How a lease payment works
With a lease you pay for the part of the car's value you use up, plus a finance charge. The residual value is what the leasing company expects the car to be worth at the end of the term. The lower the residual, the more depreciation you pay for.
Payment = (Cap cost − Residual ÷ (1 + r)n) × r ÷ (1 − (1 + r)−n)
This is the same annuity formula used for loans, with a balloon equal to the residual value. Dealers often express the rate as a money factor; multiply it by 2,400 to get an approximate APR.
Worked example
A $35,000 car with $3,000 down, a 58% residual after 36 months and a 6% rate gives a payment of about $457 per month. The buyout at the end would be $20,300.
Lease or buy?
- Leasing suits drivers who want a new car every few years, drive a predictable number of miles and prefer lower monthly payments.
- Buying is usually cheaper over the long run if you keep the car for many years after the loan is paid off.
- Watch out for mileage limits, excess wear charges and disposition fees – they are not part of the monthly payment.
Sales tax on lease payments, acquisition fees and registration vary by state and are not included in this estimate.
Frequently asked questions
What is a good residual value?
Typical residuals for a 36-month lease are 50–60% of MSRP. Cars that hold their value well have higher residuals and therefore cheaper leases.
What is a money factor?
It is the lease interest rate written as a small decimal. Multiply by 2,400 to convert it to an approximate APR – for example 0.00250 ≈ 6%.
Should I put money down on a lease?
A large down payment lowers the monthly payment, but if the car is totaled or stolen early you may not get that money back. Many experts recommend keeping the lease down payment small.
Can I negotiate a lease?
Yes. The capitalized cost (price), money factor and fees are all negotiable; the residual value is usually set by the leasing company.
Last updated November 10, 2026