Leasing a vehicle is often more complex than a standard purchase because you aren't paying for the entire car; you are paying for the depreciation of the vehicle over a fixed period, plus financing fees and taxes.
1. The Capitalized Cost (Cap Cost)
This is the "selling price" of the vehicle. Just like buying a car, you should negotiate the MSRP down. The "Adjusted Cap Cost" is the negotiated price minus your down payment and trade-in value.
2. Residual Value
This is the estimated value of the car at the end of the lease. This is set by the leasing company (usually a bank or the manufacturer's financial arm). A higher residual value means you pay for less depreciation, which results in a lower monthly payment.
3. Money Factor
The money factor is essentially the interest rate on a lease. It is expressed as a small decimal. To compare it to a standard APR, multiply the money factor by 2,400. For example, a money factor of 0.00125 is equal to a 3% APR.
Pro Tip: Always ask the dealer for the "buy rate" money factor. Some dealerships add a markup to the money factor provided by the bank to increase their profit.
The Formula
Base Payment = (Cap Cost – Residual) / Term + (Cap Cost + Residual) * Money Factor
Example Calculation
Imagine you lease a car with an MSRP of $40,000 but negotiate it to $38,000. You put $2,000 down. The 36-month residual is 60% ($24,000) and the Money Factor is 0.0015.