The short answer
- You pay for the car’s expected loss in value over the lease, plus a rent charge for the money tied up in it, plus sales tax.
- A $40,000 car at a negotiated $38,000, $2,000 down, 58% residual and a 0.0025 money factor costs about $571.04 a month over 36 months with 7% tax.
- Over the lease that is $23,592 in all, including $3,211 due at signing and the fee to return the car.
- Money factor × 2,400 gives the rough APR: 0.0025 is about 6%.
How a lease works
When you lease, a leasing company (usually the carmaker’s finance arm or a bank) buys the car and lets you use it for a set number of months and miles. It expects the car to be worth a certain amount when you hand it back: the residual value. Your payments cover the gap between the price and that residual, plus a finance charge. You never pay for the part of the car you do not use, which is why lease payments are lower than loan payments on the same car.
The federal Consumer Leasing Act, through the CFPB’s Regulation M, requires the leasing company to give you a written disclosure before you sign, showing the capitalized cost, the residual, the rent charge, the payment and what you owe at signing.
The words on a lease
- MSRP: the maker’s sticker price. The residual is a share of it.
- Gross capitalized cost: the negotiated price plus anything rolled in, such as the acquisition fee or negative equity.
- Cap cost reduction: cash down, trade-in equity and rebates, which lower the amount you finance.
- Adjusted capitalized cost: gross cap cost minus the reductions.
- Residual value: the car’s expected value at the end.
- Money factor: the lease’s rate; the disclosure calls the result the rent charge.
The payment formula
Depreciation each month = (adjusted cap cost − residual) ÷ months
Rent charge each month = (adjusted cap cost + residual) × money factor
The base payment is the two added together. In most states sales tax is then added to each payment. Adding the cap cost and the residual looks odd, but it is a shortcut: multiplied by the money factor, it gives the average monthly interest on the money tied up in the car over the lease.
A worked example
- Negotiated price$38,000
- Plus acquisition fee rolled in$995
- Less cash down−$2,000
- Adjusted capitalized cost$36,995
- Residual58% of $40,000$23,200
- Depreciation($36,995 − $23,200) ÷ 36$383.19
- Rent charge($36,995 + $23,200) × 0.0025$150.49
- Base payment$533.68
- Sales tax at 7%$37.36
The money factor
The money factor is the lease’s interest rate in disguise. Multiply it by 2,400 for an approximate APR. Like a loan rate, it depends on your credit score, and the leasing company publishes a base rate (the “buy rate”) for each model each month. Dealers are often allowed to add to it and keep the difference, so ask for the base money factor and check the figure on the contract.
| Money factor | Rough APR | Rent charge a month | Monthly payment | Total lease cost |
|---|---|---|---|---|
| 0.0015 | 3.6% | $90.29 | $506.63 | $21,274 |
| 0.0025 | 6.0% | $150.49 | $571.04 | $23,592 |
| 0.0035 | 8.4% | $210.68 | $635.45 | $25,911 |
Each step of 0.001 in the money factor moves the total by about $2,319 on this car.
The residual value
The higher the residual, the less depreciation you pay. Cars that hold their value lease well; cars that lose value fast lease badly, even with discounts. The leasing company sets the residual for each model, term and yearly mileage, and three-year residuals are often in the 50% to 60% range. You cannot negotiate it, but you can choose a car and term with a high one.
Total lease cost on the example car: the payment runs from $635.95 at 52% to $506.13 at 64%.
Negotiating the price
Many people think lease prices are fixed. They are not: the capitalized cost is the selling price, and you can negotiate it exactly as if you were buying. On the example lease, paying the full $40,000 MSRP instead of $38,000 raises the payment to $635.83 and the total cost by about $2,333. Negotiate the price first, then talk about leasing, and ask for the cap cost, residual and money factor in writing.
Money down and cap cost reductions
- Payment
- $635.83
- Due at signing
- $1,136
- Total cost
- $23,785
- Payment
- $571.04
- Due at signing
- $3,211
- Total cost
- $23,592
- Payment
- $473.85
- Due at signing
- $6,324
- Total cost
- $23,304
Putting $5,000 down instead of nothing cuts the payment by about $162 but saves only about $481 over three years, because it trims just the rent charge on that money. The bigger risk: if the car is stolen or totaled, the insurer and any gap coverage settle with the leasing company, and your down payment is usually gone. Many lease experts suggest putting as little down as possible.
Sales tax on a lease
States tax leases in different ways, and it changes both the payment and the cash due at signing:
| How the state taxes it | Monthly payment | Due at signing | Total lease cost |
|---|---|---|---|
| On each payment (most states) | $571.04 | $3,211 | $23,592 |
| On the total of payments, at signing (New York) | $533.68 | $4,519 | $23,592 |
| On the car's price, at signing (Texas, Maryland, Virginia) | $533.68 | $5,694 | $24,768 |
| No sales tax | $533.68 | $3,034 | $22,108 |
Taxing each payment means you pay tax only on the part of the car you use. New York charges tax on all the payments, plus the down payment, when the lease starts. In Texas the leasing company pays motor vehicle tax on the price and passes it on. Many states also tax a cash down payment. The calculator fills in your state’s average rate; check the vehicle rate with your state, as some differ from the general sales tax. Our sales tax calculator shows the general rates.
Acquisition and disposition fees
The acquisition fee, often about $600 to $1,100, is the leasing company’s charge for setting up the lease. Most people roll it into the cap cost, where it adds to the payment and attracts rent charge; paying the $995 upfront in the example lowers the payment to $538.80 and saves about $165 overall. The disposition fee, often about $300 to $600, is charged when you return the car, and is commonly waived if you lease or buy another car from the same brand. Dealers also charge a documentation fee, and the state charges title and registration.
What is due at signing
Lease ads quote a payment “plus amount due at signing”. That amount usually includes the first month’s payment, any cash down, any upfront tax, the acquisition fee if it is not rolled in, and title, registration and doc fees. In the example it is $3,211: the $571.04 first payment, $2,000 down, $140 of tax on the down payment and $500 of fees. Some leases also ask for a refundable security deposit.
Trade-ins and negative equity
Trade-in equity, what your old car is worth minus what you owe on it, counts as a cap cost reduction, just like cash. If you owe more than the car is worth, the difference is added to the new lease’s cap cost, and you pay it off, with rent charge, in the new payments. Rolling negative equity from car to car makes each deal worse; paying it down first is cheaper.
Leasing vs buying
The fair comparison looks at the same period. Buy the same car for $38,000 with $2,000 down on a 60-month loan at 7.5%, with 7% tax and the fees financed, and the payment is $784.69. After 36 months you have paid $30,249, still owe $17,438, and own a car worth about the $23,200 residual: a net cost of about $24,486. The lease cost $23,592, so here leasing is about $894 cheaper over three years, mainly because you pay sales tax only on the payments.
The picture changes if you keep the bought car. After the loan ends you drive with no payment at all, and over seven to ten years buying usually costs much less. Use our auto loan calculator for the full loan, and our car affordability calculator to see what price fits your income.
Mileage and wear
Leases include a yearly mileage allowance, commonly 10,000, 12,000 or 15,000 miles. Go over and you pay a charge for every extra mile when you return the car, often 15 to 30 cents a mile. Buying extra miles at the start is usually cheaper. You also pay for damage beyond normal wear: dents, curb-damaged wheels, worn tires and stains. Get the car inspected before the return date so you can fix small things more cheaply yourself.
At the end of the lease
- Return the car, pay any mileage and wear charges and the disposition fee.
- Buy it for the residual value plus any purchase fee, if it is worth more than that or you love it.
- Sell or trade it: if the market value is above the payoff, the difference is equity you can use.
- Lease again, often with the disposition fee waived.
Ending a lease early
Leases are hard to leave. Early termination usually means paying the remaining depreciation and fees, which can approach the rest of the payments. Options include a lease transfer to another person (if the leasing company allows it), or selling the car to a dealer for its payoff amount. Do not lease for longer than you are sure you will want the car.
Who leasing suits
Leasing tends to suit people who
Want a new car every two or three years, drive a predictable number of miles, keep cars in good condition, and value a lower payment and a car under warranty over the long-run saving of owning one outright. Business users may also deduct part of a lease payment; ask a tax professional.
Leasing is a poor fit if you
Drive a lot, are hard on cars, want to modify the car, or plan to keep a car for many years. Each new lease restarts the most expensive part of a car’s life.
Using the calculator
Enter the MSRP, the negotiated price, any cash down, the residual percentage and the money factor from the dealer’s quote, and choose the term. Under More options, pick your state to fill in its tax rate and method, add a trade-in, rebates and the fees, and set the auto loan rate and term to compare buying. The results show how the payment is built, step by step, so you can check it against the contract.
Key numbers
| Item | Figure |
|---|---|
| Money factor to rough APR | × 2,400 |
| Typical acquisition fee | about $600 to $1,100 |
| Typical disposition fee | about $300 to $600 |
| Average 72-month new car loan rate at banks (Fed G.19, August 2026) | about 7.2% |
| States with no state sales tax | Alaska, Delaware, Montana, New Hampshire, Oregon |