How lease payments are calculated
A lease payment has two main components plus tax:
Depreciation fee = (Capitalised cost − Residual) ÷ Term months
Finance charge = (Capitalised cost + Residual) × Money factor
Money factor is just APR divided by 2400. So 6% APR = 0.0025 money factor. It's applied to the SUM of cap cost and residual (not the average — that's already baked in).
Capitalised cost = negotiated price − down payment − trade-in.
Lease vs buy
| Factor | Lease | Buy |
|---|---|---|
| Monthly payment | Lower | Higher |
| Ownership | No | Yes |
| Mileage limits | Usually 15,000/yr | None |
| Wear & tear charges | Possible at end | Your problem |
| Customisation | Restricted | Full freedom |
| Total long-term cost | Higher (continuous payments) | Lower (owned outright) |
FAQ
What is residual value?
The car's projected value at the end of the lease. You're effectively paying for the DROP from sticker to residual, not the full price. High residual = low lease payment.
Can I negotiate the money factor?
Yes, for well-qualified borrowers. Dealers often mark up the factor — ask for the "buy rate" from the lease company.
What happens at lease end?
Three options: return the car (subject to wear-and-tear inspection and excess mileage fees), buy it for the residual value, or trade it in for a new lease.