Work out a car lease payment from capitalized cost, residual value and money factor.
An auto lease payment has two parts. The depreciation fee covers the difference between the vehicle's starting value (adjusted cap cost) and ending value (residual) spread over the term — this is the portion of the car you're 'using up'. The finance fee compensates the lessor for tying up capital; it's calculated on the average of the cap cost and residual value, multiplied by the money factor. Money factor is the leasing industry's equivalent of a monthly interest rate — multiply by 2400 to get the approximate annualized APR for comparison with loan rates. A lower money factor means a lower finance fee and a lower payment.
Depreciation fee
Depreciation fee = (Adjusted cap cost − Residual) / Term months
Finance fee
Finance fee = (Adjusted cap cost + Residual) × Money Factor
Money factor to APR
Equivalent APR ≈ Money Factor × 2400
Multiply the money factor by 2400. A money factor of 0.00125 × 2400 = 3% APR. This conversion is an industry standard, not a precise mathematical identity, but it's close enough for comparison purposes. If a dealer quotes only APR, divide by 2400 to get the money factor.
A cap cost reduction is an upfront payment that reduces the amount being depreciated, lowering your monthly payment. Unlike a loan down payment, it doesn't build equity — you're still returning the car at the end. If the car is totalled early in the lease, you lose that upfront cash. Most leasing experts recommend minimising the cap cost reduction and keeping cash liquid.
The residual is the car's projected value at lease end, set by the lessor (bank/manufacturer). A higher residual means less depreciation to recover, which means lower monthly payments. Manufacturers subsidise leases on popular models by inflating the residual. You can usually buy the car at the end for the stated residual price.
Leasing has lower monthly payments and lets you drive a new car every few years with minimal maintenance risk. But you build no equity, face mileage limits, and may pay disposition fees at turn-in. Buying costs more monthly but builds equity and provides ownership flexibility. Use the Cash Back or Low Interest Calculator for APR-sensitive comparisons.