How a lease payment is actually calculated

Component one: depreciation

This is the largest part of almost every lease payment. You are paying for the value the car loses while you have it, not for the car itself. Take the negotiated price, subtract the residual value the lender has set for the end of the term, and divide by the number of months.

On our Meridian S40 sample, the MSRP is $31,450 and the residual is 58 percent, which is $18,241. If the negotiated price is $30,200, the depreciation across 36 months is $11,959, or $332 a month before anything else is applied. That sounds higher than the $289 sample payment, and it is, because a capitalised cost reduction from your due at signing pulls it down.

The two levers here are the negotiated price and the residual. You can argue about the price. You cannot argue about the residual, because the lender sets it, but you can choose a car with a better one. This is why trucks and some SUVs lease more cheaply than their sticker price suggests.

Component two: the rent charge

Leases do not quote an interest rate. They quote a money factor, which is a small decimal like 0.00204. Multiply it by 2,400 and you get the approximate equivalent APR, in this case 4.9 percent. We print the equivalent APR on our offer cards because the money factor is deliberately opaque and there is no good reason for that.

The rent charge is calculated on the negotiated price plus the residual, not just on what you are financing. That surprises people. It means a large down payment reduces the rent charge less than you would expect, which is one of several reasons we rarely recommend putting a lot of money down.

Component three: tax

New Jersey charges sales tax on each monthly lease payment rather than on the full value of the car. That is good news compared with some states, where the whole sales tax is due at signing. It also means the tax line moves whenever the payment moves, so a lower payment carries a lower tax figure.

We itemise tax on the lease worksheet. If a quote you have been given anywhere else does not break it out, ask.

What this means when you negotiate

Once you can see the three components, the conversation changes. You stop asking whether $289 is a good payment and start asking whether the negotiated price is fair, whether the money factor has been marked up, and whether the mileage allowance matches how you actually drive.

Lenders publish a base money factor to dealers. Some dealers add to it, which is legal and common and rarely disclosed. Asking the direct question, whether the money factor has been marked up, is the single most useful thing you can do in a lease negotiation.

• Ask for the negotiated price, the residual and the money factor separately
• Multiply the money factor by 2,400 to get the rough APR
• Ask whether the money factor is the lender's base rate
• Check the mileage allowance against your last two years of driving
• Get the due at signing broken into its parts, not as one number

A worked example you can copy

Take any offer, including ours. Write down the MSRP, the negotiated price, the residual percentage, the term and the money factor. Calculate the depreciation per month. Calculate the rent charge. Add New Jersey tax. If the total is meaningfully different from the payment you were quoted, something has been added that nobody mentioned.

This is not a trick and it does not make you a difficult customer. It is the same arithmetic the finance desk runs. We would rather you understood it, because a customer who understands the structure signs faster and comes back in three years.

A lease payment is not a price. It is the output of four inputs, and you are allowed to see all four.