How it works
Leasing a vehicle means paying for the slice of its worth you actually use. The dealership's leasing bank figures out what the car will be worth at hand-back, and you cover the gap between today's sticker and that projected end value. A financing charge rides on top — that's the bank's cut for tying up capital in your car. Sales tax gets tacked onto the monthly total in most states.
Two concepts show up here that you'd never encounter buying a car outright:
| Concept | What it means | Why it's lease-only |
|---|---|---|
| Residual value | The bank's forecast of the car's resale worth at return, as a % of the negotiated price | Buyers don't care about future resale at signing — lessors base the entire contract on it |
| Money factor | The bank's financing rate, shown as a tiny decimal (0.00125 ≈ 3% APR) | Conventional loans quote APR; leasing banks use this decimal format, which you convert by multiplying by 2,400 |
This tool is an estimate, not professional financial advice — confirm the dealership's contract figures before signing.
The formula
Monthly payment = (Depreciation + Finance charge) × (1 + Tax rate)
Where depreciation is spread across the lease term and the finance charge applies to the average of the adjusted capitalized cost and residual.
Worked example
You're eyeing a sedan with a $32,000 sticker. The dealership offers a 36-month lease at 55% residual, a money factor of 0.00125, and a 12,000 miles/year allowance. You're putting nothing down, and local sales tax runs 8%.
Residual amount: $32,000 × 0.55 = $17,600
Depreciation over 36 months: $32,000 − $17,600 = $14,400
Monthly depreciation: $14,400 ÷ 36 = $400.00
Average balance: ($32,000 + $17,600) ÷ 2 = $24,800
Monthly finance charge: $24,800 × 0.00125 = $31.00
Pre-tax monthly: $400.00 + $31.00 = $431.00
With 8% sales tax: $431.00 × 1.08 = $465.48
So you'd write the dealership a check for roughly $465.48 each month for three years.
Common mistakes
Putting too much cash down. A hefty cap-cost reduction drops your monthly figure, but that cash vanishes if the car gets stolen or totaled in month two — gap insurance covers the payoff, not your down payment. Keeping that money in your pocket and accepting a slightly higher monthly is usually safer.
Ignoring the mileage tier. The 12,000 miles/year allowance in this example is a sweet spot, but dropping to 10,000 miles/year lowers residual (bumping the monthly payment) while 15,000 miles/year raises it. If you blow past the contracted miles, the dealership's per-mile penalty at return — often $0.25/mile — can cost more than the higher tier would have.
Confusing money factor with APR. A dealer might quote a great-sounding money factor and hope you don't convert it. Always multiply by 2,400 to compare apples-to-apples with conventional loan rates.
Forgetting acquisition and disposition fees. The bank often charges a $500–$1,000 acquisition fee at signing and a $300–$400 disposition fee at return. This calculator covers the core payment — those extra fees arrive separately on the contract.