How Car Lease Payments Are Calculated
A lease payment has two parts: depreciation and finance charge. Depreciation = (Net Cap Cost – Residual Value) ÷ Lease Term. Finance charge = (Net Cap Cost + Residual Value) × Money Factor. Your monthly payment is the sum of both.
On a $40,000 car with 55% residual and 0.0018 money factor for 36 months: Net Cap Cost is $40,000 (assuming no down payment). Residual = $22,000. Depreciation per month = ($40,000 – $22,000) ÷ 36 = $500. Finance charge = ($40,000 + $22,000) × 0.0018 = $111.60. Monthly payment = $611.60.
Put $3,000 down and the Net Cap Cost drops to $37,000. Depreciation = ($37,000 – $22,000) ÷ 36 = $416.67. Finance charge = ($37,000 + $22,000) × 0.0018 = $106.20. New monthly payment = $522.87—saving $88.73/month.
Lease vs Buy: The Real Math
Leasing looks cheaper month-to-month because you only pay for the car's depreciation during the lease period, not the full purchase price. But at lease end you own nothing. Buying costs more monthly but builds equity you can sell or trade.
| Factor | Lease | Buy |
|---|---|---|
| Monthly Payment | Lower (pay depreciation only) | Higher (pay full price + interest) |
| Ownership at End | Nothing — return the car | Full ownership with equity |
| Mileage Limits | 10,000 – 15,000/year typical | No limits |
| Wear & Tear | Excess wear fees at turn-in | Your car, your decision |
| Best For | New car every 2 – 3 years | Keep car 5+ years |
| Break-Even Point | Never — always paying | Typically 4 – 6 years |
The break-even point depends on the car's depreciation curve. Trucks and SUVs with high residual values make leasing more attractive because less depreciation means a smaller gap between lease and buy costs. Sedans with steep depreciation favor buying because you still own the asset after payments end.
What Makes a Good Lease Deal in 2026
- Money factor under 0.0020. That's equivalent to 4.8% APR. Anything above 0.0025 (6% APR) is expensive. Check Edmunds for current manufacturer money factors—you can negotiate this down.
- Residual value above 55%. Higher residual = lower monthly payment. Toyota, Honda, and Lexus consistently have the highest residuals. A 60% residual on a $40,000 car means you only pay for $16,000 in depreciation over 36 months.
- Negotiate the cap cost, not the payment. Dealers love quoting monthly payments because they can hide markups. Negotiate the vehicle price down first (aim for invoice price or below), then apply the lease terms. A $2,000 price reduction saves $55.56/month on a 36-month lease.
- Minimal down payment. If you total a leased car, gap insurance covers the lease payoff but your down payment is gone. Put as little down as possible. Manufacturer incentives like loyalty bonuses reduce the cap cost without requiring cash out of pocket.
- Match the lease to your mileage. Standard leases allow 10,000 – 12,000 miles/year. Excess mileage fees run $0.15 – $0.30 per mile. If you drive 15,000 miles/year, negotiate a higher-mileage lease upfront—it's cheaper than paying excess mileage penalties at turn-in.
Money Factor vs APR: Quick Conversion
Multiply the money factor by 2,400 to get the approximate APR. Here's a reference table:
| Money Factor | Equivalent APR | Rating |
|---|---|---|
| 0.0010 | 2.4% | Excellent |
| 0.0015 | 3.6% | Very Good |
| 0.0020 | 4.8% | Good |
| 0.0025 | 6.0% | Fair |
| 0.0030 | 7.2% | Poor |
To see what you can afford before shopping, try our car affordability calculator. If you decide to buy, use the car payment calculator for a full amortization schedule. And to compare any type of loan, check the loan payment calculator.