How to calculate monthly lease payment?

To calculate your monthly lease payment, you generally need to understand five key figures that contribute to the final amount. The total payment is primarily composed of the monthly depreciation, a finance charge (also known as the rent charge), and applicable sales tax.

Understanding the Key Figures for Lease Calculation

Before diving into the calculation, familiarize yourself with these essential components:

• Manufacturer's Suggested Retail Price (MSRP): The full sticker price of the vehicle.
• Adjusted Capitalized Cost: This is the negotiated selling price of the vehicle, minus any down payment, trade-in value, or rebates. Think of it as the price you're financing.
• Residual Percentage: A pre-determined percentage of the MSRP that the leasing company estimates the car will be worth at the end of the lease term. This is set by the lender.
• Money Factor: This is the finance charge in a lease, similar to an interest rate. It's often presented as a very small decimal (e.g., 0.0025). To convert it to an approximate annual interest rate, multiply it by 2,400.
• Lease Term: The duration of your lease agreement, typically expressed in months (e.g., 24, 36, 48 months).

Step-by-Step Monthly Lease Payment Calculation

Once you have these figures, you can calculate your monthly lease payment by breaking it down into its core components.

1. Calculate the Residual Value

The residual value represents the vehicle's estimated worth at the end of the lease. This amount is crucial because you are essentially paying for the difference between the Adjusted Capitalized Cost and the Residual Value, plus finance charges and taxes.

• Formula: Residual Value = (MSRP) x (Residual Percentage)

  For example, if a car has an MSRP of $30,000 and a residual percentage of 50%, the Residual Value is $30,000 x 0.50 = $15,000.

2. Determine Monthly Depreciation

Monthly depreciation is the portion of the vehicle's value that you "use up" over the lease term. This is the difference between the Adjusted Capitalized Cost and the Residual Value, spread out over the months of your lease.

• Formula: Monthly Depreciation = (Adjusted Capitalized Cost - Residual Value) / Lease Term (in months)

  Continuing the example, if your Adjusted Capitalized Cost is $28,000, Residual Value is $15,000, and the lease term is 36 months, your Monthly Depreciation is ($28,000 - $15,000) / 36 = $13,000 / 36 = $361.11.

3. Calculate the Monthly Finance Charge (Rent Charge)

The finance charge, also known as the "Monthly Rent Charge," is the cost of borrowing the money to lease the vehicle. It's calculated based on both the Adjusted Capitalized Cost and the Residual Value, multiplied by the Money Factor.

• Formula: Monthly Finance Charge = (Adjusted Capitalized Cost + Residual Value) x (Money Factor)

  Using the figures: ($28,000 + $15,000) x (Money Factor of 0.00200) = $43,000 x 0.00200 = $86.00.

4. Calculate the Total Monthly Lease Payment (Before Tax)

This is the sum of your monthly depreciation and your monthly finance charge.

• Formula: Monthly Base Payment = Monthly Depreciation + Monthly Finance Charge

  In our example: $361.11 (Depreciation) + $86.00 (Finance Charge) = $447.11.

5. Add Sales Tax

Sales tax on leases is typically applied to the sum of the monthly depreciation and finance charge, though tax regulations can vary by state. Some states tax the entire lease payment, while others tax only the depreciation portion. Always confirm local tax laws.

• Formula: Tax = (Monthly Base Payment) x (Local Sales Tax Rate)

  If your local sales tax rate is 7%: $447.11 x 0.07 = $31.30.

6. Final Total Monthly Lease Payment

The final step is to add the calculated sales tax to your monthly base payment.

• Formula: Total Monthly Lease Payment = Monthly Base Payment + Tax

  For our example, the Total Monthly Lease Payment would be $447.11 + $31.30 = $478.41.

Summary of Lease Payment Components

The calculation process can be summarized as follows:

(Reference for calculation components: Southeast Toyota Finance)

Understanding these individual components empowers you to negotiate better terms, as each element contributes to your final monthly cost. For more detailed information on leasing calculations, you can often find resources on financial institution websites like SETF.com.