How Lease Payments Work
A lease payment covers two things: depreciation and interest. Depreciation is the portion of the car's value used up during the lease. Interest (expressed as a "money factor") is the cost of financing. Together they form the base payment; sales tax adds on top.
Depreciation Fee = (Net Cap Cost − Residual) ÷ Months
Finance Fee = (Net Cap Cost + Residual) × Money Factor
Monthly Payment = (Dep. Fee + Finance Fee) × (1 + Tax Rate)
Key Lease Terms
MSRP: Manufacturer's suggested retail price. The sticker price.
Cap Cost: Negotiated price plus fees. This is what you're leasing at.
Residual Value: What the car is worth at lease end, set by the lender. Higher residual = lower payment because you're covering less depreciation.
Money Factor: The lease equivalent of interest rate. Multiply by 2,400 to get approximate APR. A money factor of 0.0020 ≈ 4.8% APR.
Negotiation Tips
You can negotiate the selling price (cap cost) just like buying. You also negotiate the down payment and fees. The money factor and residual value are set by the finance company—usually not negotiable, but you can ask for manufacturer incentives that effectively lower the money factor.
Avoid large down payments on leases. Unlike buying, a big lease down payment just shifts cost forward. If the car gets totaled or stolen, GAP insurance covers the lease balance but your down payment is gone.
Lease vs. Buy Comparison
| Lease | Buy | |
|---|---|---|
| Monthly Cost | Lower | Higher |
| Ownership | Return at end | You own it |
| Mileage | Limited (10-15K/yr) | Unlimited |
| Customization | No modifications | Full freedom |
| Long-term Cost | Higher (always paying) | Lower (eventually no payment) |
| Maintenance | Under warranty | Out of pocket after warranty |