Dealers use the formulas given in this article, and they would prefer if you did not know about it, or how to use it. They are also not required by federal leasing regulations to disclose how they calculate your payments.
The sad but real truth is that many of the people who lease do not know how to check the math calculations on their leasing contract. This leaves room for errors, or even fraud. This is the biggest reason why it is important to have knowledge of how to calculate lease payments. The lack of knowledge is why most people who lease are overpaying these days.
Importance of Lease Payment Calculation
What if the dealer calculates your leasing payments with the full sticker price instead of the negotiated price, how could you know?
How would you know if the dealer added in any hidden charges without telling you or adding them to your leasing contract?
How would you tell if the dealer “drops” a zero from you $1,500 rebate and only credits you $150, even though it says $1,500 in your contract.
Money factors are not show in easing contracts, how would you know if the dealer increases the Interest Rate (Money Factor) more than what he told you.
Lastly, how would you know if the dealer gave you the right credit for your trade-in?
To make sure that there are no mistakes or fraud, you need to be able to check your payment calculations. Remember, all you will see after all the calculations have been done by the dealer, is the monthly payment figure.
If your payment figure comes out differently than the dealers, than he could be using a different numbers for the Money Factor, Residual, Cap Cost, or extra numbers he did not tell you about. You should be able to have the same numbers as him, if not ask him to give you the exact numbers he is using.
Monthly Lease Payment Formula
The monthly lease payment formula is calculated with three parts. The Depreciation Fee, Finance Fee, and Sales Tax, they are all added together to make one total. In this article we are focusing on the first two parts of he formula, the Sales Tax is going to be described later.
The Depreciation Fee payment is calculated by taking the Net Cap Cost, which is the price of the car after negotiations, down payments, or trade-in is subtracted from the sticker price, and subtraction it from the Residual. Residual is how much the car is worth (expected wholesale price) after the depreciation. After subtracting those two numbers together, you divide the answer by the term. The term is how long you intend to keep the car. You pay off the Depreciation Fee equally each month.
Depreciation Fee = (Net Cap Cost – Residual) ÷ Term
The Finance Fee is paying the Interest Rate on the loan that the leasing company had to use to buy the car from the dealer.
Finance Fee = (Net Cap Cost + Residual) × Money Factor
The Finance Fee is calculated by adding the Net Cap Cost to the Residual, it sounds wrong but this is not a mistake, it is a way of using the money factor to find the average amount financed without having to use complicated business formulas.
Then multiply the Money Factor by the number you get from adding the Net Cap Cost and Residual.
Unfortunately, dealers will not give you the exact Monthly Finance Fee or Money Factor, and the law does not require them to. They only show you a “Lease Charge” or “Rent Charge”. That is the sum of your Monthly Finance Fee, for the whole term of your contract on the lease. We still have a way to find the Monthly Finance Fee by only knowing your “Lease Charge” or “Rent Charge”. Use formula bellow:
Monthly Finance Fee = Lease Charge ÷ Term
Or If you want to know your Money Factor, and you know your "Lease Charge" or "Rent Charge" from your lease contract, use this formula:
Money Factor = Lease Charge ÷ ((Net Cap Cost + Residual) x Term)
Then, use the formula bellow to convert the Money Factor to APR Interest Rate.
Interest Rate = Money Factor x 2400
Total Monthly Payment
To get the whole monthly payment you need to add the Depreciation Fee and the Finance Fee.
In most states, they must add the Sales Tax to the Total Monthly Payment. We will talk about that later on in the guide.
Total Monthly Payment = Depreciation Fee + Finance Fee
Example Calculation Using the Leasing Formula
Let’s give you an example to better understand this all. Let’s say you want to lease a new BMW 325 for 4 years (48-month) term. The sticker price or MRSP is $49,200. With a little negotiation, you were able to bring down the price to $47,000, which is also known as the Cap Cost. Instead of making a down payment, you want to trade in your old car, which is worth $7,000. Now, you subtract that $7,000 from the Cap Cost (47,000 – 7,000 = 40,000). $40,000 is your Net Cap Cost.
When you ask the dealer what the money factor is, he will tell you 0.00375. That is equal to 9% (0.00375 x 2400 = 9.0%). The dealer also tells you that the Residual Percentage is around 60% of MSRP. To get the Residual amount you would have to multiply the 60% by the MSRP (.60 x $49,200 = $29,520).
Here is the whole math:
Depreciation Fee = ($40,000 - $29,520) ÷ 48 = $218.33
Finance Fee = ($40,000 + $29,520) x .00375 = $260.70
- So -
Monthly Lease Payment = $218.33 + $260.70 = $479.03
Reminder: sales tax is not included.