Dealers quote a monthly number and hope you sign. But every conventional lease payment comes from one three-part formula you can run on your phone, and knowing it changes the negotiation completely. Here's each piece, the jargon decoded, and a full worked example on a $45,000 SUV.
1. Depreciation fee. You're renting the car's decline in value. Take what the car is worth now to the deal (adjusted cap cost), subtract what it's predicted to be worth at the end (residual value), and divide by the number of months.
2. Rent charge. The lender owns a $45,000 asset while you drive it. Their compensation is the rent charge, computed with the oddly-shaped formula: (cap cost + residual) x money factor. Yes, you're paying interest on the sum of the starting value and the ending value — that's the standard lease convention, not a trick.
3. Sales tax. In most states, tax applies to the monthly payment. A few tax the whole car upfront (Texas is the famous one), which lands in your drive-off instead.
Add them: monthly payment = (cap cost − residual)/months + (cap cost + residual) x money factor, then tax.
A $45,000 SUV, negotiated to $43,000, nothing down, 36 months, 60% residual, money factor 0.0025, 8% sales tax.
Total cost of the deal: 36 x $669.00 = $24,084 in payments, plus the $995 acquisition fee, roughly $25,079 plus registration for three years with the car. That all-in number — not the monthly — is what you compare against buying, alongside what the auto loan calculator says about financing the same $43,000 purchase.
Convert it: APR = money factor x 2400. So 0.0025 x 2400 = 6.0%. The bands:
| Money factor | APR | Read as |
|---|---|---|
| 0.00075 | 1.8% | Manufacturer-subsidized promo |
| 0.00150 | 3.6% | Excellent |
| 0.00200 | 4.8% | Good |
| 0.00250 | 6.0% | Fair, typical buy rate |
| 0.00300 | 7.2% | High — probably marked up |
| 0.00350 | 8.4% | Poor |
Dealers can legally mark up the money factor above the lender's buy rate, and the difference is pure profit — on our example, the gap between 0.0015 and 0.0035 is $140 a month, $5,040 over the term. Ask for the money factor in writing before you discuss payment, and check the APR conversion against current auto loan rates.
The residual is the one term you can't negotiate, and it's the biggest driver of the payment. On our $45,000 SUV, a 65% residual ($29,250) instead of 60% cuts the depreciation fee to $381.94 and the pre-tax payment to $562.57; a 55% residual ($24,750) pushes it up to $676.32. Same car, same money factor, a $113.75 monthly swing from the lender's guess about future value.
That's also why lease deals cluster on specific models: manufacturers boost residuals or cut money factors on cars they want to move, and those two levers explain nearly every "$199 a month" ad. Brands with strong resale (Toyota, Honda, some Lexus and Porsche models) lease cheaper than their prices suggest; luxury cars with weak resale lease terribly unless subsidized.
Enter cap cost, residual, money factor, and tax. Get the payment, the APR equivalent, and the all-in cost.
Lease Payment Calculator →Drive-off should be roughly first payment + acquisition fee + registration: on our example, about $1,900-$2,200. Big advertised down payments ("$2,999 due at signing") are cap reductions — prepaid depreciation that makes the monthly look small while putting your cash at risk. If the car is totaled in month 3, gap insurance covers the payoff; nobody covers your down payment.
Mileage: standard allowances are 10k, 12k, or 15k miles a year. Excess runs $0.15-$0.35 a mile at turn-in, so 9,000 over on a 36-month/12k lease costs $2,250 at $0.25. Prepaid miles cost roughly half that — if you know you'll drive 18k a year, buy the bigger allowance upfront. And if you're way under, don't celebrate yet: equity at turn-in only exists if the car's market value beats the residual, which is when buying out the lease and reselling it can pay.
Leasing costs more per year of ownership if you always have a payment — the average lease payment runs about $619 against $770 for a new-car loan (Experian data via LendingTree) — but leases on subsidized models can undercut financing while always keeping you under warranty. Buying wins for people who drive cars into the ground, drive over 15k miles a year, or hate payment-for-life. Run your own numbers both ways: this formula for the lease, a loan amortization for the purchase, and your honest expected miles for the tiebreaker. Insurance runs higher on leased vehicles too, since lessors require strong coverage — price that with the car insurance estimator before you commit.
Terms and tax rules vary by state and lender, so treat this as the general formula and your contract as the final word.
Depreciation fee (the car's expected value drop, divided by the months), rent charge (interest on the money the lender has tied up, computed as cap cost + residual times the money factor), and sales tax. For a $45,000 car at a $43,000 cap cost, 60% residual, 36 months, and 0.0025 money factor: $444.44 + $175.00 = $619.44 pre-tax, $669.00 with 8% tax.
The negotiated price (cap cost) and the money factor. Cap cost works exactly like buying: discounts, rebates, and haggling all apply. The money factor can be marked up by the dealer above the lender's buy rate, so always ask for it in writing and multiply by 2400 to check the APR. The residual is set by the lender and isn't negotiable, and the acquisition fee ($995 typical) rarely moves.
Almost never. A down payment just pre-pays depreciation: $2,500 down on our example drops the payment from $669 to $587.25, but total cost only falls $443 — the interest the cash wasn't accruing. Worse, if the car is stolen or totaled early, gap insurance covers the lease payoff but your down payment is gone. Keep the drive-off to first payment, acquisition fee, and registration.