This page explains the individual formulas used to determine the final lease payment. Visit the Terminology page for more in-depth definitions of these Terms.

We'll also use an example to demonstration how the formulas work. For the example we'll use a vehicle with the following stats:

- MSRP: $28,000
- Cap Cost: $25000
- Residual %: 51%
- Interest Rate: 3%
- Term: 36 Months
- Tax Rate: 7%

**MSRP** – Manufacturers Suggested Retail Price.

**Cap Cost** – Cap Cost is shorthand for Capitalized Costs and is basically the amount you will be paying for the vehicle.

**Residual Value** – The amount the vehicle is expected to be worth at the end of the lease.

**Formula:** Residual Value = MSRP * Residual Percentage

**Calculation:** $14,280 = $28,000 * 51%

** Residual Value:** $14,280

**Residual Percentage** – The percentage of the MSRP that is the Residual Value.

**Formula:** Residual Percentage = Residual value / MSRP

*In this case we've been given the Residual Percentage, but if we were given the Residual Value
by the Dealership we would easily be able to calculate the Residual Percentage.*

**Term** – The length of the lease in months.

**Interest Rate** – The cost of borrowing the money for the lease.

**Formula:** Interest Rate = Money Factor * 2400

*Since we've been given the Interest Rate in this example there is no need to do the calculation.*

**Money Factor** – The Money Factor is just another way to represent the Interest Rate.

**Formula:** Money Factor = Interest Rate / 2400

**Calculation:** 0.00125 = 3% / 2400

**Money Factor:** 0.00125

The number used in the conversion from Interest Rate to Money Factor is always 2400 regardless of the length of the lease.

**Tax Rate** – The tax rate that will be applied to the monthly lease payment.

**Depreciation** – The difference between the Cap Cost (Sale Price) and the Residual value. First we must
calculate the total depreciation over the life of the lease, then we simply divide by the number of months to get
the monthly depreciation.

**Formula:** Total Depreciation = Cap Cost - Residual Value

**Calculation:** $10,720 = $25,000 - $14,280

**Total Depreciation:** $10,720

To convert the Total Depreciation into the Monthly Depreciation we just need to divide by the Term (the length of the lease in months).

**Formula:** Monthly Depreciation = Total Depreciation / Term

**Calculation:** $297.78 = $10,720 / 36

**Monthly Depreciation** $297.78

**Financing** – The monthly cost of borrowing the money for the lease. This calculation looks strange, but this is the way it's done.

**Formula:** Monthly Financing = (Cap Cost + Residual Value) * Money Factor

**Calculation:** $49.10 = ($25,000 + $14,280) * 0.00125

**Monthly Financing:** $49.10

**Pre-Tax Payment** – The sum of the Depreciation and the Financing amounts.

**Formula:** Pre-Tax Payment = Monthly Depreciation + Monthly Financing

**Calculation:** $346.88 = $297.78 + $49.10

**Pre-Tax Payment:** $346.88

**Tax** – The monthly tax assessed on the payment.

**Formula:** Monthly Tax = Pre-Tax Payment * Tax Rate

**Calculation:** $24.28 = $346.88 * 7%

**Monthly Tax:** $24.28

**Payment** – The number you are going to write on your check each month.

**Formula: ** Total Payment = Monthly Tax + Pre-Tax Payment

**Calculation:** $371.16 = $24.28 + $346.88

**Total Payment:** $371.16

So now that we've seen how the formulas work, I suggest spending some time with the calculator using the numbers in this example. Also, play with the various numbers to see how they affect the final payment. For example, increase (or decrease) the Money Factor / Interest Rate to see how much that changes the final payment. Just work with the calculator and adjust the various inputs to see how they affect the final monthly payment.