How car lease payments are calculated
Auto leasing comes with its own jargon that can be unmanageable to understand. If you ’ re ready to dive into the weeds and get all the details on how vehicle lease payments are calculated, this is the right page for you .
This explanation works for states where tax is levied on the monthly payment. The calculations will be unlike for states where the tax is due up front man or on the sum sell price of the vehicle .
Key leasing financial terms
In order to calculate lease payments, you ’ ll motivation to have the pursuit data :
- MSRP: The Manufacturer’s Suggested Retail Price. This is the price set by the manufacturer (i.e. Honda).
- Selling Price: This is the price of the vehicle as offered by the dealership. If there are any manufacturer incentives and discounts, these are taken into account in the selling price.
- Capitalized Cost: The amount being financed; in other words, the total of all your monthly lease payments. Any “down payment” you make will reduce the capitalized cost.
- Residual Value: This is what the bank or leasing company estimates your vehicle to be worth after the lease expires. This value is typically expressed as a % of MSPR.
- Depreciation: For leasing, depreciation refers to the total amount you finance, minus the residual value.
- Term Length: The length of the lease agreement in months. 36 months is common (3 years).
- Money Factor: In leasing, the money factor is used to calculate the interest charged on the lease. The money factor can be converted to APR by multiplying by 2,400. For example, a money factor of 0.001 can be converted to an APR of 2.4% (0.001 * 2400).
Let ’ s get started !
Step 1: Monthly Depreciation
To calculate the calculate disparagement, first we need to know the residual value .
The residual is a value decided by the trust or leasing company. It ’ randomness barely an prediction, and the vehicle ’ s actual value at the end of your lease will probably be either higher or lower than the residual. Banks estimate residual based on the vehicle you are leasing, the term length, and mileage. For exemplar, a vehicle that ’ sulfur driven 15,000 miles per year for 3 years ( total 45,000 miles ), will be worth less than the lapp vehicle if it ’ mho driven only 10,000 miles per year ( full 30,000 miles ) .
The depreciation is calculated based off of the residual provided by the rent bank ( Honda Financial Services, etc. ) and the capitalize cost .
Monthly Depreciation = (Capitalized Cost – Residual Value) / Months
think that you want to lease a vehicle for 36 months and 12,000 miles per year and the vehicle has an MSRP of $ 20,000. The franchise is offering a sell monetary value of $ 19,000 ( $ 1,000 dealer rebate ) and the manufacturer is offering a $ 1,000 incentive. For your specific vehicle, 36-month term duration, and mileage restrictions, the savings bank has set a residual percentage of 61 % .
Based on the remainder percentage, the bank estimates that your vehicle will be worth $ 12,200 ( $ 20,000 × 0.61 ) at the end of your lease. This is your residual value. Note that we used the MSRP to calculate the residual value, not the sell price .
Capitalized cost is the amount being financed. This is typically the sell price minus incentives and down requital and plus fees. In this exemplar, our capitalize cost is $ 18,000 ( $ 19,000 selling price – $ 1,000 manufacturer bonus ) .
disparagement is calculated by subtracting the residual value ( $ 12,200 ) from the capitalized cost ( $ 18,000 ). In this simplified case, the disparagement would be $ 5,800. To get our monthly depreciation, we divide our total disparagement ( $ 5,800 ) by the term duration in months ( 36 ) .
Monthly Depreciation = ($18,000 – $12,200) / 36
Monthly Depreciation = $161.11
Step 2: Monthly Finance Charge
The formula to calculate the monthly finance charge is simple. Check it out below :
Monthly Finance Charge = (Capitalized Cost + Residual Value) × Money Factor
Continuing with the same example in Step 1, we already know our capitalize monetary value and residual value. They are $ 18,000 and $ 12,200 respectively. The money factor is what indicates how a lot interest will be charged. It can be expressed as an APR by multiplying the money factor by 2400. For model, a money factor of 0.001 could be seen as a 2.4 % APR. In this case, the bank has offered us a money factor of 0.001. Let ’ s hack this into our recipe :
Monthly Finance Charge = ($18,000 + $12,200) × 0.001
Monthly Finance Charge = $30.20
Step 3: Base Monthly Payment
The base monthly requital is the payment expressed before tax has been added. To calculate your root monthly payment, simply add your monthly depreciation to your monthly finance charge. here ’ s the basic formula :
Base Monthly Payment = Monthly Depreciation + Monthly Finance Charge
Add the monthly disparagement ( $ 161.11 ) to the monthly finance charge ( $ 30.20 ) for a nucleotide monthly requital of $ 191.31. note that this payment does not include tax or fees. A standard lease like the one we are calculating here charges the first base payment and fees upfront at lease origin. Let ’ s plug our values into the formula below :
Base Monthly Payment = $161.11 + $30.20
Base Monthly Payment = $191.31
Step 4: Monthly Lease Payment
The last matter that we need to add into the payment is tax. Lease taxation varies greatly by state. For this example, we will use Minnesota. In Minnesota, tax is levied on the rent requital. This means that we need to calculate the tax for each lease payment and add it to the payment. Some other states tax on the full price of the rent and require the tax upfront. Some states even tax on the wax deal price of the fomite, creating a huge tax bill and very expensive leases.
To calculate our monthly lease payment, we just need to add the tax to our monthly payment using the surveil recipe :
Monthly Lease Payment = Base Monthly Payment × (1 + Tax Rate)
At the time of write, the local tax rate is 7.125 %. We will express this in our formula as 0.07125. Add 1 to the tax rate for 1.07125 and multiply that by the base monthly payment calculated in Step 3 for a monthly rent payment of $ 204.94 :
Monthly Lease Payment = $191.31 × (1 + 0.07125)
Monthly Lease Payment = $204.94
This is the final monthly payment that you will be billed for. good problem !
Step 5: Drive-off and Disposition Costs
At lease origin, you should expect some upfront costs and possibly even a lease-end price. These can include an acquisition fee, document tip, your first payment, registration tip, down payment, disposal fee, extra taxes and more. Let ’ s define these briefly :
- Acquisition Fee: The acquisition fee is set by the bank offering the lease, and is almost never negotiable.
- Document Fee: The document fee is a fee that covers the dealership’s processing of your – you guessed it – documents. This covers the dealership’s documentation processes that help to get your vehicle titled and registered with the state’s motor vehicle department.
- Registration Fee: The registration fee is a state-imposed fee for registering your vehicle. This is essentially a tax and is non-taxable.
- Down Payment: The down payment is an upfront cost that reduces the capitalized cost used to calculate your lease payment. The larger the down payment, the less your payments will be.
- Disposition Fee: Depending on your lease agreement, a disposition fee may be charge at the end of your lease agreement.
- Additional Upfront Taxes: Additional upfront taxes include taxes due on the acquisition fee, document fee, down payment, trade allowance, and other upfront, taxable charges.
therefore nowadays we know our monthly lease requital. It ’ second $ 204.94 per calendar month. What else are we going to have to pay to lease this car ? Let ’ s assume an skill fee of $ 595, a document tip of $ 100, and a registration fee of $ 400. We did not make a down payment in this example .
To calculate our drive-off ( upfront costs ), let ’ s first base calculate the taxes we will owe on our fees and taxable crown monetary value reducers ( down requital, taxable bonus, trade wind allowance ). Let ’ s take the learning fee ( $ 595 ), document fee ( $ 100 ), down requital ( $ 0 ), and manufacturer incentive ( $ 1,000 ) and calculate our drive-off taxes due on those items :
Drive-off Taxes = (Acquisition Fee + Document Fee + Down Payment + Taxable Incentives + Trade Allowance) × Tax Rate
Drive-off Taxes = ($595 + $100 + $0 + $1,000 + $0) × 0.07125
Drive-off Taxes = $120.77
adjacent, we will add all of our drive-off costs and taxes for our entire drive-off. Let ’ s total up our first lease payment ( $ 204.94 ), acquisition fee ( $ 595 ), document fee ( $ 100 ), adjustment fee ( $ 400 ) and drive-off taxes ( $ 120.77 ). If you are making a devour payment, don ’ t forget to include that here. This leaves us with a total drive-off of $1,420.77. This is the amount due when you sign the lease .
Leasing Costs Summary
lease costs can be typically be broken down into drive-off costs, lease payments, and disposal costs. Keep in take care that extra wear and tear on the fomite could lead to more charges at the end of your lease .
Let ’ s imagine the bank imposes a $ 395 disposition fee. The disposition tip is determined at the originate of the rent. If we wanted to calculate our total lease price, we would need to add our entire drive-off, our total rent payments ( don ’ t forget that one of these payments is in the drive-off ), and our disposal fee. If you mistreat your vehicle, you may besides incur wear and tear charges. Let ’ s assume you don ’ t. hera ’ s how that would look in a recipe :
Total Lease Cost = Total Drive-off + (Monthly Lease Payment × (Term Length – 1))* + Disposition Fee
Total Lease Cost = $1,420.77 + ($204.94 × (36 Months – 1))* + $395.00
*We subtract 1 from the condition distance because the first requital is included in the sum drive-off .
Total Lease Cost = $1,420.77 + $7,172.90 + $395.00
Total Lease Cost = $8,988.67
The above rule is specifically used to calculate a rent where the beginning requital and fees are due at drive-off. It is besides limited to states that levy tax on the lease payment, like Minnesota. Most states calculate rent taxes this way, however yours may be unlike .
In most cases, you may opt to roll your fees or taxes into your car lease payment to lower your drive-off. note that the calculations become very different from the method listed here – specially regarding tax .
Sign and Drive leases
You can even choose to roll all of your drive-off costs into your requital. This character of lease is referred to as a Sign and Drive rent. Sign and Drive leases are becoming increasingly democratic as people prefer to trade upfront costs for an increased monthly payment .