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How A Lease Payment Is Calculated?

Thinking of leasing a car, but not sure about the amount? Fear not! This page will show you in detail how a lease payment is calculated. You can follow simple steps and calculate it on your own at home. Alternative many online lease calculators are also available if you would like to use one.

To put it simply, your lease payment is calculated based on three things – depreciation, interest, and tax.

Here’s how it works; when you lease a car the lease company buys the vehicle from the car dealer and then leases it out to you. As with all business the leasing company expects to earn some interest on the money that they have used. As we all know a car’s worth will decrease at the end of the lease term and hence the company must also recover the depreciation value from you. 

It is best if you familiarize yourself with some leasing terms. That way during a negotiation you will have full control of what each term means. 

  • Capitalized Cost 

This is the price of the vehicle that is the Manufacturer’s Suggested Retail Price or MSRP.  This can be and must be negotiated to a larger extent to bring down the cost.

  • Capital Cost Reduction

This is a type of down payment for those who do not intend to purchase the car after the lease term is over. This can be easily waivered off as an incentive and is not required most of the time. 

  • Residual Value

This is the estimated value of the car at the end of the lease term. A higher residual value is a good factor for leasing a car. You can do some research on the residual values of cars and get the highest one for your lease. Consequently, you can also use a  lease guide calculator for this purpose.

  • Depreciation

The amount of worth the vehicle has lost during the lease period.

  • Term of Lease

This is the period of lease of your car. Generally, you can find many periods like 24 months, 36 months, 39 months or even 48 months. 

  • Money Factor 

This is the interest rate of your lease. This is not indicated by a percentage value but as a fraction. The number that you get needs to be multiplied by 2.4 to get an APR. Interest rates on car lease can be 2-3 percent higher than the interest charged on traditional car loans. You can also try to negotiate the rate with most dealers. Never know, you might be lucky!

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The Actual Math

Let us assume that a car has a leasing amount of 27,000 and you have successfully managed to bring it down to 25000. Congratulations! Just for argument’s sake, let’s just imagine you have no down payment in this and you are leasing the car for about 36 months. The money factor in this would be 0.0029 and the residual value is estimated to be around 12500 at the end of the term (36 months). Thus:

  • Capitalized cost is 25000.
  • Residual Value is 12500.
  • Money Factor is 0.0029.
  • Term of Lease is 36 months.

These are the only data that you need to calculate the lease payment. The dealer will provide you with all these data and you can use your personal lease guide calculator that we have mentioned here.

Depreciation

(Capitalized Cost – Residual Value)/ Term of Lease

Here the calculation would be (25000-12500)/36. Hence your monthly depreciation cost comes up to 347. Please never forget to negotiate the capital cost. The dealer does not suffer any losses from negotiation. They always keep a hefty percentage no matter how much you negotiate.

Interest

The interest forms the second largest part of your lease amount. This is where the leasing company benefits the most and gets a good profit. Lease acquisition fee and deposition fee are also a method for the leasing company to earn some extra cash. Hence negotiation on such fees is also essential. The formula used here is:

(Capitalized Cost + Residual Value)/Money Factor

 which is, 

(25000+12500)/0.0029. 

You get an amount of 109, which is your interest amount.

Taxes

The last and final part of your lease amount is taxes. Here you will need to know the local tax rates, which also the dealer can provide. Let’s assume the local sale tax rate to be 7 percent. Simply use the formula:

(Depreciation Value + Interest) * Local Sale Tax Rates

(347+109)*7% = 32.

Hence your monthly tax payment comes to 32.

The total lease amount you will have to pay is an addition of all these values, which comes up to 488. So, by using this simple method you know how much your lease payment would be. Just collect a few data from your dealer and get on with it!

Bharat Vashistha

The author Bharat Vashistha

I am professional blogger and content writer from past 5 years working for many business organizations i.e. education, healthcare and many more

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