Leasing a car
is a cheaper alternative if you want to drive a newer vehicle.And while you have to give the car back at the end of the lease term or choose to buy it then
, you can drive it for a lot less money than if you had bought the car outright. Before leasing a car, you can calculate how much you will pay each month to see if it fits within your budget. Here's how to do it.
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Lease payment terms
You need to keep certain factors in mind when you are trying to calculate the car lease payment on your own. A lot of the terminology around leasing can be confusing, so before you calculate your car lease payment, learn what the various terms mean.
Most dealerships use the same criteria when figuring out your lease payment amount, including:
Depreciation fee: Depreciation is the amount of value lost as a car ages. Depreciation on a newer car occurs much more rapidly, with the value of a new car depreciating 15 to 25 percent each year within the first five years, according to U.S. News & World Report
. The company you lease from gets back the lost value of the vehicle through the depreciation fee they charge you. Finance fee: Car leasing companies charge you a finance fee for financing the car you lease. Calculating the finance fee requires you to use a few of the other terms below, including the net capitalized cost, the residual value of the car, and the money factor.
MSRP: The Manufacturer's Suggested Retail Price, or MSRP, is the sticker price of a car. This amount represents the manufacturer's recommended selling price for dealerships. You can find the MSRP price on the car window sticker or on the dealership's website.
Selling price: The selling price is what you end up paying for the vehicle below or over the MSRP. Most often, you can negotiate the selling price down a bit. The selling price does not take into account any incentives or taxes associated with buying the car, as the dealership applies those after you decide on a selling price.
Net capitalized cost: The net capitalized cost, or net cap cost, is the amount the dealership plans on financing with the lease. Dealerships come to this total after the subtracting any discounts and the down payment from you. Sometimes the net cap cost also includes the sales tax.
Lease term: The lease term is the amount of time you plan on leasing the car for. Most lease terms run for a period of 36 months or less, though you can find lease terms as long as 60 months. The shorter the term, the more you end up paying each month. Longer terms require a smaller payment each month, but you end up paying more in interest.
Money factor: The money factor is the interest rate you end up paying for leasing the car. The money factor helps to determine the finance fee. To get the money factor, multiply it by 2,400 to get the corresponding annual percentage rate.
Residual value: Expressed as a percentage of the MSRP, the residual value is the value of the car after a set amount of time. Dealerships calculate residual value of a car being leased on the number of months in the lease term and the number of miles you plan on driving the car. Dealerships set limits on the number of miles you can drive a car over the lease term, and they penalize you if you go over that amount.
MORE: How to get an open end car lease
How to calculate a car lease payment with a lease formula
Each of the above terms plays a part in determining how much you owe each month on a lease. To determine how much you will end up paying, use the formula below:
Depreciation fee formula: To determine the depreciation fee on the vehicle you want to lease, subtract the residual value of the car from the net cap cost and divide the sum you get by the lease term amount.
Finance fee formula: To get the finance fee amount, add the residual value of the car to the net cap cost and multiply the result by the money factor.
Total monthly payment: The total monthly payment on the leased car equals the depreciation fee plus the finance fee. The dealership then adds sales tax to the sum to give you the final monthly payment for your leased car.
Regardless of why you decide to lease a car, knowing how much it costs can help you more easily work the lease payment into your budget. Make sure to calculate how much you will pay for a leased car by using factors such as depreciation, net cap cost, and residual value.
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