Calculating a car lease payment is not quite as simple as the calculations needed in traditional auto financing, but this article will demystify the process. Though time-consuming, it is not difficult to calculate a lease payment, and knowing how to do so will be of great help at the negotiating table.

Gathering Information

The first step is to decide what the terms of the lease will be. Cars are usually leased for a certain number of months: 24, 30, 36, and 48 month terms are the most common. Also decide which annual mileage allowance makes the most sense. The more miles a leased car is driven per year, the more expensive the lease will be, so it isn’t advantageous to select too large of a mileage allowance. On the other hand, for every mile a leased car is driven over the mileage allowance, a certain fee will apply. This fee is commonly $0.20 to $0.25 per mile over the annual allowance; however, this may vary. Ideally, a lessee (that is, the person getting the lease) would choose a mileage allowance with just a bit of “wiggle room” so as to avoid paying overage fees, but would not have terribly many miles leftover going to waste.

The next step is to gather some basic information. It will be important to know the purchase price of the car, after negotiations. If this is presently unknown, use a realistic number as a substitute. Then, knowing which lease terms and mileage allowances are preferred, call a dealer to ask what the residual value will be at the end of the lease term for the car under consideration. This will be given as a percentage. Some cars hold their value better than others; generally the higher the percentage, the better candidate a car is for leasing.

Also ask the dealer for two more pieces of information: their “money factor,” as well as the MSRP of the car being considered. In most cases, the MSRP is different from (higher than) the negotiated price. Once all of this information is gathered, a monthly lease payment can be calculated.

Calculating the Monthly Car Lease Payment

First, find the residual value (a number given as a percentage) and multiply it by the MSRP of the car. Don’t worry about the negotiated price right now; it will be used in the next step of the calculation. The resulting value is the amount the car will be worth at the time the lease ends.

Second, subtract the residual value that was just calculated from the negotiated purchase price, less any down payment. (FYI: In leasing terms, the negotiated price is known as the capitalized cost, and a down payment is known as a capitalized cost reduction.) The resulting value is the amount of depreciation the car will experience during the term of the lease.

Third, divide the total depreciation amount by the number of months of the lease. This calculation is the first half of a monthly lease payment. It represents how much a lessee will have to pay per month to cover the depreciation of the car during the lease.

Fourth, find the money factor given by the dealer. It is expressed as a decimal, such as 0.0026. (FYI: In leasing terms, the money factor is the equivalent of the interest rate. The lower the money factor, the better.) Add the negotiated purchase price (less any down payment) to the residual value of the car. Multiply this by the money factor. The resulting amount is the second half of a monthly auto lease payment.

Fifth, add the amount just figured (essentially, the monthly interest amount) to the monthly depreciation amount from the third step. The total of the two will be the monthly car lease payment!

Keep in mind that this payment does not include any sales tax. Many states have sales tax on automobiles, so to account for that in the monthly payment calculation, just multiply the monthly payment by whatever sales tax percentage applies in the state where the car will be leased and add that amount to the monthly payment. For example, if the total pre-tax lease payment was $300 and the state sales tax was 5%, the grand total monthly payment would be $315.

Congratulations! You are now a well-informed consumer!