Car Lease Calculator
The Car Lease Calculator can help estimate monthly lease payments based on the total price of the car or vice versa. For more information or to perform calculations related to leases in general, use the Lease Calculator.
Car Leases
A lease is a contract that allows one party to transfer ownership to another party for a specific time, usually in exchange for a periodic payment. A car lease allows a person to drive a car for a fixed period of time while making an initial payment and monthly lease payments until the lease ends. It can be helpful to think of a car lease as a long-term car rental; while car rentals typically last just a day or even a few hours, car leases average between two and four years in length.
Many leases allow for the purchase of the leased vehicles through a purchase option agreement at a specific price once the lease ends. It’s important to note that choosing to add such an option at the beginning of a lease will add a small amount to the monthly lease payment. Most car leases can be found at dealerships or private car dealers.
Several variables are required to calculate the monthly rental for any vehicle:
Car price: Also known as the capitalized cost, this refers to the retail price of the car. It is possible to negotiate this figure down (the same strategy used to buy cars) to get a more affordable rental. In fact, many experts claim that it is best to negotiate with car salespeople as if buying the car outright, and only when the desired figure is reached should a potential lessee disclose that they intend to lease the car and not buy it.
Money factor: This is the interest rate expressed differently and used specifically in the context of car rentals. Lessors use the money factor as a way to determine rental rates that correspond to each lessee’s credit history. They usually work in a very similar way: the worse the lessee’s credit history, the higher their money factor, and the more expensive the rental. To get the money factor, divide the lease APR by 24 or 2400, depending on whether it is expressed as a decimal or percentage.
Lease Term: This is the length of the lease. Most leases are between 2 and 4 years in length.
Residual Value: Sometimes called the end-of-lease value. Essentially, the residual value of a car is the amount it can be purchased for at the end of the lease. Residual values for vehicles are set by financial institutions that issue leases, not dealers. It is an estimate of the value of the car at the end of the lease period. The difference between the price of the car minus the residual value will result in the depreciation of the car after the lease, which is amortized over the life of the lease loan. Therefore, car leases tend to be more affordable for vehicles that depreciate slowly because they hold their residual values well.
Mileage
Most leases will have a mileage limit, which is the maximum number of miles the car can be driven over the life of the lease. In the U.S., standard car leases typically allow for annual mileage limits of 10,000 to 15,000, with most being 12,000. If the lessee exceeds this limit, a penalty per mile over the limit will apply when the lease ends. In the U.S., the average cost is between 5 and 20 cents per mile over the limit.
There are certain car leases called “high-mileage leases,” which give lessees several thousand extra miles to work with annually. Although monthly lease payments for high-mileage leases tend to cost more than standard leases, they can be helpful for those who are prone to racking up a ton of miles. Keep in mind that the average American drives about 18,000 miles a year. Lessees who exceed their mileage limits have the option of avoiding penalties by purchasing the vehicle at the end of the lease.
Wear and Tear
Leased vehicles are expected to be returned to lessors in reasonable condition at the end of the lease period. When returned, the vehicles will undergo thorough inspections (usually by a hired third party) to ensure there is nothing out of the ordinary given the mileage accumulated. As should be more specifically stated in each individual lease agreement, any pertinent damage or failures accumulated during the use of the leased vehicles that are attributed to the lessee (such as collisions caused by the lessee) will likely come out of the lessee’s own pocket. On the other hand, wear and tear can be the financial responsibility of either party, depending on whether the visual inspection shows it was “normal” wear and tear or “excessive” wear and tear. The two are explained in detail below.
Normal: Normal wear and tear is not the financial responsibility of the lessee. Each lessor’s definition of “normal” is different, but they tend to follow a basic pattern. Minor physical damage that is less than a half-inch in diameter is considered normal. This can include exterior dents and scratches that can be easily buffed out, interior stains or damage that can be removed, small nicks or scratches on wheel covers, and no broken parts or missing equipment. Additionally, routine replacement of items that meet manufacturer-recommended guidelines, such as tires, brakes, and light bulbs, is considered normal.
Excessive Wear: Excessive wear is the financial responsibility of the renter. While renters typically do not charge renters for every small dent or ding, any broken or missing parts will be considered excessive, such as frame damage that affects a vehicle’s structural integrity, bent or broken tires, or mechanical or electrical components that no longer function properly. Excessive wear can also refer to exterior bodywork punctures larger than two inches that significantly affect a vehicle’s appearance or reduce its marketability. If the cost of repairing excessive wear and tear exceeds the cost of replacing the entire vehicle (for example, if the engine fails due to an accident), the renter may be responsible for whichever of the costs is cheaper.
Renters can avoid excessive wear and tear charges by taking good care of their leased vehicles. This may include adding protection, such as car door guards, or making sure that small children are well cared for. In the days leading up to returning the vehicle to the renter, it may be beneficial for the renter to make sure the car is as attractive as possible. It may be helpful to wash the car, polish out scratches, replace small broken parts, and remove stains from the upholstery. Wear and tear insurance is available to renters who feel they might need it to cover excessive wear and tear. Renters with excessive wear and tear have the option of avoiding penalties by purchasing the vehicle at the end of the lease.
Maintenance
Most lease agreements require the renter to perform regular maintenance on the vehicle, such as having it serviced (with a receipt) on a regular basis. Failure to do so may result in penalties or voiding of warranties. Maintenance of leased vehicles typically includes routine tasks such as changing engine oil, tires, brakes, and topping up fluids when necessary. Be sure to read the terms of your lease agreement carefully, as maintenance standards can vary significantly from one lease to another.
Why To Choose Lease Rather Than Buy?
There are many reasons why people choose to lease rather than buy. Here are some of them:
People who cannot afford to buy new cars but enjoy driving them can do so by leasing, which requires a lower down payment and monthly payment. All other upfront costs are relatively minor.
In the US, leased cars can be deducted as a business expense. Because the IRS defines leases as an operating expense, they can potentially be deducted from taxes, which is particularly beneficial for small business owners and the self-employed.
Leases are ideal for people who do not want to worry about the maintenance associated with cars, which is minor during their first few years.
Permanently leasing new cars can alleviate this hassle. Additionally, most leased cars will still be covered by a manufacturer’s warranty, freeing the renter from costly repairs.
It is possible to lease a car for a few years as a way to test out a certain car before fully committing to buying it at the end of the lease.
These are just a few examples. However, that doesn’t mean there aren’t disadvantages associated with leasing contracts. First, just like renting a home instead of buying, there’s no equity built up when the lease ends. Also, since you never actually own the car, as it remains legally owned by the lessor, the renter can’t do whatever they want with it; there are certain restrictions on what modifications can be made. Second, there are distance limits, so renters should probably think twice before setting out on long cross-country road trips in their rented cars.
Renting or buying a car is a big and potentially complex decision, and the Car Rental Calculator can help. Below the calculated rental information is data conveyed as if the car had been purchased rather than leased. Right off the bat, it’s easy to see that down payments and monthly payments are higher for purchased cars.
Getting out of a Car Lease Early
Renters, for a variety of reasons, often find that they want to terminate their car rental agreements. Most commonly, they don’t like certain features of their leased vehicles and, as a result, no longer want to drive them. Another common reason is a change in lifestyle; for example, perhaps the renter’s family has grown and the two-seater convertible isn’t big enough, or, due to a new longer commute, they want a more fuel-efficient vehicle. For others, due to unexpected financial situations, they can’t continue making the monthly rental payments. Whatever the case, there are a few options the renter may have to terminate a rental agreement.
Returning the car to the lessor: This is probably the easiest way to terminate a car rental agreement, but there will be fees involved, usually including an early termination fee and the remaining depreciation of the car.
Transferring the lease: A car lease exchange involves the legal transfer of a leased vehicle from an initial lessee to a new lessee. The new lessee takes over the lease on the same terms as the original, including making the same monthly payment for the remainder of the term. However, there are typical administrative fees for transferring leases, which can run into several hundred dollars. Specialized lease exchange websites are available to start the process. They are helpful not only because they can put lease buyers and sellers in touch, but because they are transparent about administrative costs. Make sure this is allowed within the terms of the lease and is legal in the respective US state.
Purchasing the leased vehicle: In most cases, it is possible to pre-purchase the car from the lessor at a specific price. By doing so, the lease effectively ends, and as the lessee becomes the rightful owner afterwards, they can do whatever they want with it, including selling or trading in the vehicle. This strategy usually only makes sense if the lease buyout is less than or close to the resale value of the car. Talk to the lessor: Lessees in financial trouble can ask the lessor to tell them if they will offer payment relief for a few months. In some cases, they will agree to temporarily suspend payments, but the lessee will have to make up the difference later.
How the Lease Calculator Calculates Monthly Rentals
Take as an example a car that can be leased for 3 years and has an agreed value of $25,000 after negotiations on the price of the car (capitalized cost). The financial institution providing the lease loan has assigned a residual value of $12,500 to the car after 3 years and has given the lessee a 6% APR after a $5,000 down payment. Assume that the down payment is solely to reduce the capitalized cost, not as payment for any upfront fees. For simplicity, assume that all fees are included in the price of the car. The lessee is also willing to trade in a used car worth $2,000, and the transaction is taking place in a state with a 6% tax rate.
First, get a real figure for the capitalized cost. To do this, subtract any trade-ins or down payments from the agreed-upon value of the car. If no trade-ins or down payments have been made, simply use the originally agreed-upon value.
$25,000 – $5,000 – $2,000 = $18,000
Subtract the residual value provided by the financial institution,
$18,000 – $12,500 = $5,500
This is the amount that must be depreciated over the life of the lease. Simply divide it by the term, 36 months, to get the monthly depreciation:
$5,500/36 = $152.78
Next, convert the APR to a money factor.
(.06)/24 = .0025
Add the capitalized cost and the residual value, then multiply by the money factor to get the monthly interest charge,
($18,000 + $12,500) × .0025 = $76.25
Add the monthly depreciation and the monthly interest, then multiply this figure by the tax rate to get the monthly tax amount. If there is no sales tax, simply ignore this step.
($76.25 + $152.78) × .06 = $13.74
Finally, add the three charges together to arrive at the monthly lease payment amount:
$152.78 + $76.25 + $13.74 = $242.77