Calculate Your Vehicle Lease Payment
Understanding Your Vehicle Lease
A vehicle lease is essentially a long-term rental agreement that allows you to drive a new car for a specific period and number of miles, without the commitment of ownership. Leasing can offer lower monthly payments compared to buying, and it provides the flexibility to drive a new vehicle every few years.
Key Components of a Lease Calculation
Calculating a lease payment can be complex as it involves several specific financial terms. Understanding these components is crucial to negotiating a favorable lease agreement:
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Vehicle Price (Capitalized Cost): This is the negotiated selling price of the car. In leasing terms, it's often referred to as the Gross Capitalized Cost. The lower this price, the lower your payments will be.
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Residual Value: This is the leasing company's estimate of the vehicle's wholesale market value at the end of the lease term. It is one of the most significant factors in the payment calculation. A higher residual value means lower depreciation and, consequently, a lower monthly payment. Residual value is typically expressed as a percentage of the vehicle's MSRP.
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Lease Term: The duration of the lease, usually expressed in months (e.g., 24, 36, or 48 months).
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Money Factor: This is the finance rate on the lease, representing the interest charge. It is often presented as a very small decimal (e.g., 0.00208). To get a rough equivalent of an Annual Percentage Rate (APR), you can multiply the money factor by 2400.
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Capitalized Cost Reduction (Down Payment): Any payment made at the beginning of the lease to reduce the capitalized cost, such as a cash payment or the net value of a trade-in. This reduces the amount of depreciation being financed, lowering the monthly payment.
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Depreciation Portion: The part of the monthly payment that covers the estimated loss in the vehicle's value from the start of the lease to the end (Capitalized Cost minus Residual Value, divided by the Term).
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Finance Charge (Rent Charge): The portion of the monthly payment that covers the interest (or rent) on the money borrowed, calculated based on the Money Factor.
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Sales Tax: Tax can be applied in different ways depending on the local regulations—it might be taxed on the full capitalized cost, the monthly payment, or only the depreciation amount. Our calculator uses a simplified method of taxing the monthly payment.
How Leasing Payments Are Determined
A monthly lease payment is fundamentally composed of two main parts:
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Monthly Depreciation Payment: This covers the vehicle's estimated value loss.
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Monthly Finance Charge: This covers the interest or rent on the funds tied up in the vehicle.
Understanding this breakdown empowers you to scrutinize the lease quote and negotiate better terms, focusing specifically on reducing the Capitalized Cost (the price) or the Money Factor (the interest rate).