Making sense of the numbers

Knowledge is power. If you arm yourself with understanding of the terms below, you will be able to negotiate a better deal.

The secret leasing formula
This is the formula used by most industry financial institutions and captive finance sources to calculate a closed-end lease.

(Capitalized Cost – Residual Value) / Total Months of Lease = Monthly Depreciation
(Capitalized Cost + Residual Value) X Money Factor = Monthly Interest Charged
Monthly Depreciation + Monthly Interest Charged = Base Monthly Payment

Factor 1: Capitalized Cost (Cap Cost)
As you can see, there are only a few variables that make up a lease payment. The capitalized cost can affect both the monthly depreciation and the monthly interest. It is important that this be as low as possible. As mentioned previously, this is basically what you are paying for the vehicle, plus any fees like the acquisition fee, wear and tear insurance and/or sales tax.

Negotiating a lower purchase price, as discussed previously, will lower your cap cost and your monthly payment.

Factor 2: Residual Value
A high Residual Value can help lower your monthly depreciation, but can also increase the interest you pay. This number should be a realistic value to give you the most options during and at the end of the lease.

If for some reason you need to get out of a lease early, the more realistic your residual value, the closer to market value your vehicle will be during the lease. This will make it easier to sell or trade your vehicle without getting into a negative equity situation.

Having a realistic residual value at the end of your lease gives you the option of purchasing it at a price very close to market value. This is good if you or someone else wants to buy it.
On new cars, the residual value is based on a percentage of the vehicle’s MSRP. These percentages are published by Automotive Lease Guide (ALG). Most lenders use a derivative of these to set their own residual values. For used cars the residual is based on an estimated cash value and adjustments for the vehicle’s current mileage.

DEALER LEASE ADVISORY: Some captive lease programs offer special low lease payments by artificially raising the residual value. While this can provide a lower payment, it will be very costly if you need to terminate your lease early. Also, the purchase option at the end of the lease will be far above market value, meaning you will probably have to turn the vehicle in and be subject to any fees and/or penalties.

Factor 3: The Money Factor
There is a new term that we haven’t covered yet – the money factor. It is similar to an interest rate for a conventional loan because it is used to calculate the interest charged.

Dealers usually do not disclose the money factor, making it difficult for you to determine if you are getting a good deal. It probably won’t be stated on the lease contract, even though it is as important as any other part of a lease. A lower money factor equals a lower payment. In order to accurately compare lease programs from different financial sources you must know all the variables of the leasing formula — including the money factor.

Because of the way it’s used in the calculation, there is no direct correlation between the money factor and a conventional interest rate. To get a close comparison, multiply the money factor (usually expressed as a percentage, like .00245) by 2400.

Your credit score can also affect the money factor. More and more lenders are going to a tiered scoring model: the higher your credit score, the lower your rate and the lower your monthly payment.

The money factor is similar to a conventional finance rate, the lower the rate the lower your payment.

Factor 4: Sales Tax
There is not much you can do to change this portion of your payment, as your sales tax is determined by where you live or register the vehicle.

In most states the sales tax is calculated by one of the following three ways:

Paid monthly: In this scenario your sales tax is calculated by taking your tax rate times the monthly payment. The tax is collected by the lessor along with your base payment and they submit the tax monthly to the state.

Paid upfront: The tax is calculated as stated above, but is paid in a lump sum upfront. This amount can be included in the cap cost and financed in the lease.

On the Purchase Price, paid upfront: Tax is collected on the purchase price and is paid up front by the lessor. This amount can also be included into the cap cost. Unfortunately, if you live in a state where the tax is calculated in this manner, you will pay more than the other scenarios.
In most states you will pay less sales tax by leasing vs. purchasing your vehicle.

Sample Lease Calculation
To calculate your own lease payment you will need to have all of the information below. If you are not able to get the required information to calculate your own lease payment, do NOT lease the car, period.

$37,740 - Vehicle MSRP (Manufacturer’s Suggested Retail Price)
$35,306 - Negotiated Purchase Price
$1,100 - Bank acquisition fee & dealer documentation fee
$36,406 - Capitalized Cost (sum of purchase price and fees)
$21,512 - Residual Value (57% of MSRP)
.00230 - Money Factor (multiply by 2400 for a ballpark interest rate)
36 mo - Term of lease

Next, plug the numbers into the formula:
(36,406 – 21,512) / 36 = $414
(36,406 + 21,512) X .00230 = $133
$414 + $133 = $547

$547 = Final Monthly Payment

Use a service like to compare what the dealer is offering to an independent leasing source and select the best program. Remember, you do not have to use the dealer’s lease programs, just as you don’t have to use their traditional financing programs.