Question 1

How is a car lease payment calculated?

Accepted Answer

The standard lease formula is: Monthly Payment = (Depreciation + Finance Charge) ÷ Months. Depreciation = (Net Cap Cost − Residual Value) ÷ Term. Finance Charge = (Net Cap Cost + Residual Value) × Money Factor. The money factor is the lease equivalent of an interest rate — multiply it by 2400 to get the approximate APR (e.g. 0.00125 MF ≈ 3% APR).

Question 2

What is a money factor?

Accepted Answer

A money factor (MF) is the lease financing rate expressed as a small decimal instead of a percentage. A money factor of 0.00125 equals roughly 3% APR (0.00125 × 2400). You can convert any APR to a money factor by dividing it by 2400. Dealers are required to disclose both the money factor and its APR equivalent in your lease contract.

Question 3

What is residual value?

Accepted Answer

Residual value is what the leasing company expects the car to be worth at the end of the lease. It's set as a percentage of MSRP and depends on the term (typically 36 or 39 months). A higher residual means lower monthly payments because less of the car is being depreciated during the lease. Manufacturer-subsidized leases often have inflated residuals to lower advertised payments.

Question 4

Should I put money down on a lease?

Accepted Answer

Most experts recommend $0 down on a lease. If the car is stolen or totaled in the first week, you lose any down payment — and gap insurance usually doesn't cover it. A larger down payment also reduces your monthly payment but doesn't reduce the total cost of the lease much, because the depreciation is fixed. Put your down payment toward the monthly payment instead, so you can walk away if needed.