How Is a Lease Payment Calculated?
How is a lease payment calculated?
A lease payment has two parts: the depreciation charge, the car's predicted loss in value divided by the term, and the rent charge, the interest portion, equal to the adjusted cap cost plus the residual value times the money factor. On a $31,500 selling price with a $19,720 residual and a 0.0023 money factor over 36 months, the two add up to $445.03 a month before tax.
Key takeaways
- A lease payment equals the depreciation charge plus the rent charge. On a hypothetical $31,500 lease with a $19,720 residual, $327.22 a month in depreciation plus $117.81 in rent charge makes a $445.03 base payment.
- The rent charge is interest, but it is charged on the adjusted cap cost plus the residual value, not just the amount you are financing away. On that same $31,500 lease, that base is $51,220, more than the selling price itself.
- Capitalizing a fee changes the payment because it enters the cap cost. On the $31,500 hypothetical lease, rolling in a $650 acquisition fee raised the payment from $445.03 to $464.58 a month.
- A down payment mostly lowers the depreciation charge, not the rent charge. On the same $31,500 hypothetical lease, $2,000 down alone (no fee capitalized) cuts the payment from $445.03 to $384.87 a month, and that money is at risk if the car is stolen or totaled.
- Money factor times 2,400 equals the approximate APR. A 0.0023 money factor, used in this page's $31,500 hypothetical lease, is about 5.52%.
- Sales tax adds to the payment and the total, and the method varies by state. The $31,500 hypothetical lease, taxed at a hypothetical 7%, totals about $17,142 over 36 months instead of $16,021.
How is a lease payment calculated?
A lease payment is two numbers added together: the depreciation charge and the rent charge. Depreciation is what the car is predicted to lose in value over the lease, spread across the term. The rent charge is the interest portion, the price of financing that depreciation instead of paying it off in one lump sum. Add the two together, apply sales tax where it applies, and you have the number on the payment line.
That is the whole formula. Everything that moves a lease payment (selling price, residual value, money factor, fees, a down payment) moves it by changing one of those two pieces.
What is the depreciation charge?
The depreciation charge is (adjusted cap cost minus residual value) divided by the number of months in the term. It is the part of the payment that pays down what the car is expected to lose in value.
Here is a hypothetical 36-month lease, computed rather than estimated. The car has a $34,000 MSRP, a negotiated $31,500 selling price, and a 58% residual, meaning the leasing company predicts it will be worth $19,720 at lease end.
$31,500 minus $19,720 is $11,780. Divided across 36 months, the depreciation charge is $327.22 a month. That is the part of the payment doing what most people assume the whole payment does: paying for the car's drop in value.
What is the rent charge?
The rent charge is the interest, sized by the money factor, a lease's interest rate written in decimal form. Multiply the money factor by 2,400 for the approximate APR: this example's 0.0023 money factor is about 5.52%. The full mechanics, including how dealers can mark the factor up, are in what is a money factor on a lease.
The rent charge formula is (adjusted cap cost + residual value) x money factor. On this car, $31,500 plus $19,720 is $51,220. Times 0.0023, the rent charge is $117.81 a month.
Notice what the rent charge multiplies: cap cost plus residual, more than the price of the car itself. That is the part of a lease payment most shoppers never see broken out, because federal disclosures show the rent charge in dollars, not the rate or the base it is charged on.
What does the full worked example look like, tax included?
Add the two charges and you have the base payment, computed with the site's lease calculator rather than estimated by hand.
| Line | Amount | Where it comes from |
|---|---|---|
| MSRP | $34,000 | window sticker |
| Selling price (adjusted cap cost) | $31,500 | negotiated, nothing rolled in |
| Residual value | $19,720 | 58% of MSRP, set by the leasing company |
| Money factor | 0.0023 | approx 5.52% APR |
| Depreciation charge | $327.22/mo | ($31,500 - $19,720) / 36 |
| Rent charge | $117.81/mo | ($31,500 + $19,720) x 0.0023 |
| Base payment | $445.03/mo | before tax |
| Total of base payments | $16,021 | over 36 months, before tax |
Sales tax comes next, and this is where the example has to say "it depends." Most states tax the monthly payment; some tax the full selling price up front; a few use other formulas. Using a hypothetical 7% rate on the monthly payment, the most common approach, tax adds $31.15 a month, making this lease $476.18 a month and about $17,142 over 36 months. Ask the dealer's worksheet, or your state's revenue department, which method your state actually uses before you sign anything.
How do fees and a down payment change the calculation?
They move the same two numbers every lease payment is built from, the depreciation charge and the rent charge, and not always the way people expect. Any capitalized cost (an acquisition fee, a service contract, a rolled-in trade balance) raises both the depreciation charge and the rent charge, because it enters the cap cost that both formulas use. A down payment, technically a cap cost reduction, mostly lowers the depreciation charge and barely touches the rent charge, because the rent charge is still calculated on cap cost plus residual, a number a down payment shrinks by only a fraction.
Here is the same car with Toyota's own acquisition fee, cited around $650, capitalized into the deal, shown both with and without $2,000 down:
| Scenario | Depreciation | Rent charge | Base payment | Total over 36 months |
|---|---|---|---|---|
| No fees, no money down | $327.22/mo | $117.81/mo | $445.03/mo | $16,021 |
| $650 acquisition fee capitalized | $345.28/mo | $119.30/mo | $464.58/mo | $16,725 |
| Fee capitalized, plus $2,000 down | $289.72/mo | $114.70/mo | $404.42/mo | $14,559 |
Compare the last two rows. $2,000 down cut the depreciation charge by $55.56 a month but the rent charge by only $4.60. Money down on a lease reduces what you are financing away, not much of what you are paying interest on, and it is money you do not get back if the car is stolen or totaled before the lease ends.
Which number moves the payment the most?
The selling price and the residual value do, because they set the depreciation charge, usually the larger of the two pieces. A dealer who will not move on price but happily quotes a low money factor is still holding an advantage: the bigger piece of your payment is the piece the money factor cannot touch.
The rent charge is smaller here, $117.81 of $445.03, but it is real interest, and it is worth arguing against on the same principle as any other loan's interest. If you plan to keep a car for years past when a lease would end, or you drive well past a typical mileage allowance, financing a purchase or paying cash usually costs less in total than leasing new every few years, because you stop renting depreciation and stop paying a rent charge on money you are not borrowing. The full anatomy of a lease, and where this calculation fits into the rest of the deal, is in how does leasing a car work.
Common questions
What is the formula for a lease payment?
Depreciation charge plus rent charge. Depreciation is (adjusted cap cost minus residual value) divided by the term. Rent charge is (adjusted cap cost plus residual value) times the money factor. On a $31,500 car with a $19,720 residual and a 0.0023 money factor over 36 months, that is $445.03 a month before tax.
How much of a lease payment is interest?
The rent charge is the interest portion, and it is not as small as the decimal makes it look. In this page's example it is $117.81 a month, because the money factor applies to $51,220, the adjusted cap cost plus the residual, not just the $31,500 selling price.
Does a down payment lower a lease payment a lot?
Some, but less than expected. Putting $2,000 down alone on this page's $31,500 example, with no fee capitalized, cut the payment from $445.03 to $384.87 a month, mostly by shrinking the depreciation charge. The rent charge barely moved, because it is still calculated on the cap cost plus the residual.
Do capitalized fees really change the payment much?
Yes. Rolling a $650 acquisition fee into the cap cost, instead of paying it up front, raised this page's example from $445.03 to $464.58 a month, about $704 more over 36 months.
Is a lease payment taxed the same in every state?
No. Most states tax the monthly payment, some tax the full selling price up front, and a few use other methods. This page uses a hypothetical 7% rate on the monthly payment to show the mechanics; check your own state's method before you sign.
Sources
- What Is the Lease Money Factor? — Capital One Auto Navigator
- What Is a Lease Acquisition Fee? — Capital One Auto Navigator