Lease Formula

The term, lease formula, in car leasing, refers to the math formula used to calculate monthly payments. The standard formula used in the auto leasing business by car companies and dealers is explained in detail, with examples, in the following article: Lease Payment Formula.

Although the strict time-value-of-money (TVM) formula for leasing is a bit more precise, the car leasing industry has chosen to go with the simplified standard formula, as discussed in our article referenced above. Difference in results is so small as to be negligible. The simplified formula can be easily calculated on a cheap drugstore calculator, where the more complicated formula cannot.

The formula is:

Payment = (Cap Cost – Residual) ÷ Term    +    (Cap Cost + Residual) x Money Factor

The first component of the lease formula calculates monthly Depreciation cost while the second component calculates monthly Finance cost. The sum of these two components results in Monthly Lease Payment (not including sales tax).

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