Leasing a car in the United States is a popular alternative to buying, offering the flexibility of driving a new vehicle every few years without the long-term commitment of ownership. However, understanding how lease payments are calculated can be complex, involving various factors such as MSRP, money factor, and residual value. This guide will walk you through the auto lease calculation process in detail, including an example to illustrate how the numbers come together. We will also cover the formula used to calculate lease payments, helping you make informed decisions when considering a car lease.
Table of Contents
Key Fields in an Auto Lease Calculator
Before diving into the calculation, it’s essential to understand the various fields used in an auto lease calculator. These fields are crucial inputs that determine your lease payments.
- MSRP (Manufacturer’s Suggested Retail Price): The retail price recommended by the car manufacturer.
- Negotiated Selling Price: The price you negotiate with the dealer, which is usually lower than the MSRP.
- Lease Term: The duration of the lease agreement, typically measured in months (e.g., 36 months).
- Sales Tax: The applicable tax rate for leasing a vehicle, varying by state (e.g., 6%).
- Residual Factor: A percentage that indicates the car’s estimated value at the end of the lease term.
- Money Factor: A figure representing the interest rate on the lease. To convert a money factor to an approximate interest rate, multiply by 2400.
- Dealer Fee: Any fees charged by the dealer for processing the lease, typically negotiable.
- Registration Fee: The cost to register the vehicle with your state’s DMV.
- Down Payment: An upfront amount you choose to pay to reduce the total lease amount.
- Trade-in Value: If you trade in your current vehicle, its value can reduce your lease cost.
- Other Reductions: Any other financial reductions, such as rebates or incentives.
Results Calculated by the Auto Lease Calculator
Once the fields above are filled in, the calculator generates the following results:
- Net Capitalized Cost: The amount financed through the lease after accounting for the negotiated selling price, down payment, trade-in value, and other reductions.
- Residual Value: The vehicle’s estimated value at the end of the lease term, determined by the residual factor.
- Monthly Depreciation Fee: The cost attributed to the vehicle’s depreciation over the lease term.
- Monthly Lease Fee: The finance charge based on the money factor.
- Monthly Lease Payment (Excl. Tax): The combined cost of the depreciation fee and lease fee, excluding sales tax.
- Monthly Sales Tax: The amount of tax applied to the monthly payment.
- Monthly Lease Payment (Incl. Tax): The total monthly lease payment, including sales tax.
Formula for Calculating Auto Lease Payments
The lease payment is calculated by adding two main components: the depreciation fee and the lease fee. Here’s a breakdown of the formulas used:
1. Depreciation Fee:
$$\text{Depreciation Fee} = \frac{\text{Net Capitalized Cost} – \text{Residual Value}}{\text{Lease Term (in months)}}$$
2. Lease Fee:
$$\text{Lease Fee} = (\text{Net Capitalized Cost} + \text{Residual Value}) \times \text{Money Factor}$$
3. Monthly Lease Payment (Excluding Tax):
$$\text{Monthly Lease Payment (Excl. Tax)} = \text{Depreciation Fee} + \text{Lease Fee}$$
4. Monthly Sales Tax:
$$\text{Monthly Sales Tax} = \text{Monthly Lease Payment (Excl. Tax)} \times \frac{\text{Sales Tax Rate}}{100}$$
5. Monthly Lease Payment (Including Tax):
$$\text{Monthly Lease Payment (Incl. Tax)} = \text{Monthly Lease Payment (Excl. Tax)} + \text{Monthly Sales Tax}$$
Detailed Example Calculation
Let’s walk through a practical example using the following details:
- MSRP: $40,000
- Negotiated Selling Price: $38,000
- Lease Term: 36 months
- Sales Tax: 6%
- Residual Factor: 60%
- Money Factor: 0.001
- Dealer Fee: $500
- Registration Fee: $300
- Down Payment: $2,000
- Trade-in Value: $1,000
- Other Reductions: $500
Step 1: Calculate the Net Capitalized Cost
The net capitalized cost is calculated by subtracting any upfront reductions (down payment, trade-in value, and other reductions) from the negotiated selling price and adding any additional fees.
$$\text{Net Capitalized Cost} = \text{Negotiated Selling Price} + \text{Dealer Fee} + \text{Registration Fee} – (\text{Down Payment} + \text{Trade-in Value} + \text{Other Reductions})$$
Substituting values:
$$\text{Net Capitalized Cost} = 38,000 + 500 + 300 – (2,000 + 1,000 + 500) = 35,300$$
Step 2: Calculate the Residual Value
The residual value is the vehicle’s estimated worth at the end of the lease term, calculated by multiplying the MSRP by the residual factor.
$$\text{Residual Value} = \text{MSRP} \times \frac{\text{Residual Factor}}{100}$$
Substituting values:
$$\text{Residual Value} = 40,000 \times \frac{60}{100} = 24,000$$
Step 3: Calculate the Monthly Depreciation Fee
The depreciation fee represents how much value the car loses over the lease term. It’s calculated by dividing the difference between the net capitalized cost and residual value by the number of months in the lease term.
$$\text{Depreciation Fee} = \frac{\text{Net Capitalized Cost} – \text{Residual Value}}{\text{Lease Term (in months)}}$$
Substituting values:
$$\text{Depreciation Fee} = \frac{35,300 – 24,000}{36} = \frac{11,300}{36} = 313.89$$
Step 4: Calculate the Monthly Lease Fee
The lease fee is based on the money factor and the sum of the net capitalized cost and residual value.
$$\text{Lease Fee} = (\text{Net Capitalized Cost} + \text{Residual Value}) \times \text{Money Factor}$$
Substituting values:
$$\text{Lease Fee} = (35,300 + 24,000) \times 0.001 = 59,300 \times 0.001 = 59.30$$
Step 5: Calculate the Monthly Lease Payment (Excluding Tax)
The total monthly lease payment, excluding tax, is the sum of the depreciation fee and the lease fee.
$$\text{Monthly Lease Payment (Excl. Tax)} = \text{Depreciation Fee} + \text{Lease Fee}$$
Substituting values:
$$\text{Monthly Lease Payment (Excl. Tax)} = 313.89 + 59.30 = 373.19$$
Step 6: Calculate the Monthly Sales Tax
Sales tax is applied to the monthly payment, calculated by multiplying the payment by the sales tax rate.
$$\text{Monthly Sales Tax} = \text{Monthly Lease Payment (Excl. Tax)} \times \frac{\text{Sales Tax Rate}}{100}$$
Substituting values:
$$\text{Monthly Sales Tax} = 373.19 \times \frac{6}{100} = 22.39$$
Step 7: Calculate the Monthly Lease Payment (Including Tax)
The final step is to add the sales tax to the monthly lease payment to get the total payment.
$$\text{Monthly Lease Payment (Incl. Tax)} = \text{Monthly Lease Payment (Excl. Tax)} + \text{Monthly Sales Tax}$$
Substituting values:
$$\text{Monthly Lease Payment (Incl. Tax)} = 373.19 + 22.39 = 395.58$$
Summary of Results
- Net Capitalized Cost: $35,300
- Residual Value: $24,000
- Monthly Depreciation Fee: $313.89
- Monthly Lease Fee: $59.30
- Monthly Lease Payment (Excl. Tax): $373.19
- Monthly Sales Tax: $22.39
- Monthly Lease Payment (Incl. Tax): $395.58
FAQs on Auto Lease Calculations
What is the residual value in a lease?
The residual value is the estimated worth of the car at the end of the lease term, often expressed as a percentage of the original MSRP.
What is the money factor in leasing?
The money factor is a way to represent the interest rate on a lease. To convert it to an APR, multiply by 2400.
How is the net capitalized cost determined?
The net capitalized cost is the amount you’re financing in the lease after accounting for fees, down payments, and other reductions.
Can I negotiate the residual value?
Typically, the residual value is set by the leasing company and is not negotiable.
Is the lease payment affected by my credit score?
Yes, your credit score can influence the money factor, which affects the monthly lease payment.
What happens at the end of a car lease?
At the end of the lease, you can either return the vehicle, purchase it for the residual value, or lease another vehicle.