Car leasing continues to be a popular financing option. With the possibility of a much smaller deposit (if any at all), the ability to spread the cost like a loan, and the added benefit for many of being able to trade the car in at the end of the lease period for a better model, all make car leasing a very attractive proposition.
Have you ever wondered, though, how the car dealership or other leasing company comes up with that monthly figure to charge you? What many don’t realize is that there is a fixed formula that’s already no secret. If you are thinking about getting a car lease, then we strongly recommend that you first learn how to calculate likely lease payments by yourself first.
Why Is It a Good Idea to Calculate My Car Lease Payment?
There are several reasons to use the formula below to calculate your car lease payment in advance.
The main reason is to give you an advantage in negotiation when you approach the dealership to discuss the car lease. If you have a good idea of what a reasonable payment should be according to the standard formula, then you’ll know if the dealership is trying to rip you off or at least when they are going a little overboard with their pricing.
Easing the Financial Burden
This brings us to another good reason for working out the lease payment in advance, and that’s to ease the monthly burden of your lease. The key is to negotiate a lower sale price for the car in question. Once you get that foundational number as low as you can get it, the rest will naturally work out in your favor. It’s not all as easy as it sounds, of course, but it all begins with the crucial insight into a reasonable car lease payment.
Before You Calculate
The calculation involves a relatively simple step-by-step formula, but in order to complete it you need to know a few base numbers first. You will then use these as input for the formula to then work out your rough monthly cost.
Item 1: The MSRP
The first thing you need is the retail price of the car. This refers to the recommended retail price of the vehicle as given by the manufacturer. To create the most realistic and conservative estimate, you should use the MSRP. If, however, you know for a fact by about how much you might be able to discount the retail price with a specific dealership, then you can use that number.
It seems odd at first to discuss a sales price when you are only leasing the car, but in fact a leasing agreement is still set up so that at the end you can have the option to pay the balance and gain all equity in the car. Therefore, a leasing agreement starts by first establishing a sales price, either the MSRP at the most conservative level, or something lower after some negotiation.
Item 2: “The Money Factor”
This is an interesting gameshow-like term that refers to the interest rate you are going to pay through the term of your lease. Other names for the money factor include “lease factor” and the more straightforward “lease fee.” To calculate the money factor, you have to take the interest rate and divide it by 2,400. So, if your interest rate is 3%, then divided by 2,400 that comes to 0.00125. That rather interesting decimalized number is what a typical money factor number looks like.
Item 3: Lease Length
The most common lease term is 3 years, or 36 months, but some places offer longer leases at 4 or even 5 years. Remember, though, that the longer you lease, the more interest you are paying on a car that you ultimately won’t likely come to own. There may be additional fees to pay in a longer lease, too.
Another reason to opt for 3 years is that the majority of cars’ bumper-to-bumper warranties are 3 years long. If you go for a longer lease, then some components will be without a warranty for the final year or two.
Item 4: Car’s Residual Value
This is what the car is worth at the end of your lease. If you choose to buy the car, then this represents the amount you would have to pay at the end of your 3-year term. Likely residual value after 3 years depends on the specific make and model of the car, but it’s most often somewhere between 40 and 60 percent in total value.
Item 5: Additional Fees
One thing people tend to hate about leasing is all the added fees. It’s how dealerships really clean up in profits with car leasing. Common fees include acquisition fee, document fees, registration and more. Only the dealership or leasing company you’re working with can give you an exact rundown of their fees. They should spell them out. If you ask a dealership for their standard lease agreement fee details, they should be willing to share them.
Item 6: Rebates (if any)
Rebates refer to special incentives that might be put in place by dealerships in order to attract more leasing business. These rebates are not the same as government rebates that you get when you buy an electric car. Examples of rebates include:
- Lower APR rate
- Bonus cash
- “Conquest Bonus” – cash incentive offered by some dealerships if you can show you’re abandoning a competing brand in favor of leasing this new brand
- And others…
Step-by-Step Guide: How To Calculate Your Car Lease Payment
Follow the guide below and we’ll show you how you can quite easily calculate an approximate monthly payment on your car lease. Please note, however, that this formula is not the most exact science. The actual figure you get from the dealership may well vary, but it shouldn’t be very far away unless the dealership is being crooked with you.
In our example, we’re leasing a car for which we know the following numbers:
- MSRP – $21,000
- Negotiated Final Price $20,000
- Residual value – 55%
- Money factor – 0.00125
- Down payment $1,500
- $500 cash rebate because we’re switching to a competing brand
- Cost of fees: $1400
Multiply the MSRP by the residual value percentage to get the residual value
21,000 x 0.55 = 11,550 — therefore our residual value = $11,550
Take the negotiated final price and add in all fees to get the gross capitalized cost.
20,000 + 1,400 = 21,400 — therefore our gross capitalized cost = $21,400
Add together your down payment and rebate and then subtract this number from the gross capitalized cost to get what we call the adjusted capitalized cost.
1,500 + 500 = 2,000
21,400 – 2,000 = 19,400 — therefore our adjusted capitalized cost = $19,400
Take the residual amount and subtract it from the adjusted capitalized cost to get the amount of deprecation.
19,400 – 11,550 = 7,850 — therefore our depreciation = $7,850
Divide the depreciation by the lease length (months) to get the base payment
7,850 ÷ 36 = 218.05 — therefore our base payment is 218.05
Add together the adjusted capitalized cost and the residual, and then multiply the result by the money factor to get the rent charge (monthly interest)
19,400 + 11,550 = 30,950
30,950 x 0.00125 = 38.68 — therefore our rent charge is $38.68
Add the rent charge to the base payment to give you your pretax lease payment
218.05 + 38.68 — therefore our pretax lease payment = $256.73
If we assume a local tax rate of roughly 10 percent, then we can multiply by 1.10 to get the final estimate, which comes to $282.40.
Is It Worth Leasing a Car?
Whether or not a car lease is worth it depends mostly on your individual circumstances. If you know you need a car for a fixed period of time but can’t be sure beyond that, then a lease is perfect because you never have to worry about the resale of the car, and it goes away from you as quickly and as easily as it came. Even better, you can lease the very latest models, which means you’ll have minimal maintenance costs.
On the other hand, leasing means you are paying money for a car but gaining no equity in it. Even if you buy the car at the end of the lease, then you are probably spending a lot more than you would have done if you bought the car even using an auto loan.
Therefore, there are swings and roundabouts. It’s important to evaluate your own needs before signing a car lease. Getting out of a lease prematurely is a lot harder and potentially more expensive than it is to sell your car and pay off your auto loan, too. If you sign up for a lease, be ready to commit and see it through to the end. If the conditions are right, it’s a fantastic option.