The two halves of a lease payment
Any lease payment breaks into two core parts. The first is depreciation — the value the asset is expected to lose over the lease, found by subtracting the residual value from the capitalized cost and spreading the difference evenly across the months. This is the cost of using up the asset.
The second is the rent charge, the lease world’s version of interest. It applies the money factor to the sum of the capitalized cost and the residual value. Adding depreciation and rent gives the base payment, and sales tax is layered on top to reach the figure you actually pay.
Making sense of the money factor
The money factor looks unfamiliar because it is a tiny decimal rather than a percentage. The quick conversion is to multiply it by 2,400 to get an approximate APR — so a money factor of 0.0025 is roughly a 6% rate. Doing that conversion lets you judge whether the financing built into the lease is competitive.
Because the rent charge is based on both the cap cost and the residual, a small change in the money factor moves the payment more than you might expect over a multi-year term.
Ways to bring the payment down
You have more control over these inputs than the dealer often implies:
- Negotiate the capitalized cost downward — it lowers depreciation pound for pound.
- Push for a lower money factor, which directly shrinks the rent charge.
- A higher residual value reduces the depreciation you have to cover.
- Watch upfront fees and taxes, which can add meaningfully to the real cost beyond the monthly number.
What is not included
This estimate covers depreciation, rent and tax. Acquisition and disposition fees, security deposits, mileage overage charges, and excess wear-and-tear are separate. Always read the full lease agreement to understand the total commitment.
Formula
depreciation = (capCost − residual)/term; rent = (capCost + residual)·moneyFactor; payment = (depreciation + rent)·(1 + taxRate/100)Frequently asked questions
- What is a money factor?
- The money factor is the lease equivalent of an interest rate. Multiply it by 2,400 to approximate the APR.