How to Calculate Your Car Lease Payment?

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Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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, Automotive Content Editor - April 30, 2024

Calculating car lease payments is a simple 5-step process. Learn how to calculate payments, how your credit score affects them, and how to reduce them.

When you consider leasing a car, knowing what your car lease payments are is important since you should always do your research before jumping into a lease. Calculating your car lease payments is easy, and can be accomplished using a calculator if you need to do the math yourself.

More often than not, you can also find a lease estimator online to help you determine what your lease payments might look like. However, we're going to show you how to do the math if an online car lease calculator isn't available. Here's how to calculate your car lease payment.

Factors Affecting Car Lease Calculations

There are several different factors that are used to calculate a lease payment. It is very difficult to calculate your leasing payments down to the exact penny but you can get it pretty close. It is important to know the type of payment you can afford when you are looking at getting a new car lease.

  • Step 1: Gather Lease Information
    You need to know the manufacturer's suggested retail price (MSRP), negotiated price, residual value, term of the lease, and interest rate/money factor in order to estimate your lease payment. This information can be obtained by going to the dealer's website or contacting a car finance company.
  • Step 2: Calculate the Vehicle's Value
    Since a lease is typically for a period of up to 36 months, the full value of the car will not be used by the lessee. To determine what the car's value is, take the MSRP and the residual value to calculate the car value. For example, if the MSRP is $25,000, the residual value is around 50% (this number can be obtained from the car finance expert). If you negotiate the lease value for $24,000, the car value is $11,500 ($25,000 / 50 percent - $1,000 = $11,500).
  • Step 3: Calculate the Principal Amount
    Take the car value and divide it by the term of the lease. For example, if the car value is $11,500 and the lease term is 36 months, the principal amount of the lease payment would be $319.44 ($11,500 / 36 = $319.44).
  • Step 4: Calculate the Interest Amount
    To determine the interest amount, take the purchase price, add the negotiated price, and multiply it by the money factor or interest rate. For example, take $25,000 plus $24,000, and using a money factor of .003, your interest would be $147 ($25,000 + $24,000 x .003 = $147).
  • Step 5: Add the Principal and Interest Payments
    Add the principal and interest payments together to come up with the estimated payment. For example, $319.44 plus $147 = $466.44. This is the estimated lease payment. Understand that this amount does not include taxes, fees, and other costs but is a good rough estimate of what you will pay each month.

Does My Credit Score Affect My Car Lease Payments?

Yes, it absolutely does. Knowing more about how companies use your credit score for a variety of consumer situations can help you manage your finances better and get more leverage out of your particular credit situation. Here are a few tips on how your credit score can affect your car lease.

  • Your Credit Score. Your credit score is used for more and more financial transactions every day in America. It affects routine things like cell phone plans, car loans, mortgage applications, and much more. In terms of car lease payments, your credit score can affect not only the payments you make on your lease but also how you get evaluated for your insurance costs.
  • Credit Score and Car Lease Payments. If you break down your car lease into the categories of interest and principal, it becomes clear that your credit score has a huge impact on what you pay over time. A vehicle lease is a specific financial agreement over a specific time for a specific amount of money. However, lease payments come with interest. That's where your credit score comes in. A lower credit score means you will not qualify for better interest rates.
  • Manage Your Credit Score: Don't get fooled. The only way to know if a lender is lying to you about your credit score is to routinely check your credit scores. A score above 670 is generally okay. Below 670, you may have a problem getting good interest rates. You can pull your credit reports from the three national credit bureaus for free by visiting www.annualcreditreport.com but you may have to look elsewhere for your free credit score. Scores can be obtained for free in many ways including your bank or credit union, websites for Experian, or TransUnion, credit card companies, or a service such as Discover ScoreCard. Know your credit score and stay on top of your credit status. If a dealer offers you a lease with high interest rates, and you know your score warrants a lower rate, you can say no, and move on to a more honest shop.

How Do Interest Rates Affect My Car Lease Payments?

Overall, the higher the interest rate, the higher the monthly payment and the more you pay in the end.

Whenever money is borrowed from an outside source, there is an interest rate (although there are temporary offers of 0% APR by some lenders for special promotions). This means you have to pay them an additional percentage on top of what you are borrowing. Essentially you are paying them to let you borrow their money.

Lending companies look at your credit score and determine what kind of a risk they are taking by lending that money out. The lower the credit score the higher the risk. That is why low credit score holders have the experience of having high interest rates.

But what exactly do high interest rates mean? This means that a car originally thought to be, say, $10,000 could end up costing the lessee about $15,000 in the long run. This is figured into monthly payments. Since the APR is based on the outstanding balance, for the first part of the lease period, a large majority of the car payment goes towards interest, and then, in the end, it goes towards the principal.

The way to figure out how much would be going to interest is to use the formula is to look online for a lease calculator, which will tell you how much you're likely to pay overall for your lease.

That is why it is important to shop around and look for lease deals. Dealers use a special number called a "money factor" instead of APR. However, the two numbers can be easily converted back and forth. The money factor is simply the APR divided by 2400.

If a dealer offers a lease with a money factor of .00175, a quick calculation will find that the APR is 4.2%, lower than the national average, and hence a good deal. Likewise, if an offer of .00395 is offered, that equates to 9.48% APR and is obviously not a good choice. These money factors should not strictly be known to dealers. Consumers need to be well-educated about them as well so they can avoid getting a bad deal.

How to Reduce Car Lease Payments

Some of the average lease amounts that drivers pay each month could strain any budget. Here are some quick ways that shoppers limit their payment amounts at the outset of the deal, or afterward.

  • Get a lower interest rate - shop around to lenders and find out which ones will work with you for a result you can feel good about, and something that won't break the bank. Always know where you stand with your credit score.
  • Put money down - a bigger down payment means less payment in interest. That is the key to bringing down those large lease payments. Get a big chunk of money to put down upfront, and enjoy less stress over your lease term.
  • Use a cosigner - A cosigner can be a good solution for getting more competitive lease terms for someone with less than great credit, but beware: some shops try to make the cosigner into the primary borrower. Check the paperwork thoroughly at deal time.
  • Refinance debt - debt refinancing or consolidation are other ways to change car lease payments after the fact. If your lease is tearing a hole in your wallet, ask about refinancing with other lenders to help ease the burden.

The above are some options for making sure your lease doesn't become too much of a liability.

Conclusion

When it comes to figuring out how much your lease payments are going to be there are many factors to take into consideration. However, the calculations can be simple if you know all the key factors of the lease. These days finding a lease estimate online is typically pretty simple, and you can usually find payment estimates using calculators like ours. But, if you need to do the math the steps above should help.

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, Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

Follow On: LinkedIn

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