How Car Lease Payments Work (and Leasing vs Buying)

Published October 12, 2026

Free tool: Car Lease Calculator→

A car lease is like a long-term rental: you pay for the part of the car's value you use up while you drive it, plus a finance charge, and hand it back at the end. Lease payments are often lower than loan payments for the same car, but the math behind them is less obvious. This guide explains how a lease payment is built, what the jargon means and how leasing compares with buying, using the free Car Lease Calculator.

The lease vocabulary

• Capitalized cost (cap cost): the price you negotiate, plus fees such as the acquisition fee. Lower is better, and it's negotiable just like a purchase price.
• Cap cost reduction: your down payment, trade-in equity and rebates, which lower the amount you're financing.
• Residual value: what the car is expected to be worth at the end of the lease, set as a percentage of the sticker price (MSRP).
• Money factor: the lease's interest rate in a different form. Multiply it by 2,400 to get an approximate APR, or divide an APR by 2,400 to get the money factor: 4.8% APR ≈ 0.002.

How the monthly payment is built

A lease payment has three parts:

1. Depreciation fee = (adjusted cap cost − residual value) ÷ months
2. Rent charge = (adjusted cap cost + residual value) × money factor
3. Sales tax on the payment, in most US states

Example: a car with a $35,000 MSRP, negotiated to $33,000, with a $695 acquisition fee, $2,000 down, a 58% residual, a 36-month term, a 4.8% APR and 7% sales tax:

• Adjusted cap cost: $33,000 + $695 − $2,000 = $31,695
• Residual value: 58% × $35,000 = $20,300
• Depreciation fee: ($31,695 − $20,300) ÷ 36 = $316.53
• Rent charge: ($31,695 + $20,300) × 0.002 = $103.99
• Tax: 7% of the two = $29.44
• Monthly payment: $449.95, with $2,449.95 due at signing (down payment plus the first payment)

Over the lease, you'd pay about $18,198 in total, and then hand the car back.

Lease or buy?

Financing the same car over 60 months instead would cost about $626 a month. After 36 months, you'd still owe about $14,288, but the car would be worth about $20,300, giving you about $6,012 of equity. Counting that equity, buying costs about $18,508 over the same three years in this example, close to the lease's cost, and buying keeps getting cheaper the longer you keep the car.

Leasing suits you if you like a new car every few years, drive a predictable number of miles, and want lower payments with the car under warranty. Buying suits you if you keep cars for many years, drive a lot (leases charge for extra miles), or want to modify the car.

How to use the Car Lease Calculator

1. Open the Car Lease Calculator.
2. Enter the MSRP and the negotiated price, your down payment, trade-in equity and rebates, and the acquisition fee.
3. Enter the residual value (as a percentage of MSRP), the lease term, the interest rate (APR) and the sales tax.
4. Enter a loan term to compare with buying.
5. Read the results: the monthly lease payment, the depreciation fee, the rent charge, the residual value, the total lease cost and a lease-versus-buy comparison over the lease term.

Frequently asked questions

How is a lease payment calculated?

Add the depreciation fee ((cap cost − residual) ÷ months) and the rent charge ((cap cost + residual) × money factor), then add sales tax. In the example, that's $316.53 + $103.99 + $29.44 = $449.95 a month.

What is a money factor?

The interest rate on a lease, written as a small decimal. Multiply it by 2,400 for the approximate APR: a money factor of 0.002 is about 4.8%.

Can you negotiate a car lease?

Yes. The price (cap cost) is negotiable, and you can ask about the money factor and fees. The residual value is usually set by the leasing company.