Lease payments, in short
A lease payment is really three charges stacked together: depreciation (what the car is expected to lose in value while you drive it), a finance charge (the lease's version of interest), and sales tax on top of both. Depreciation is usually the biggest piece by far, which is why residual value — the car's predicted worth at lease end — tends to move your payment more than almost anything else you can negotiate.
Key takeaways
- On a $45,000 car negotiated to $43,000, with $2,000 down, 55% residual, and a 0.00125 money factor, the payment breaks down to about $469 depreciation + $83 finance charge + $44 tax ≈ $597/month.
- Raising the residual from 55% to 65% of MSRP — same everything else — drops the monthly payment by about $129, since less of the car's value needs to be financed as depreciation.
- Negotiating $2,000 off the price only saves about $63/month on the same car, since that discount gets spread thin across 36 monthly payments rather than saved as a lump sum.
- The money factor (0.00125 in this example) converts to APR by multiplying by 2,400 — here, that's 3.00% APR hiding behind an unfamiliar-looking decimal.
The three real parts of a lease payment
Depreciation covers the gap between what the car is worth now (the adjusted capitalized cost, after your down payment and any rebates) and what it's predicted to be worth at lease end (the residual value), spread evenly across the term. The finance charge is the lease's stand-in for interest, calculated on the combined cap cost and residual rather than a shrinking loan balance. Sales tax is then applied on top of both, usually every month rather than as one upfront charge.
How this calculator builds your payment
Using the defaults — $45,000 MSRP, $43,000 negotiated price, $2,000 down, 36-month term, 55% residual, 0.00125 money factor, 8% sales tax, $650 acquisition fee:
Residual value = $45,000 × 55% = $24,750
Adjusted cap cost = $43,000 + $650 fee − $2,000 down = $41,650
Depreciation = ($41,650 − $24,750) ÷ 36 ≈ $469.44/month
Finance charge = ($41,650 + $24,750) × 0.00125 ≈ $83.00/month
Tax = ($469.44 + $83.00) × 8% ≈ $44.20/month
Total monthly payment ≈ $596.64
Add the down payment and acquisition fee on top and due at signing comes to about $3,246.64, with a total lease cost near $24,129 over the full 36 months.
Why residual value matters more than price
Since depreciation is the difference between cap cost and residual, a higher residual shrinks that gap directly. Keep every other input the same and raise the residual from 55% to 65% of MSRP: the payment drops from about $596.64 to $467.72 — a $128.92 monthly swing. Compare that to negotiating $2,000 off the price, which only saves about $62.70 a month on this same car. Residual value is set by the leasing company based on the model's predicted resale strength, not something you negotiate directly — but it's worth comparing across vehicles, since two cars at the same price can lease very differently if one holds its value better.
Decoding the money factor
Dealers quote lease interest as a "money factor" — a small decimal like 0.00125 — instead of the percentage rate you'd expect from a loan. It's the same underlying cost, just dressed up in unfamiliar units. Multiply the money factor by 2,400 to convert it to an approximate APR: 0.00125 × 2,400 = 3.00%. Always ask for the money factor directly and do this conversion yourself — comparing an unconverted money factor to a loan's APR will make the lease look artificially cheap.
Leasing vs. buying: a different question
Leasing wins on monthly cash flow: the payment only covers depreciation and interest on the depreciation, not the whole vehicle price, which is why it usually beats a purchase payment on the same car. Buying wins on total ownership economics once you keep the car past the loan term, since payments eventually stop while the car keeps running. Mileage limits, wear-and-tear charges, and having nothing to trade in at lease end are the real trade-offs — run the numbers on the auto loan calculator for the same vehicle to compare purchase payments against what you see here.
Related calculators
For financing a purchase instead of leasing, see the auto loan calculator. For lease math outside the auto context — equipment, real estate, or general leasing scenarios — the lease calculator covers the broader case.