Monthly Lease Payments

We've already discussed the separate factors that contribute to the cost of car leasing: net cap cost, cap cost reductions, residual, money factor, and term  (see How Leasing Works).  Now, let's put it all together and see exactly how your monthly lease payment is determined.

The "secret" lease payment formula described below is used by dealers and leasing companies, who would prefer that you not know about it. Even federal leasing regulations do not require that leasing companies actually disclose how your payment is calculated. It doesn't appear anywhere on a car lease contract form.

The result is that the vast majority of people who lease do not know how to check the math on their lease contract and cannot detect the existence of simple errors, intentional "mistakes", or out-and-out fraud.

Lack of knowledge of how lease payments are calculated is one of the key reasons that consumers overpay on car leases today.

Importance of Lease Payment Calculation

Let's establish why it's so important to know how to calculate monthly lease payments. Consider the following:

• If the dealer figures your lease payment based on full sticker price rather than the discounted price you negotiated with him, how will you know?
• If the dealer doesn't give you proper credit for your trade-in, even though it's in your contract, how will you know?
• If the dealer adds hidden charges and fees to your lease without mentioning them or showing them in your contract, how will you know?
• If the dealer mistakenly "drops" a zero and gives you credit for only $100 of a $1000 rebate, even though your contract shows the $1000 rebate, how will you know?
• If the dealer "bumps" the interest rate (money factor) that he has quoted you (money factor is not shown in lease contracts), how will you know?

Remember, all you see is a "bottom-line" monthly payment figure, after the calculations have been done by the dealer. Therefore, you must be able to check a dealer's lease payment figures to make sure there are no "mistakes," intentional or otherwise.

If your payment figures and the dealer's don't agree, the only possible reason is that he's using a different set of numbers for cap cost, residual, money factor, or term than the numbers he's given you. Ask him to give you exactly the numbers he's using — and you should be able to exactly match his results.

Let's now look at the formula. If you don't particularly like math, our Lease Kit provides easy to use payment tables that can be printed and used in place of the formula. The printed tables can be carried with you to the dealer's showroom so that you don't need to remember how to do the math there.

Monthly Lease Payment Formula

A lease payment is made up of three parts: a depreciation fee, a finance fee, and sales tax — all added together. We'll look at the first two parts of the formula below. Sales tax is covered a little later.

Depreciation Fee

The depreciation fee portion of your payment simply pays the leasing company for the loss in value of its car, spread over the lease term (number of months), based on the miles you intend to drive and the time you intend to keep the car. You pay off an equal portion of the total expected depreciation each month. This is calculated as follows:

Remember, Net Cap Cost is the Gross Cap Cost (selling price you negotiate with the dealer) plus any add-on fees and taxes, and any prior loan balances, minus any Cap Cost Reductions (down payment, trade-in, or rebates). A good lease deal is when you have the lowest possible Net Cap Cost with the highest possible Residual.

Finance Fee

The finance fee portion of your monthly lease payment is like interest on a loan and pays the leasing company for the use of their money. It's calculated as follows:

Yes, you add Net Cap Cost and Residual — this is not a mistake. It's not double-counting as it may appear. It's simply a way of calculating the average amount financed without using complicated constant-yield annuity business formulas (for more details, click here).

Also be aware that you're paying finance charges on both the depreciation and residual (the total of which is the negotiated selling price of the car). Remember, you're tying up the leasing company's money while you're driving their car. Technically, you're paying finance charges on half the depreciation and all of the residual for the term of the lease.

Total Monthly Payment

Now, add the Depreciation Fee and the Finance Fee that you calculated above to get your Total Monthly Payment.

Sales tax must also be added in most states, but we'll hold that discussion until later.

Note: Ford Motor Credit (FMC) uses a slightly different, more complex formula than the rest of the world, which results in slightly higher payments — typically 2%-3% higher than the figure you get using the conventional formula above.

Example Calculation Using the Leasing Formula

So now that we've looked at the formula, let's see how it actually works.

Let's assume you've decided on 3-year (36 month term) lease of a Toyota Camry XLE that has a sticker price of $24,600 (MSRP).

You've managed to negotiate the price down to $23,000 (Cap Cost). You decide not to make a down payment, but you have a trade-in worth $5000. Your Net Cap Cost is therefore $23,000 - $5000 = $18,000.

Now, the dealer tells you (because you asked) that the Money Factor is .00375 (.00375 x 2400 = 9.0%) and the Residual Percentage is 60% of MSRP. So your Residual amount, in dollars, is .60 x $24,600 = $14,760.

Now let's do the math:

Depreciation Fee = ( $18,000 – $14,760 ) ÷ 36 = $90.00

Finance Fee = ( $18,000 + $14,760 ) × .00375 = $122.85

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Monthly Lease Payment = $90.00 + $122.85 = $212.85
(sales tax not included)