How to Calculate Car Lease Payment
Here is how the car and truck lease payment calculator calculates the monthly lease payment, based on the following example variables and using the car lease calculator formula:
| Vehicle Lease Example Variables | |
|---|---|
| Sticker price: | $25,000.00 |
| Negotiated price after incentives: | $24,000.00 |
| Additional lease costs not paid upfront: | $500.00 |
| Down payment: | $1,500.00 |
| Trade-in credit: | $2,000.00 |
| Sales tax: | 7.875% |
| Length of lease in number of months: | 36 |
| Money factor (interest rate / 2400): | 0.00250 |
| Residual value rate: | 55.000% |
- Calculate the Lease Cost, which is equal to the Negotiated Price plus the Additional Lease Costs, minus any Trade-In, minus any Down Payment ($24,000 + $500 - $2,000 - $1,500 = $21,000).
- Calculate the Residual Value, which is equal to the MSRP times the Residual Value Percentage ($25,000 x 0.55 = $13,750).
- Calculate the Monthly Depreciation Fee, which is equal to the Lease Cost minus the Residual Value, divided by the number of months (($21,000 - $13,750) / 36 = $201.39).
- Calculate the Monthly Lease Fee, which is equal to the Lease Cost plus the Residual Value, times the Money Factor (($21,000 + $13,750) x 0.00250 = $86.88).
- Calculate the Monthly Before-Tax Lease Payment, which is equal to the Monthly Depreciation Fee plus the Monthly Lease Fee ($201.39 + $86.88 = $288.27).
- Calculate the Monthly Sales Tax Payment, which is equal to the Monthly Before-Tax Lease Payment times the Sales Tax Rate ($288.27 x 0.7875 = $22.70).
- Calculate the Monthly Lease Payment, which is equal to the Before-Tax Lease Payment plus the Monthly Sales Tax Payment ($288.27 + $22.70 = $310.97)
Why a Lease is a Loan in Sheep's Clothing
Don't be fooled, a lease is just another type of loan.
After all, the only difference between a car loan and a car lease, is that in the former case you are borrowing cash (an asset) to buy the car, and in the latter case you are borrowing the value of the car (also an asset).
In both cases you will need to pay a rental fee on the asset you borrowed (interest charges on the cash borrowed or leasing fees on the car value borrowed).
And because a lease is a type of loan, the fact remains that whether you lease or buy, you will still be spending more to drive the car than you would have to if you had saved up and paid cash for the car.
The Most Costly Aspect of Leasing
Because you will be leasing a "new" car instead of purchasing a "used" car, you will suffer the same warp-speed depreciation that comes from buying new instead of used (see the Car Depreciation Calculator).
For these reasons, and because I see "borrowing value to be repaid with interest" as nothing more than a legal way for the super-wealthy to inconspicuously siphon money out of the pockets of average hard-working Joes and Janes, the only car acquisition method I recommend is to save up and pay cash for a used car.
I realize that because we weren't raised to grow slow and pay as we go, paying cash for a vehicle is probably not an option for you at this very moment -- thanks to all of the borrowing from tomorrow you've done in the past.
But that doesn't mean you should give up on the idea altogether.
How to Pay Cash for a Car
So how do you go from borrowing to acquire vehicles to paying cash for them so you can save thousands, even tens of thousands of dollars in finance charges and leasing fees throughout your lifetime?
Start small and work your way up.
The best way to get into the habit of paying cash for everything you buy is to start with small expenditures.
If you stop borrowing money to pay for all of the relatively small purchases that most people put on their credit cards, eventually you will rid yourself of monthly credit card payments.
Then, once you no longer have any credit card payments, you can then begin to redirect those payments into a "depreciation account."
What's a depreciation account? It's an account you use to pay cash to replace your assets as they wear out.
In other words, a depreciation account is where all of your monthly payments should be going.
In any case, as you form your habit of paying cash for everything you buy, and faithfully deposit the payment savings into your depreciation account, you will be able to make larger and larger down payments on your future car purchases.
Then, if you stay fully committed to paying cash for all of the small purchases, you will eventually be able to pay cash for a car.
But take it from me, you probably won't like the feeling you get when you hand a car dealer $25,000 in cash. And what should that suggest to you?
