Car Buying

Leasing a Car: How to Calculate Your Monthly Payment

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author photo by Russ Heaps June 2019

Leasing a car is simple. Understanding the ins and outs of leasing isn't. There are a lot of moving parts to wrangle and leasing-specific jargon to master. If you are considering leasing (particularly for the first time), there are things you probably don't know that you don't know.

One common question is, "Can I look at the price of a vehicle and determine the leasing monthly payment?" The short answer is that you can, but with varying degrees of accuracy. There are so many variables from car to car, lender to lender and consumer to consumer, with every vehicle and lender, some of the variables change. Figuring a lease payment on a specific model car at a particular lender requires obtaining certain information from the lender. This is information that will change from model to model even with that same lender.

Most automaker captive finance companies (Ford Motor Credit, Honda Financial Services and so forth) offer leasing through their franchise dealers. If you go to a brand's consumer website and choose a car, the website will calculate a monthly leasing payment for you based on how long you want to lease and the number of miles you will put on the car each year. But even this may not be 100% accurate because of your credit history and score. If your credit score is good, however, using the automaker's website calculator should provide a monthly payment in the ballpark. That is, close, but not necessarily accurate.

Unless you have loads of free time on your hands, we don't recommend trying to compute monthly leasing payments yourself. However, if you decide to head down that rabbit hole, here's how to do it.

What You Want

The first step on your lease-payment journey is a bit of soul searching. Decide how many months you want to be locked into the lease. Keep in mind that many new-car bumper-to-bumper warranties are for a maximum of 36 months. Hanging on to a vehicle after the new-car warranty expires defeats a core reason to lease: no major repair expenses. We recommend holding your leasing period to 24 to 36 months. Many lenders will lease for longer periods, but, generally, we think that's a bad idea.

Questions to Answer

  • Vehicle Price -- How much does the vehicle cost? There is the MSRP, or sticker price, and the dealer's invoice. Chances are the transaction price will fall somewhere between those numbers. You won't know the transaction price for certain until you have negotiated with a dealer. So, use the MSRP.
  • Residual Value -- What will the vehicle be worth at the end of the lease? Although most lenders source this number (usually expressed as a percentage) from the leasing experts at Auto Leasing Guide (ALG), it can vary from lender to lender. It can even vary based on trim levels and content. You will need to contact the specific lender, or dealer, if using a captive finance company, to establish the correct residual value.
  • Money Factor -- What is the interest rate on the money being borrowed? Money factor is lease-speak for interest rate. It may also be called "lease factor" or even "rent fee." It isn't expressed as the typical APR interest rate is (1.75, 2.25 and so forth). It will be a strange-looking number, such as 0.00125 or 0.00100. To convert this to a familiar interest rate, multiply the money factor by 2,400. So, 0.00100 is actually 2.4% APR.
  • Rebates and Fees -- What other amounts will be added or subtracted from the transaction price? Many leasing contracts are loaded with fees, such as Acquisition Fee and Disposition Fee. Also, even when you lease, you should qualify for any rebates the carmaker currently offers. The only way to establish these fees and rebates is to ask the car dealer.
  • Down Payment and Trade-In -- As with regular financing, you may need to put down some cash or use your current vehicle as a trade-in, in which case you will need to go to Kelley Blue Book (KBB) to determine your current car's worth. Any down payment will need to be subtracted from the transaction price.

Calculating the Payment

KBB pegs the average cost of a new car to be about $35,000. We'll work with that, but we'll assume we negotiated the price down to $32,000. Here are the other factors we'll use.

  • Residual Value: 70%
  • Lease Length: 36 months
  • Money Factor: 0.00100
  • Fees: $1,500
  • Rebate: $600
  • Down Payment: $5,000

Here's what you are going to do:

Step 1 -- $32,000 x 70% = $22,400 (Residual Value or RV)

Step 2 -- $32,000 + $1,500 = $33,500 (Price plus Fees = Gross Capitalized Cost or GCC)

Step 3 -- $5,000 + $600 = $5,600 (Down Payment plus Rebate = Capitalized Cost Reduction or CCR)

Step 4 -- $33,500 - $5,600 = $27,900 (GCC minus CCR = Adjusted Capitalized Cost or ACC)

Step 5 -- $27,900 - $22,400 = $5,500 (ACC minus RV = Depreciation or Lost Value over lease period)

Step 6 -- $5,500 ÷ 36 = $152.78 (Depreciation divided by Lease Length = Base Monthly Payment)

Step 7 -- $27,900 + $22,400 = $50,300 x 0.00100 = $50.30 (ACC plus RV times Money Factor equals Monthly Interest)

Step 8 -- $152.78 + $50.30 = $203.08 (Base Monthly Payment plus Interest equals Monthly Lease Payment before taxes)

For most states, any state or city sales taxes that may apply should be calculated for and added to the monthly payment.

Autotrader's Advice

We've input our numbers into several leasing calculators offered on the internet, resulting in a different monthly amount each and every time. One gave us a monthly payment as low as $148. When leasing a car, the only way you will know for sure what your exact monthly payment will be is to sit down with a dealer or leasing broker and have it calculated. We've assembled some tips for grading a lease deal to help you wade through that process.

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Leasing a Car: How to Calculate Your Monthly Payment - Autotrader