Page published October 28, 2026
Get the free Car Buyer’s Cheat Sheet, 7 things to know before you sign anything. The numbers that matter, in plain English, on one page.
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Page published October 28, 2026
In words: the first half pays for the value the car loses, and the second half pays interest on the average of what the car is worth at the start and at the end. Tax, fees, and any money down sit outside the formula and are handled after it, which is why a quote that only shows the monthly number cannot be checked until the inputs behind it are on the table.
The three inputs, in plain words
Cap cost (capitalized cost). The price the lease is based on. It starts from the selling price and adds anything rolled into the lease, such as an acquisition fee, and subtracts any cap cost reduction, which is money paid up front to lower the leased amount. A lower cap cost lowers the payment, but money paid up front is money paid up front: it is not a discount, it is an early payment.
Residual value. What the leasing company expects the car to be worth when the lease ends. It is usually stated as a percentage of the sticker price. A higher residual means less value lost during the lease, so a lower monthly payment, but it also means a higher price if you later buy the car, since the buyout is built on that same residual. The residual is set by the leasing company, not by the dealer, and it is the one input you generally cannot negotiate.
Money factor. The interest rate on the lease, written as a small decimal instead of a percent. To turn it into an APR you can compare with a loan, multiply by 2,400. A money factor of 0.00125 times 2,400 is 3.00%. A money factor of 0.00250 times 2,400 is 6.00%. The 2,400 conversion is the standard dealer conversion and gives an approximate APR, close enough to compare offers, and the right way to catch a quote where the interest is far higher than the advertised rate suggests.
Worked example: a $32,000 car over 36 months
These are clearly labeled example inputs, not market claims: cap cost $32,000, residual $17,600 (55% of a $32,000 sticker price), term 36 months, money factor 0.00125 (about 3.00% APR).
| Step | Math | Result |
|---|---|---|
| Depreciation fee | ($32,000 minus $17,600) divided by 36 | $400.00 |
| Finance fee | ($32,000 plus $17,600) times 0.00125 | $62.00 |
| Monthly payment before tax | $400.00 plus $62.00 | $462.00 |
| Sales tax at the site example rate of 7% | $462.00 times 7% | $32.34 |
| Monthly payment with tax | $462.00 plus $32.34 | $494.34 |
| Total of 36 payments before tax | $462.00 times 36 | $16,632.00 |
| Total of 36 payments with tax | $494.34 times 36 | $17,796.24 |
Notice what the finance fee is charged on: the cap cost plus the residual, which is roughly the average value of the car across the lease. That is why the finance fee barely moves when the residual changes, while the depreciation fee moves a lot. It is also why a lease can look cheap next to a loan payment while costing plenty overall: the payment only covers the value lost plus interest, and at the end there is no car owned unless the buyout is paid.
Formula
The payment has two parts. The depreciation fee is (cap cost minus residual value) divided by the term in months. The finance fee is (cap cost plus residual value) times the money factor. Add them for the payment before tax. On the worked example, a $32,000 cap cost, $17,600 residual (55% of a $32,000 sticker price), 36 months, and a 0.00125 money factor give a depreciation fee of ($32,000 minus $17,600) divided by 36, which is $400.00, plus a finance fee of ($32,000 plus $17,600) times 0.00125, which is $62.00, or $462.00 before tax.
Tax sits outside the formula and is handled after it. At the site example rate of 7%, tax is $462.00 times 7%, which is $32.34, so the monthly payment with tax is $494.34. The total of 36 payments before tax is $462.00 times 36, which is $16,632.00, and with tax it is $494.34 times 36, which is $17,796.24. The finance fee is charged on the cap cost plus the residual, roughly the average value of the car across the lease, which is why it barely moves when the residual changes while the depreciation fee moves a lot.
The residual table keeps the same $32,000 cap cost, 36 months, and 0.00125 money factor and moves only the residual. At 50%, a $16,000 residual, the depreciation fee is $444.44, the finance fee is $60.00, and the payment before tax is $504.44. At 55%, a $17,600 residual, the fees are $400.00 and $62.00, and the payment is $462.00. At 60%, a $19,200 residual, the fees are $355.56 and $64.00, and the payment is $419.56. Five points of residual moves this payment by about $42 to $44 a month, or about $1,500 over the lease. The second example, a $40,000 cap cost, $22,000 residual (55%), 36 months, and a 0.00200 money factor (about 4.80% APR), gives a $500.00 depreciation fee plus a $124.00 finance fee, or $624.00 before tax. To turn a money factor into an APR, multiply by 2,400: 0.00125 times 2,400 is 3.00%, and 0.00250 times 2,400 is 6.00%.
How sensitive the payment is to the residual
Same $32,000 cap cost, same 36 months, same 0.00125 money factor, only the residual changes:
| Residual | Residual value | Depreciation fee | Finance fee | Payment before tax |
|---|---|---|---|---|
| 50% | $16,000 | $444.44 | $60.00 | $504.44 |
| 55% | $17,600 | $400.00 | $62.00 | $462.00 |
| 60% | $19,200 | $355.56 | $64.00 | $419.56 |
Five points of residual moves this payment by about $42 to $44 a month, or about $1,500 over the lease. That is why two quotes for the same car can differ sharply: the residual and the money factor are doing most of the work, and neither one appears in an advertised monthly number.
A second example, at a higher interest rate
Cap cost $40,000, residual $22,000 (55%), term 36 months, money factor 0.00200 (about 4.80% APR). Depreciation fee: ($40,000 minus $22,000) divided by 36 equals $500.00. Finance fee: ($40,000 plus $22,000) times 0.00200 equals $124.00. Payment before tax: $624.00. The payment is higher here mostly because the car costs more, but the finance fee doubled as a share of the payment compared with the first example, from $62 on a $462 payment to $124 on a $624 payment. When the money factor is the thing that moved, the APR conversion is what catches it.
How to check a real dealer quote, line by line
Ask for these five lines in writing, then run the formula above on them. If any line is missing, the quote cannot be checked, and that is a reason to ask, not a reason to sign.
1. Cap cost, with every add-on itemized. Compare it with the sticker price and with the selling price you agreed. Anything rolled in, such as an acquisition fee, raises the cap cost and therefore the payment. A cap cost reduction lowers the payment, but it is cash out of your pocket on day one.
2. Residual value and residual percentage. Divide the residual by the sticker price. If the percentage looks far from other quotes for the same car and term, ask why, since the residual is set by the leasing company and should not vary much between dealers for the same lease program.
3. Money factor, converted to an APR. Multiply by 2,400. If the result is far above the loan APR you could get on a purchase, the lease interest is doing quiet damage. This is the line most often left off a quote, and the line most worth asking for.
4. Fees outside the formula. The acquisition fee (charged at signing, sometimes rolled into the cap cost), the disposition fee (charged at return), and any registration or documentation fees. The return bill is priced line by line on our lease end costs page, including mileage overage and wear charges.
5. Tax treatment. Tax rules vary by state: most states tax the monthly payment, a few tax the full price up front, and the example on this page taxes the monthly payment at the site example rate of 7%. Your state rule decides which version of the total applies to you, so check the tax line on the quote rather than assuming it matches this page.
This page is the math behind the decision. For whether leasing or buying fits your situation, see lease vs buy. For what happens if you buy the car at the end, see should you buy out your lease, and to check any quote against its own numbers, use the quote check tool.
Figures: Driveonomics arithmetic on the stated example inputs. The money factor to APR conversion (times 2,400) is the standard dealer conversion and gives an approximate APR. Tax at 7% is a site example, not any state actual rate.
Keep looking
If this page answered one question and raised the next, these follow naturally from it:
- Lease vs buy: whether leasing fits your situation at all, beyond the monthly math.
- Should you buy out your lease: what that residual means if you buy the car at the end.
- What it costs when your lease ends: the return bill, line by line, including mileage and wear charges.
- Check your quote: run a real dealer quote against its own numbers before you sign.
Educational estimates only, not financial, tax, legal or insurance advice. Every figure on this page is a typical example worked from the inputs stated on the page, not a quote for a specific car, loan, or driver. Your rate, insurance, fuel use, and resale value will move your total. See Terms.
Calculation transparency
Scope. The lease payment formula itself, worked on two stated example cars, with the residual sensitivity table and the five lines to ask for on a real dealer quote.
Rules and time period. Example inputs are clearly labeled examples, not market claims: cap cost $32,000, residual $17,600 (55% of a $32,000 sticker price), term 36 months, money factor 0.00125 (about 3.00% APR); second example $40,000, $22,000 residual (55%), 36 months, money factor 0.00200 (about 4.80% APR); money factor to APR conversion times 2,400 is the standard dealer conversion and gives an approximate APR; tax at 7% is a site example, not any state actual rate.
Scope and limitations. Educational estimate only. The formula covers depreciation and interest only. Outside it sit the acquisition fee, the disposition fee at return, mileage overage and wear charges, registration and documentation fees, any money down or cap cost reduction, and tax, whose treatment varies by state. The residual is set by the leasing company, not by the dealer. Prices vary by car, shop, and city. Get a written quote for your own car before you decide.
Source links checked November 6, 2026. Figures: Driveonomics arithmetic on the stated example inputs; money factor to APR conversion (times 2,400), the standard dealer conversion, as set out by Edmunds; tax at 7% is a site example, not any state actual rate. No other external source figure is used on this page.
Primary sources: Edmunds, how to calculate your own lease payment; Lease vs buy calculator; Lease buyout calculator; What it costs when your lease ends. How the numbers are calculated is written down on the methodology page, and every source is listed on the sources page.
Definitions
Cap cost. Short for capitalized cost, the price the lease is based on. It starts from the selling price, adds anything rolled into the lease such as an acquisition fee, and subtracts any cap cost reduction. On this page, $32,000 in the worked example.
Residual value. What the leasing company expects the car to be worth when the lease ends, usually stated as a percentage of the sticker price. On this page, $17,600, or 55% of a $32,000 sticker price, in the worked example.
Money factor. The interest rate on the lease, written as a small decimal instead of a percent. To turn it into an APR, multiply by 2,400. On this page, 0.00125 is about 3.00%.
Depreciation fee. The first half of the payment: (cap cost minus residual value) divided by the term in months. On this page, $400.00 in the worked example.
Finance fee. The second half of the payment: (cap cost plus residual value) times the money factor. On this page, $62.00 in the worked example.
Cap cost reduction. Money paid up front to lower the leased amount. It lowers the payment, but it is cash paid on day one, not a discount.
Acquisition fee. A fee charged at signing, sometimes rolled into the cap cost. It sits outside the payment formula.
Disposition fee. A fee charged at return, when the car goes back. It sits outside the payment formula.
Questions people actually ask
How is a lease payment calculated?
A lease payment has two parts. The depreciation fee is (cap cost minus residual value) divided by the term in months. The finance fee is (cap cost plus residual value) times the money factor. Add them for the payment before tax. On the example on this page, a $32,000 cap cost, $17,600 residual, 36 months, and a 0.00125 money factor give a $400.00 depreciation fee plus a $62.00 finance fee, or $462.00 before tax.
What is a money factor, and how do I turn it into an APR?
A money factor is the lease interest rate written as a small decimal. Multiply it by 2,400 to get an approximate APR: 0.00125 times 2,400 is 3.00%, and 0.00250 times 2,400 is 6.00%. The conversion is the standard dealer conversion and gives an approximate APR, close enough to compare a lease offer with a loan offer.
What is residual value on a lease?
Residual value is what the leasing company expects the car to be worth when the lease ends, usually stated as a percentage of the sticker price. A higher residual lowers the monthly payment, because less value is lost during the lease, but it also raises the buyout price if you later buy the car, since the buyout is built on that same residual.
What is cap cost on a lease?
Cap cost, short for capitalized cost, is the price the lease is based on. It starts from the selling price, adds anything rolled into the lease such as an acquisition fee, and subtracts any cap cost reduction, which is money paid up front. A lower cap cost lowers the payment, but a cap cost reduction is cash paid on day one, not a discount.
Why does a higher residual lower my lease payment?
Because the depreciation fee is the value lost during the lease divided by the term. On the example on this page, moving the residual from 50% to 60% of a $32,000 car cuts the depreciation fee from $444.44 to $355.56 a month, and the payment before tax from $504.44 to $419.56, while the finance fee barely moves. Five points of residual is worth about $42 to $44 a month here.
Related: Run your own numbers with the lease vs. buy calculator.
Related: If you keep the car later, the buyout calculator runs that math.
Related: Leasing an EV? Run the EV lease vs. buy calculator.