Why leases use a different formula than loans
A loan payment pays off the entire vehicle price. A lease payment only covers the portion of value the car is expected to lose during the lease — the depreciation fee — plus a finance charge on the average amount of money tied up over the term. That's why a lease payment is usually lower than a loan payment on the same vehicle, even at a similar rate.
A worked example
A $32,000 vehicle with $2,000 down, a 55% residual value, over a 36-month lease at a 4% rate equivalent comes to about $424 a month before tax — split roughly between a $344 depreciation fee and a $79 finance fee.
Frequently asked questions
What is a 'money factor' and how does it relate to APR?
A money factor is the lease-world equivalent of an interest rate, expressed as a small decimal rather than a percentage. Multiplying an APR by 2400 converts the other way — roughly, a money factor of .00125 is comparable to a 3% APR. This calculator lets you enter the more familiar APR-style percentage and converts it internally.
Why does a higher residual value lower my payment?
The depreciation fee — usually the bigger part of a lease payment — is based on how much value the car is expected to lose during the lease, which is the negotiated price minus the residual value. A higher residual means less projected depreciation, and therefore a lower monthly payment.
Can I negotiate the residual value or money factor?
Generally no — both are typically set by the manufacturer's captive finance company based on the model and lease term, not the dealer. What is negotiable is the vehicle's selling price and your down payment (cap cost reduction), so that's where to focus.
Is putting a large down payment on a lease a good idea?
Often not as beneficial as it seems — leases carry more risk for the lessee on a down payment, since that money is typically not refunded if the car is totaled or stolen early in the lease, unlike equity in a loan. Many advisors suggest minimizing upfront cash on a lease for this reason.
This calculator provides estimates for general informational purposes only and is not financial advice. Actual lease terms, fees, and taxes vary by manufacturer, dealer and state.