How a lease payment is built
A lease payment has two parts. The depreciation fee spreads the value the car loses during the lease, the price minus its residual value, over the term. The finance charge, sometimes called rent, is interest on the money tied up, worked out from the money factor. Add any sales tax and you have the monthly payment. Understanding the two parts is what lets you spot a good lease from a bad one.
Two examples
A 30,000 car with 2,000 down, a 55% residual and a 0.0025 money factor over 36 months costs about 431 a month before tax. That money factor is roughly a 6% APR, since multiplying it by 2400 converts it to an equivalent rate.
Take the same car but with a higher 65% residual. Because the car is expected to lose less value, the depreciation you pay for shrinks and the monthly payment drops noticeably. This is why two similarly priced cars can lease for very different amounts.
Watch the money factor
The money factor is the lease world's version of an interest rate, just dressed up in an unfamiliar form. Multiply it by 2400 to see the APR and compare it against a normal loan. A low advertised payment can still hide an expensive money factor, so always convert it and check, rather than judging the lease on the monthly figure alone.
Frequently asked questions
Is leasing cheaper than buying?
The monthly payment is often lower, but you own nothing at the end. Compare against buying with the car loan and cost-of-ownership calculators.
What is the money factor?
It is the lease interest rate in a different form. Multiply it by 2400 to get the equivalent APR.
What is residual value?
The car's estimated worth at the end of the lease. A higher residual means less depreciation and a lower payment.