Now that you understand the basics of leasing, let us take a look at how your monthly payment is calculated. A monthly lease payment is actually pretty easy to understand.
The problem with leasing today is that so few consumers understand how to be certain their payment is calculated correctly. It is not unusual for customers to overlook certain charges and factors because they do not understand the mechanics of a lease.
In this section we are going to make sure you understand exactly how a monthly lease payment is calculated and what you need to do to ensure your number matches the dealers.
What makes up a monthly lease payment?
Putting it all together - Determining your Monthly Lease Payment
Down Payment
Sales Tax on Down Payment
Security Deposit
Initial Monthly Payment
Acquisition Fee
Disposition Fee
A monthly car lease payment is a combination of three factors:
Calculating Depreciation
Calculating Rent Charge (Finance Fee)
Calculating Taxes
Depreciation = (Net Capitalized Cost - Residual) ÷ Term
The Net Capitalized Cost is the total cost of your vehicle after negotiation with the dealer. Be sure you are calculating this cost versus the original price of the vehicle.
To factor in your Residual you will have to know what residual price your leasing company will set on the vehicle. The Term is set by you and can range from 24 – 72 months depending on your preferences. Let's look at an example:
Factors Results
Net Capitalized Cost $25,000
Residual $15,000
Term 36 Months
Total Depreciation $10,000
Depreciation ÷ Term $277.77
Monthly Depreciation $277.77
As long as you know the Net Capitalized Cost, Residual and Term, you can calculate your depreciation very easily.
Please note that when you extend your term to 48, 60, or 72 months (or whatever term you set with your leasing company) your Residual amount will change, which affects your monthly depreciation. Because a car tends to depreciate at a slower rate after a few years, your residual amount will not drop as far, and therefore your depreciation will not be quite as great for the entire term of the lease. (Translation: Your payment will be lower in a longer-term lease.)
Your Rent Charge (or Finance Fee) is the cost you pay to your leasing company for the use of the money that purchased the car. If you took out a loan, you would pay this in the form of a straight interest payment. A Finance Fee on a lease is calculated slightly differently than a traditional interest payment.
Rent Charge = (Net Capitalized Cost + Residual) × Money Factor A Rent Charge requires you to add both the Net Capitalized Cost of the vehicle to the Residual before you multiply it by your Money Factor (for more information on determining Money Factors, see “Leasing Basics”) Many people think that adding both the Net Capitalized Cost and the Residual would not make sense, but it's a simplified method of accounting for the use of the bank's money.
Misunderstanding this formula is a very common error among consumers looking to calculate their own lease payment.
Factors Results
Net Capitalized Cost $25,000
Residual $15,000
Total Net Cap Cost + Residual $40,000
Money Factor .0025
Money Factor × Total Cap Cost + Residual = $100.00
Monthly Rent Charge (Finance Fee) $100.00
Notice that when you add both the Net Capitalized Cost to the Residual you get a total of $40,000, which increases the total balance you will use to multiply with your money factor.
You’re Rent Charge and Depreciation makes up the largest portion of your monthly payment. Working with these values will make the largest impact on keeping your payment as low as possible. There is a small consequence that will reflect in your taxes, which is the third component of your payment. Obviously the larger your monthly payment, the larger your tax component will be.
As we explained in the earlier section, calculating your taxes into your payment will vary from state to state. Generally speaking, though, most states only tax the monthly payment using the local sales tax. Be careful to note that you must pay tax on both the Depreciation and the Finance Fee.
How to Calculate a Sales Tax Payment
Sales Tax Rate × (Depreciation Per Month + Finance Fee Per Month)
Let's look at an example:
Factors Results
| Depreciation per Month |
$277.77 |
| Rent Charge (Finance Fee) per Month |
$100.00 |
| Total Depreciation + Finance Fee |
$377.77 |
| Local Sales Tax Rate |
5% |
| Tax Rate × (Depreciation + Finance Fee) |
$25.21 |
| Total Taxes |
$25.21 |
Calculating your lease payment sales tax is really not much different than any other purchase you would make.
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Once you have all the details together, it’s time to get a good feel for what your final payment will be well before you ever step foot into a dealership.
Determining your final lease payment is as simple as adding the three principal factors of your lease together:
Monthly Payment = Depreciation + Rent Charge + Taxes
We can't stress how important it is to know your monthly lease payment before walking into a dealership. If you can't get all the figures you need before you walk into the dealership, you should then consider keeping these formulas handy so that you can do your own math on the spot.
As we mentioned earlier, it’s important to know all the factors that contribute toward calculating your lease, including your Residual, Money Factor, and Net Capitalized Cost. All of these values can change from vehicle to vehicle, and again from year to year.
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A down payment should be viewed as an optional fee that simply buys down the monthly payments on your lease. By putting money down on a lease, you are effectively spreading the money across all remaining payments, which, in turn, create more attractive monthly payments. It is a good idea to avoid a down payment if possible, because the money is a sunk cost that you will never get back. Down payments may be mandatory, though, if you do not have good credit.
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If you do make a down payment, state and local sales tax will likely be assessed on the money that you put down.
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A security deposit is a refundable fee, typically about one month's payment that may be assessed by the leasing company at the beginning of your lease. Upon returning your vehicle at lease-end, the leasing company will determine whether any money needs to be taken out of the deposit to cover excess wear and tear, excess mileage, damage, or disposition fees. Some leasing companies will waive this fee for those customers with flawless credit ratings.
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In leasing, it is important to recognize that the payments are expected at the beginning of each month, prior to use of the vehicle. So, your first payment will be due upon signing the lease contract.
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The acquisition fee, typically a few hundred dollars, is assessed by the dealer and included in the capitalized cost. The capitalized cost is then used to determine your monthly payments. The acquisition fee is simply a way for the dealer to make extra money on the deal. If you do not see this fee listed in your contract, you should ask about it before you sign.
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The disposition fee, assessed by the leasing company at lease-end, is justified as compensation for the leasing company's responsibility to sell or dispose of the vehicle once you turn it in. This fee is typically a few hundred dollars, but may be negotiable at the beginning of the lease.
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