Calculate a Lease Payment

Negotiating a car lease that meets your needs comes down to a few key factors and, for many people, the monthly lease payment is the most important element. You should know how to calculate a lease payment so you can verify that you are not being overcharged by the inclusion of additional fees.


Understanding the Components of a Lease Payment

  1. Learn the three main components of a lease payment. The first is depreciation, the reduction in the value of the car over the term of the lease. The second is financing, the amount that you pay for the use of the car. It is computed on the amount the leasing company invested to purchase it. The third is sales tax, which is added to the monthly lease payment in many U.S. states and in Canada.[1]
  2. Shop smart. Choose a vehicle based on the amount it will depreciate rather than the sales price of the car. Your lease payment is dependent on how much your car depreciates during the lease period. Cars depreciate at different rates, and some models lose much more of their value than others in the first few years of use. When considering an auto lease, shop for a vehicle focusing on the amount a vehicle will depreciate during the lease term rather than the initial sale value of the car.
    • If you are the lessor (or person who is leasing the car to someone else), you want to purchase the car that best retains its purchase price; that is, a car with a low depreciation.
  3. Negotiate aggressively. Many people know they can negotiate on the sale price of a new car but think they have to pay the advertised price for a lease. Look for special offers from dealers and lease at a time of year when they want to reduce their inventory, such as when new models are arriving in September.
    • Note that you can also lease used cars, especially those coming off their first lease term.

Calculating the Depreciation Portion of the Lease Payment

  1. Calculate the "net capitalized cost." The net capitalized cost equals your negotiated selling price minus any down payment and any other credits (such as the value of a trade-in or factory rebate). If the dealer agrees to pay off the balance of the loan on your existing car, add that loan balance to the selling price.[1]
    • For example, let's say the negotiated selling price of the car is $26,000. Subtract a down payment of $1,000 and a trade-in value of $3,000 = $22,000. The dealer then agrees to pay off the balance of the loan on your existing car at $5,000, so that equals a $27,000 net capitalized cost.
  2. Determine the residual value of the car at the end of the lease. The dealer may provide this number or may provide you with a residual percentage. To calculate the residual value, multiply the sticker price of the car by the residual percentage.[1]
    • For example, $30,000 sticker price X 55% residual percentage = $16,500 residual value.
    • Remember that depreciation isn't a straight line — it is usually accelerated in the first five years, particularly in the first year.[2] Your car may depreciate by 20% or more in the first year, After the first five years, most cars have depreciated by 60% on average.[2]
  3. Identify the number of the monthly payments on the lease. Then subtract the residual value from the net capitalized cost. Divide the resulting number by the number of payments. The result is the depreciation portion of the lease payment.[1]
    • For example, you lease a new car for three years. The sticker price of the car is $30,000, you negotiate a purchase price of $26,000, you make a cash down payment of $1,000 and you trade in your old car for a credit of $3,000. There is no loan balance due on your current car. The dealer tells you the residual value at the end of the lease will be 55% of the sticker price.
    • The net capitalized cost = $26,000 - $1,000 - $3,000 = $22,000.
    • The residual value = $30,000 x 55% = $16,500.
    • The number of monthly payments = 3 years x 12 months/year = 36.
    • Depreciation fee = ($22,000 - $16,500) / 36 = $152.78.

Calculating the Financing Portion of the Lease Payment

  1. Calculate the "money factor." You can determine the value of the money factor in one of two ways depending on the information that is provided to you by the dealer. It might be an interest Annual Percentage Rate (APR) or a "rent charge."
  2. Compare APR vs. rent charge. If the dealer provides you with the interest rate APR, divide the interest rate by 2,400. For example, if the interest rate is quoted at 6 percent, the money factor = 6 / 2,400 = 0.0025. If the dealer provides a "rent charge" or "lease charge," add the residual value to the net capitalized cost. Then multiply that total by the number of months in the lease term. Divide the rent charge or lease charge by this number to compute the money factor.[3]
    • For example, if the dealer quotes a lease charge of $3,465, the money factor = $3,465 / [($22,000 + $16,500) x 36] = 0.0025.
    • "2400" is the denominator after conversion of a percentage to decimals, yearly interest to monthly interest, and applying it to average principal amount outstanding during the lease.
  3. Add the net capitalized cost to the residual value. Multiply that total by the money factor. The result is the financing portion of your lease payment. For example, financing fee = ($22,000 + $16,500) x 0.0025 = $96.25.

Determining the Sales Tax Component and Total Lease Payment

  1. Calculate the sales tax. In Canada and in most states in the U.S., sales tax is applied to the monthly lease payment. In that case, multiply the lease payment (the depreciation fee + the finance fee) by the local sales tax rate. In some states, sales tax is collected at the time the lease is initiated; in such cases, no sales tax is added to the monthly payment.[3]
  2. Calculate the total lease payment. Add the depreciation fee, the financing fee and the monthly sales tax, where applicable. Do these calculations for every brand of vehicle you are considering for a lease.
  3. Compare dealership offers. Once you choose a brand, compare these calculations to at least three dealerships that sell this brand. Do not negotiate the selling price separately from the trade-in value. A dealer might give you a lower selling price and then subtract that amount from what he or she would give as a trade-in value. Negotiate for one final monthly price that you can afford.

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