How does auto leasing work and how are payments calculated?

Auto leasing is essentially renting a car for 2-4 years. You pay for the vehicle's depreciation during the lease term, not the full value. Monthly payment calculation: (1) Capitalized cost - the negotiated price (negotiate this like buying!). (2) Residual value - what the car will be worth at lease end, set by manufacturer as % of MSRP (typically 50-65%). Example: $40k MSRP, 60% residual = $24k. (3) Depreciation - cap cost minus residual, divided by lease months. $32k cap cost - $24k residual = $8k ÷ 36 months = $222/month depreciation. (4) Money factor - the lease interest rate. Multiply by 2,400 to get APR equivalent. Money factor 0.00125 = 3% APR. Finance charge = (cap cost + residual) × money factor = ($32k + $24k) × 0.00125 = $70/month. (5) Sales tax - applied to monthly payment in most states. Total = depreciation + finance charge + tax. You also pay acquisition fee ($500-800) upfront, disposition fee ($300-500) at lease end unless you buy or lease another vehicle from same brand.

Should I lease or buy a car? When does leasing make sense?

Lease if: (1) You want new car every 2-3 years with latest tech and safety. (2) You drive 12k-15k miles/year or less. Leases charge $0.25-0.30/mile for overages. (3) Lower monthly payments matter - lease payments are typically 30-50% lower than buying because you only pay depreciation. (4) Business use - may be able to deduct lease payments (consult tax pro). (5) Warranty matters - most leases are fully covered by manufacturer warranty. Buy if: (1) High mileage driver (18k+/year). (2) Keep cars 7-10+ years - years 6-10 are payment-free, massive savings. (3) Want to build equity - after 5 years own a $15k-20k asset vs $0 with leasing. (4) Want to modify/customize - leases require returning in original condition. (5) Prefer ownership and no restrictions. Cost example over 6 years: Lease 2 consecutive 3-year terms = $600/mo × 72 months = $43,200, own nothing. Buy with 5-year loan = $750/mo × 60 months = $45,000, own car worth ~$18k. Net cost: Lease $43k, Buy $27k. Buying wins long-term.

What is money factor and how do I convert it to APR?

Money factor is the interest rate for a lease, expressed as a decimal. To convert to APR, multiply money factor by 2,400. Examples: (1) Money factor 0.00125 = 3.0% APR (0.00125 × 2,400). (2) Money factor 0.00200 = 4.8% APR. (3) Money factor 0.00300 = 7.2% APR. Why money factor? Leasing originated in commercial equipment financing which used this format. It's intentionally confusing - dealers prefer you don't understand it. Money factor is NOT negotiable in the same way APR is for loans, but dealers may mark it up from manufacturer's base rate. Always ask for the 'buy rate' (manufacturer's money factor) and compare across dealers. Good money factors (2025): 0.00100-0.00150 (2.4-3.6% APR) = excellent credit. 0.00150-0.00200 (3.6-4.8% APR) = good credit. 0.00200-0.00300 (4.8-7.2% APR) = average credit. Over 0.00300 (7.2%+) = poor credit or dealer markup. Calculate monthly finance charge: (Capitalized cost + Residual value) × Money factor = Finance charge. Example: ($35,000 + $21,000) × 0.00125 = $70/month.

How much should I put down on a lease?

Put as little down as possible, ideally $0-1,000. Here's why: (1) If car is totaled - insurance pays the leasing company, not you. You lose your entire down payment. Example: Put $5,000 down, car totaled month 2, insurance pays off lease, you lost $5,000. (2) No equity building - unlike buying, down payment doesn't build ownership. You're just prepaying depreciation. (3) Opportunity cost - that $5,000 could earn 5-7% in a savings account or investments over the lease term. (4) Dealer markup - dealers LOVE big down payments (called 'cap reduction') because it makes monthly payment look great while hiding bad lease terms. Better approach: Instead of $5,000 down to lower payment $140/month on 36-month lease, keep the $5,000. Math: Save $140/mo × 36 = $5,040 savings. But you still have your $5,000 + interest earned. Net: You're ahead ~$5,300. Only put money down if: (1) Payment must be below specific amount for budget. (2) Getting unusually good money factor/residual and paying cash reduces total interest significantly (rare). When dealers quote 'sign and drive' $0 down, verify they're not adding fees to capitalized cost. Roll-in fees are fine, but negotiate selling price first.

What happens at the end of my lease?

You have 3 options at lease end: Option 1 - Return vehicle: (1) Schedule lease-end inspection 30-60 days before end. (2) Excessive wear-and-tear charges: $200-2,000 for dents, scratches, tire wear, interior damage. (3) Excess mileage fees: $0.25-0.30/mile over allowance. 15,000 miles over = $3,750-4,500. (4) Pay disposition fee: $300-500 (waived if you lease another vehicle from same brand). (5) Walk away, car is theirs. Option 2 - Buy the vehicle: (1) Purchase for predetermined residual value (in lease contract). (2) Good if market value exceeds residual or you love the car. Example: Residual $24k, market value $28k = buying makes sense. (3) Finance the buyout - banks offer auto loans for lease buyouts at standard rates. (4) No trade-in value comparison needed, price is locked. Option 3 - Lease another vehicle: (1) Most common option (65% of lessees). (2) Dealer typically waives disposition fee. (3) May offer loyalty incentives ($500-1,500). (4) Can roll equity if vehicle worth more than residual. Lease-end inspection tips: Fix minor damage yourself before inspection (door dings, small scratches = $100 to fix vs $500 charged by dealer). Normal wear-and-tear is expected: light scratches, small chips, worn floor mats OK. Not OK: dents, cracked glass, bald tires, stains, strong odors.

Auto Lease Calculator

Calculate monthly lease payments and compare lease vs buy options

Vehicle Details

MSRP (Sticker Price)

Negotiated Selling Price

Discount: $2,000 (5.7% off MSRP)

Down Payment / Cap Reduction

Trade-In Value

Lease Terms

Lease Term (Months)

Annual Mileage Allowance

Total allowed: 36,000 miles

Residual Value (% of MSRP)

Residual value: $21,000

Money Factor

Equivalent APR: 3.00%

Plan to Buy at Lease End?

Monthly Lease Payment

Due at Signing$0

Total Lease Cost$0

Residual Value$0

Monthly Payment Breakdown

Lease Cost Breakdown

Depreciation Cost$0

Finance Charges$0

Total Tax Paid$0

Fees (Acq + Disp)$1,090

Monthly Payment

Term

36mo

Rate

3.00%