plus the residual, not on a declining balance. That is not a mistake in the formula — it is how leases work, and it is why the arithmetic feels unfamiliar.
Worked examples
| Cap cost | Residual | Term | Money factor | Depreciation | Rent charge | Payment |
|---|---|---|---|---|---|---|
| $38,000 | $22,000 | 36 mo | 0.00250 (6%) | $444.44 | $150.00 | $594.44 |
| $38,000 | $24,000 | 36 mo | 0.00250 (6%) | $388.89 | $155.00 | $543.89 |
| $38,000 | $22,000 | 24 mo | 0.00250 (6%) | $666.67 | $150.00 | $816.67 |
| $38,000 | $22,000 | 36 mo | 0.00375 (9%) | $444.44 | $225.00 | $669.44 |
Rows one and two are the same car on the same terms, differing only in what the finance company predicts it will be worth at the end. A residual $2,000 higher cuts the payment by $50 a month, because you are only paying for the value consumed. This is why cars that hold value lease well and cars that do not lease badly, regardless of sticker price — and it is why the advertised deal is often on the model with the strongest resale rather than the best discount.
Common mistakes
- Negotiating the payment instead of the cap cost. A dealer can hit almost any monthly figure by stretching the term or adjusting the money factor. Negotiate the capitalised cost first, exactly as you would a purchase price, then look at the payment.
- Not converting the money factor to an APR. 0.00375 looks like nothing and is 9%. Multiply by 2,400 every time. This is the single most effective thing you can do in a lease negotiation.
- Putting a large sum down. A capitalised cost reduction lowers the payment, and if the car is written off in month three, that money is generally gone — insurance pays the finance company, not you. Most advice is to put down as little as possible.
- Underestimating the mileage you drive. Excess mileage runs 15 to 30 cents a mile. Being 5,000 miles over on a three-year lease is $750 to $1,500 due at the end, and buying extra miles up front is almost always cheaper.
Terms explained
- Capitalised cost
- The negotiated price of the car for lease purposes. Lower is better, and it is negotiable in exactly the way a purchase price is.
- Residual value
- What the finance company predicts the car is worth at lease end, set by them and generally not negotiable. Higher means a lower payment.
- Money factor
- The lease interest rate in disguise. Multiply by 2,400 for the APR.
- Depreciation
- The value the car loses during your term. The bulk of most lease payments.
- Cap cost reduction
- Any down payment, trade-in or rebate applied up front to reduce the capitalised cost.
- Disposition fee
- A charge of typically $300 to $500 for returning the car at the end. Often waived if you lease again from the same brand.
Common questions
- What is a money factor and is mine good?
- It is the interest rate divided by 2,400. Multiply yours by 2,400 to compare it with loan rates — if the answer is well above what you would be offered on a car loan, the lease is where the margin is being taken.
- Why do two cars at the same price lease so differently?
- Residual value. You pay for depreciation, so a car predicted to keep more of its value costs less to lease even at an identical sticker price.
- Should I put money down on a lease?
- Generally no. It reduces the payment but is not refundable if the car is stolen or written off early, and it does not reduce the total cost of the lease so much as prepay it.
- Is leasing cheaper than buying?
- Monthly, almost always. Over ten years, almost never — leasing means permanent payments, whereas a purchased car eventually has none. Leasing buys a newer car and less hassle, not a lower lifetime cost.
- What happens if I go over the mileage?
- You pay the excess rate, commonly 15 to 30 cents a mile, when you return the car. If you know early that you will exceed the allowance, buying extra miles up front usually costs less than paying at the end.
- Can I get out of a lease early?
- It is expensive and usually means paying the remaining payments. Transferring the lease to someone else is often cheaper, though not every finance company permits it.
- What is wear and tear?
- Normal use is expected. Damage beyond a defined standard — deep scratches, torn upholstery, bald tyres — is charged at return. Getting an independent inspection before you hand the car back gives you time to fix things cheaply.
- Should I buy the car at the end?
- Only if the residual is below what the car is actually worth on the open market. That happens when used prices run hot, and when it does, the buyout is the best deal in the contract.