How Lease Payments Work
A lease payment covers two costs: depreciation (the value the asset loses during the lease) and a finance charge (interest on the leased amount). Unlike a loan, you only pay for the portion of the asset you use.
The Lease Payment Formula
Monthly Payment = Depreciation Fee + Finance Fee
- Depreciation Fee = (Net Cap Cost − Residual Value) ÷ Term
- Finance Fee = (Net Cap Cost + Residual Value) × Money Factor
- Money Factor = APR ÷ 2,400
Lease vs Buy Comparison
| Factor | Lease | Buy (Loan) |
|---|---|---|
| Monthly Payment | Lower | Higher |
| Ownership at End | Return the asset | You own it |
| Mileage Limits | Yes (10-15k/yr) | No |
| Equity Built | None | Yes |
| Maintenance | Often under warranty | Your responsibility |
| Total Long-term Cost | Higher (perpetual payments) | Lower (payments end) |
Money Factor to APR
The money factor is a small decimal that represents the lease interest rate. To convert:
- APR = Money Factor × 2,400
- Money Factor = APR ÷ 2,400
| Money Factor | APR |
|---|---|
| 0.00100 | 2.4% |
| 0.00150 | 3.6% |
| 0.00200 | 4.8% |
| 0.00250 | 6.0% |
| 0.00300 | 7.2% |
| 0.00350 | 8.4% |
Tips for Getting a Better Lease
- Negotiate the cap cost: The sale price is negotiable just like buying — a lower cap cost means lower payments
- Compare money factors: Ask the dealer for the money factor — compare it to rates from banks and credit unions
- Look for high residuals: Vehicles with high residual values (Toyota, Honda, Lexus) have lower monthly payments
- Avoid long terms: 36 months is the sweet spot — longer leases may extend past warranty coverage
- Watch for fees: Acquisition fee, disposition fee, excess mileage, and wear-and-tear charges add up
- Consider $0 down: Down payments reduce monthly cost but are lost if the vehicle is totaled