How to Calculate Your Monthly Car Lease Payment

When you lease a car, the leasing company either purchases the vehicle from the dealer or finances it through a bank. Since the company is essentially loaning you the car, it aims to make a profit by charging interest on the amount spent to acquire the vehicle. In addition, the leasing company requires you to cover the depreciation cost — the difference between the vehicle’s original price and its residual value at the end of the lease term. This is because the car will be worth significantly less once the lease is up.

To calculate your monthly lease payments, several steps need to be taken. In this article, we’ll break down the components of a lease payment, go over the formulas used in the calculations, and explain how to determine your monthly lease cost.

Table of Contents:

• Breakdown of a Lease Payment
• Key Factors for Calculating Your Payment
• Which Can Reduce Your Monthly Payments
• How Lease Payments Are Determined
• Lease Payment Formula
• Step-by-Step Calculation of Monthly Lease Payments
• Real-World Example of Lease Calculation

Breakdown of Monthly Lease Payments

The base lease payment consists of two main components: depreciation and finance charges. The total monthly lease payment is made up of five key elements:

1. Residual Value – The estimated value of the vehicle at the end of the lease term.
2. Capitalized Cost – The agreed-upon price of the vehicle after negotiations and any applicable discounts.
3. Monthly Depreciation – The portion of the vehicle’s value lost each month during the lease.
4. Base Lease Payment – The sum of monthly depreciation and finance charges.
5. Taxes and Fees – State and local taxes, which vary depending on where you lease the car.

At the start of your lease, you’ll typically pay upfront costs, which may include a down payment, security deposit, the first monthly payment, administrative fees and taxes (may vary by state). After that, you’ll make regular monthly payments as agreed upon in the lease contract. 

Key Factors in Lease Payment Calculation

To determine your monthly lease payment, you need the following information:

• MSRP (Manufacturer’s Suggested Retail Price) – The sticker price of the car, which may differ from the actual selling price due to dealer discounts and promotions.
• Selling Price – The negotiated purchase price of the car before taxes and fees.
• Discounts or Incentives – Any dealer or manufacturer rebates applied to lower the cost.
• Capitalized Cost – The final amount being financed after deducting any down payment or incentives.
• Residual Value – The estimated worth of the car at the end of the lease, set by the manufacturer.
• Depreciation – The difference between the capitalized cost and the residual value, spread evenly over the lease term.
• Money Factor (MF) – The lease interest rate, which determines the financing cost.
• Lease Term – The total number of months in the lease agreement.

Your monthly payment is primarily determined by two factors: the capitalized cost and the residual value. The difference between them is what you pay for depreciation, plus the financing charges based on the money factor. To get an accurate estimate of your monthly lease payment, you need to know how much the car will be worth at the end of the lease, the interest rate (money factor), and the depreciation cost. 

How to Lower Your Monthly Lease Payments

You can secure a better lease deal by choosing a vehicle with a high residual value. A higher residual value means the car retains more of its worth over time, reducing your depreciation costs. Other ways to lower your lease payments include:

• Lower Mileage Limits – Reducing the allowed mileage in your lease contract increases the car’s residual value, which can result in lower payments.
• Lease Incentives – Some manufacturers offer lease subsidies, such as lower money factors (interest rates) or higher residual values, to make leasing more attractive.
• Capitalized Cost Reduction – Making a down payment reduces the amount you finance, lowering your monthly payment.
• Interest Rate & Trade-In – A lower interest rate (money factor) and trading in a vehicle can also help bring down lease costs.

The Role of Credit Score in Leasing

Your money factor (lease interest rate) is tied directly to your credit score. The best lease deals — often advertised with ultra-low payments – are usually reserved for those with excellent credit (typically a 700+ FICO score). If your credit score is lower, you may face higher interest charges, increasing your monthly payment. 

How to Calculate Monthly Lease Payment for Car

To determine your total monthly lease payment, you need to add up:

• Monthly Depreciation – The portion of the car’s value lost over the lease term.
• Monthly Finance Charge – The interest paid on the lease.
• Monthly Taxes – Sales tax applied to the lease payment.

Before you calculate these, you need to consider a few key financial factors:

• Residual Value Calculation – If the residual value is given as a percentage of MSRP (e.g., 55% of MSRP), multiply the MSRP by the residual percentage to determine the dollar amount.
• Depreciation Calculation – Subtract the residual value from the adjusted capitalized cost (the final negotiated price after down payments and discounts) and divide by the lease term (in months).
• Finance Charge Calculation – Add the capitalized cost and residual value, then multiply by the money factor to determine the monthly finance charge.
• Base Monthly Payment – The sum of your monthly depreciation and finance charge, before taxes and fees. 

Keep in mind that your lease payment includes state and local taxes. Some states tax the entire vehicle price upfront, while others only apply tax to the monthly lease payments. Be sure to check your state’s lease tax regulations to understand how it impacts your total cost.

Monthly Lease Payment Formula

The monthly lease payment consists of three main components:

Depreciation Fee + Finance Charge + Monthly Taxes & Fees = Monthly Lease Payment

Using this formula, you can manually calculate your lease payments. However, if math isn't your strong suit, you may want to use an online lease calculator. Below, we’ll walk through the step-by-step process for manual calculations. 

How Monthly Lease Payments Are Calculated

Let’s break down each component of the monthly lease payment, explaining how depreciation, finance charges, and taxes are calculated separately.

Depreciation Fee

Depreciation is the largest portion of a lease payment. It represents the loss in value of the car over the lease term, divided equally across the months of the lease.

The formula for calculating depreciation is:

Depreciation Fee = (Capitalized Cost – Residual Value) ÷ Lease Term

Where:

• Capitalized Cost – The final negotiated price of the vehicle after factoring in discounts, down payments, dealer fees, and other costs. Any upfront cash payments made at signing reduce the capitalized cost.
• Residual Value – The estimated value of the car at the end of the lease. This is set by the leasing company and is based on the car model and lease term.
• Lease Term – The length of the lease, usually expressed in months.

The residual value is typically calculated as a percentage of the MSRP:

Residual Value = MSRP × Residual Percentage

It's important to note that the residual percentage is determined by the leasing company and varies based on the car model. Higher residual values result in lower depreciation costs and, in turn, lower monthly lease payments.

Finance Charge

The finance charge in a lease functions similarly to interest payments on a loan—it is the cost of borrowing money to use the car. However, in leasing, this charge is calculated based on the Adjusted Capitalized Cost (the negotiated price after discounts and down payments) and the Residual Value. The total is then multiplied by the Money Factor (MF), which is derived from the Annual Percentage Rate (APR) stated in the lease contract.

The formula for calculating the monthly finance charge is:

Finance Charge = (Adjusted Capitalized Cost + Residual Value) × Money Factor

Where:

• Money Factor (MF) = APR ÷ 24
• To convert a Money Factor (MF) to APR, multiply it by 2400.

APR is divided by 24 because, in leasing, interest is calculated on a monthly basis rather than annually. This means a lower Money Factor results in lower finance charges, which ultimately reduces the monthly lease payment. 

Sales Tax in a Lease

In most states, sales tax is applied to the cost of leasing rather than the full vehicle price. Typically, it is charged on both the depreciation (amortization fee) and the finance charge (interest payments). The formula for calculating sales tax looks like this:

Sales Tax = (Depreciation Fee + Finance Charge) × Sales Tax Rate

Total Monthly Lease Payment

Your monthly lease payment consists of depreciation, finance charges, and sales tax. To determine your total monthly payment, you sum up these components:

Total Monthly Lease Payment = Depreciation + Finance Charge + Taxes & Fees

Base Monthly Payment vs. Total Monthly Payment

It’s important to distinguish between base monthly payment and total monthly payment:

• Base Monthly Payment: The total before taxes, consisting only of depreciation and finance charges.
• Total Monthly Payment: The final amount after sales tax is applied.

State-Specific Tax Variations

Sales tax calculations vary by state:

• Most states charge tax on each monthly lease payment.
• Some states calculate tax based on the full vehicle price instead of just the lease payments.
• If you move to a different state during the lease, your tax rate may change, affecting your monthly payments.

Dealer Lease Calculations

Many dealers present lease quotes excluding sales tax, so the formula often appears as:

Base Monthly Payment = Depreciation Fee + Finance Charge

Make sure to confirm whether the quoted payment includes tax to avoid surprises.

Lease Payment Calculation Example

To make the lease payment formula easier to understand, let's go through a concrete example.

Assumed Lease Terms:

• Car: Toyota Camry
• Initial Capitalized Cost: $30,000
• Residual Value (End-of-Lease Price): $15,000
• Annual Percentage Rate (APR): 5%
• Sales Tax Rate: 7.25%
• Lease Term: 36 months
• Down Payment: $6,000
• Dealer Discount: $1,000

Step 1: Calculate the Adjusted Capitalized Cost

If you make a $6,000 down payment and get a $1,000 discount, your capitalized cost is: 

$30 000 - $1 000 - $6 000 = $23 000

Step 2: Calculate Depreciation (Amortization Fee)

The total depreciation cost is:

$23 000 – $15 000 = $8 000

Monthly depreciation charge:

$8000 ÷ 36 = $222,22

Step 3: Calculate Finance Charge

First, convert APR into the Money Factor (MF). APR needs to be converted to a decimal fraction:

0,05/24 = 0,00208

Then, apply the finance charge formula:

($23 000 + $15 000) × 0,00208 = $78,96

Step 4: Calculate Monthly Sales Tax

Sales tax is applied to the sum of depreciation and finance charge:

($222,22 + $78,96) × 0,0725 = $21,83

Final Monthly Lease Payment

$222,22 + $78,96 + $21,83 = $323,01

Key Takeaways:

• The four main factors you need to calculate a lease payment are:
  1. Vehicle Price
  2. Residual Value
  3. Money Factor
  4. Lease Term
• Some details like the Money Factor may not be disclosed upfront, so always ask your dealer.
• Double-check your lease terms before signing to ensure accurate calculations.

This breakdown should help you estimate and verify your lease payments before committing to a deal. And to evaluate the deal a dealer is offering you, use our "Deal Check" tool

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Nathan Brooks

I’m Nathan Brooks, a financial consultant and market analyst based in Austin with over 20 years of experience. I specialize in auto financing, including leasing and purchasing options. Passionate about cars and technology, I focus on helping people make informed financial decisions. Outside of work, I enjoy spending time with my family and exploring the world of automobiles.