How a car lease payment is calculated
A lease payment has two main parts. The depreciation fee pays for the value the car loses while you drive it: the difference between the adjusted capitalized cost and the residual value, spread over the term. The finance fee (the lease version of interest) is the money factor times the sum of the cap cost and the residual. Most states then add sales tax to each monthly payment.
Lease formula
Residual = MSRP × residual %
Depreciation fee = (cap cost − residual) ÷ months
Finance fee = (cap cost + residual) × money factor
Money factor = APR ÷ 2,400
Payment = (depreciation fee + finance fee) × (1 + tax rate)
Worked example
A car with a $40,000 MSRP is negotiated to $38,000. Add a $995 acquisition fee and put $3,000 down, and the adjusted cap cost is $35,995. With a 58% residual the car is worth $23,200 at the end of 36 months.
- Depreciation fee: ($35,995 − $23,200) ÷ 36 = $355.42
- Finance fee: ($35,995 + $23,200) × 0.0025 = $147.99 (0.0025 is the money factor for 6% APR)
- Payment before tax: $503.40; with 7% sales tax: $538.64 a month
Over the full lease you pay about $22,391 including the down payment, and you hand the car back at the end.
How to get a better lease deal
- Negotiate the price, not the payment. Every $1,000 off the cap cost saves about $30 a month before tax on a 36 month lease at 6% APR.
- Ask for the money factor and multiply it by 2,400 to compare it with loan APRs. Dealers can mark it up.
- Choose cars with high residuals. A higher residual means less depreciation to pay for.
- Be careful with big down payments. If the car is totaled early, a large down payment is usually lost.
- Pick the right mileage allowance. Extra miles typically cost 15 to 30 cents each at turn-in.
Thinking about buying instead? Compare the payment with the car loan calculator, and see how much value a car loses with the car depreciation calculator.
Frequently asked questions
How is a lease payment calculated?
Add the depreciation fee, (cap cost minus residual) divided by the number of months, to the finance fee, (cap cost plus residual) times the money factor, then add sales tax. A $35,995 cap cost, $23,200 residual, 36 months and a 0.0025 money factor give $503.40 before tax.
How do I convert a money factor to APR?
Multiply the money factor by 2,400. A money factor of 0.0025 equals 6% APR, and 0.00125 equals 3% APR.
What is a good residual value on a lease?
For a 36 month lease, residuals of 55% to 65% of MSRP are common. Higher residuals mean lower payments because you pay for less depreciation.
Is it smart to put money down on a lease?
A down payment lowers the monthly payment but does not reduce the total cost much, and it is usually lost if the car is stolen or totaled. Many buyers prefer to pay only the first month and fees at signing.
Is sales tax charged on a lease?
In most US states sales tax is charged on each monthly payment rather than on the full price of the car. A few states tax the total of the payments or the car's price upfront.
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Last updated October 2026.