A lease payment is depreciation plus rent
When you lease, you are not buying the car — you are buying the part of it you use up, plus the cost of the money that sits in the vehicle while you use it. Those two ideas are the two halves of every lease payment, and every dealer worksheet in the country computes them the same way.
The depreciation charge is the value the car loses over your term, divided evenly across the months. If the leasing bank finances $34,895 and expects the car to be worth $22,000 when you hand it back, the car loses $12,895, and over 36 months that is $358.19 a month. Nothing about it is negotiable once the two endpoints are fixed.
The rent charge is interest. It is calculated as the money factor multiplied by the sum of the capitalised cost and the residual, which looks strange until you see why. Your balance falls steadily from the capitalised cost to the residual over the term, so the average amount outstanding is roughly the midpoint, (C + R) ÷ 2. Charging a monthly rate of 2f on that midpoint gives f × (C + R). The convention hides the factor of two inside the money factor itself — which is exactly why the conversion to APR is a multiplication by 2400 rather than by 1200.
Federal law requires the leasing company to disclose the gross capitalised cost, the cap cost reduction, the residual, the total of base payments and the rent charge on a standard form. That requirement comes from the Consumer Leasing Act and its implementing rule, Regulation M (12 CFR Part 1013). What Regulation M does not require is disclosure of the money factor as a rate — which is why leases are quoted in a unit almost nobody can price by eye.
Working through each input
MSRP and selling price are different jobs. The residual percentage is applied to MSRP, always. The selling price is what you negotiate. So a discount off sticker reduces the capitalised cost without touching the residual, which means every dollar you negotiate off the price cuts the depreciation charge by one dollar spread over the term — plus a little more, because it also shrinks the rent charge base.
The residual is set by the bank, not the dealer. It is published per model, per term, per mileage allowance, and it is not negotiable. A high residual is why some cars lease well and others do not: two vehicles at the same price with residuals of 62% and 48% will differ by hundreds of dollars a month. Ask for the residual in writing, and check that the figure matches the term and mileage you are actually signing for.
The money factor can be marked up. The leasing bank quotes a buy rate to the dealer; the dealer may add to it, and the difference is dealer profit. A markup of 0.00050 is only half a thousandth in the quoted unit but it is 1.2 percentage points of APR. Always convert before you judge it.
The acquisition fee is usually capitalised. That means it is added to the amount financed, so you pay rent charge on it. If you have the option to pay it at signing, doing so removes it from the rent charge base.
Cap cost reduction is not a deposit. Money down on a lease reduces the amount financed and therefore the payment, but it buys you no equity. If the car is written off early, the insurance proceeds go to the leasing bank, and unless the lease includes gap coverage that refunds it, your down payment is gone. This is the single biggest structural difference from a purchase, and the reason many experienced lessees put nothing down.
Worked example: $40,000 MSRP, 36 months, 55% residual
You negotiate a $40,000 car down to $37,000. The bank quotes a 55% residual for 36 months at 10,000 miles a year, a money factor of 0.00125, and an $895 acquisition fee. You put $3,000 down and your state taxes the monthly payment at 7%.
- Residual value. 55% × $40,000 = $22,000. Note this comes from MSRP, not from the $37,000 you agreed.
- Gross capitalised cost. $37,000 + $895 = $37,895.
- Adjusted capitalised cost. $37,895 − $3,000 = $34,895.
- Depreciation charge. ($34,895 − $22,000) ÷ 36 = $12,895 ÷ 36 = $358.19 a month.
- Rent charge. ($34,895 + $22,000) × 0.00125 = $56,895 × 0.00125 = $71.12 a month.
- Base payment. $358.19 + $71.12 = $429.31.
- With tax. $429.31 × 1.07 = $459.37.
- Equivalent APR. 0.00125 × 2400 = 3.00%.
- Total outlay. $3,000 down plus 36 × $459.37 = $3,000 + $16,537 = $19,537 for three years of driving.
Check the split: of the $429.31 base payment, 83% is depreciation and 17% is finance cost. On a lease with a low money factor and a fast-depreciating car, the finance component is a small minority of the payment — which is why negotiating the selling price matters far more than shaving the money factor.
How to judge the numbers on the worksheet
Convert the money factor first. Multiply by 2400 and compare against what you would pay on a car loan. If the lease APR is materially above current loan rates, the dealer has probably marked up the buy rate, and that is a conversation worth having. Under 4% is competitive; above 8% deserves a direct question about the bank's buy rate.
Then check the depreciation share. Divide the depreciation charge by the base payment. On a mainstream three-year lease with a healthy residual, depreciation is usually 75% to 90% of the payment. If it is far higher than that, the residual is low relative to price — either the car depreciates hard or you did not negotiate enough off sticker. If it is far lower, you may be looking at an unusually short term or a very high money factor.
Look hard at the amount due at signing. Dealers advertise low monthly payments by loading thousands into the drive-off. The total cost figure above is what makes two offers comparable: it adds the cap cost reduction back to the sum of the payments so that a low payment bought with a big down payment does not look better than it is.
Finally, sanity-check the residual against the mileage allowance. A 15,000-mile allowance carries a lower residual than a 10,000-mile one, which raises the payment. If you drive more than the allowance, buying the extra miles up front is normally cheaper than paying the overage rate at turn-in — and if the gap is large, leasing may be the wrong structure entirely. The lease vs buy calculator settles that question against a financed purchase.
Money factor to APR, and what it costs per month
| Money factor | Equivalent APR | Rent charge per $10,000 of (cap + residual) |
|---|---|---|
| 0.00050 | 1.20% | $5.00 |
| 0.00075 | 1.80% | $7.50 |
| 0.00100 | 2.40% | $10.00 |
| 0.00125 | 3.00% | $12.50 |
| 0.00175 | 4.20% | $17.50 |
| 0.00250 | 6.00% | $25.00 |
| 0.00300 | 7.20% | $30.00 |
| 0.00375 | 9.00% | $37.50 |
APR column is money factor × 2400. Rent charge column is money factor × 10,000, since the rent charge is levied on the sum of the adjusted capitalised cost and the residual.
Where lease quotes go wrong
- Applying the residual percentage to the negotiated price. It comes off MSRP. Using the discounted price understates the residual and overstates the payment.
- Multiplying the money factor by 1200. The correct conversion is 2400, because the rent charge is already computed on the sum of two balances rather than their average.
- Treating a down payment as a deposit. Cap cost reduction is spent, not held. Ask whether the lease includes gap coverage and whether it refunds the cap cost reduction on a total loss.
- Ignoring capitalised fees. An acquisition fee rolled into the deal adds to both the depreciation base and the rent charge base.
- Comparing payments across different terms or mileage allowances. A 39-month lease at 12,000 miles is a different product from a 36-month at 10,000, and the residuals differ accordingly.
- Forgetting disposition and excess-wear charges. These land at turn-in, not during the term, and they are not in the monthly payment at all.
What Regulation M requires the lease to disclose
The Consumer Leasing Act and Regulation M (12 CFR Part 1013) require a consumer vehicle lease to disclose, in a segregated box: the amount due at lease signing, the monthly payment, other charges, the total of payments, the gross capitalised cost, any capitalised cost reduction, the adjusted capitalised cost, the residual value, the depreciation and any amortised amounts, the rent charge, and the early-termination conditions. Every figure this calculator produces should have a counterpart on that form. If a dealer's worksheet and the federal disclosure box disagree, the disclosure box governs.
When a lease is the right structure
A lease is a good fit when the car's residual is strong relative to its price, when your mileage is predictable and modest, and when you genuinely want a new vehicle every few years. It is a poor fit when you drive long distances, when you keep cars for a decade, or when the money factor has been marked up beyond what you could borrow at.
The alternative structures are worth pricing side by side. A conventional purchase loan builds equity — every payment reduces a balance you own; use the auto loan payment calculator for that path. A lease with a purchase option at the end blends the two, and whether exercising it makes sense depends on how the residual compares with the market price of the car at that moment, which nobody knows in advance.
Before either, check what you can carry. The car affordability calculator works backwards from your income and existing obligations, and lenders look at the same ratio you can compute with the debt-to-income ratio calculator. Note that a lease payment counts fully in that ratio, exactly as a loan payment does.
This calculator assumes a standard closed-end consumer lease with level payments, tax applied to the monthly payment, and the acquisition fee capitalised. It does not model multiple security deposits, single-pay leases, up-front tax states, or the tax treatment of a trade-in credit, all of which vary by jurisdiction. For the underlying rate arithmetic on any consumer credit product, including how fees turn a note rate into a higher disclosed APR, see the loan APR calculator.