How Car Lease Payments Work (Money Factor Explained)
Car lease payments explained: depreciation, finance charge and tax, how the money factor converts to APR, and what residual value means.
Last updated: 2026-07-25
Leasing a car does not finance the whole price — you pay for the portion of the car you use up over the lease, plus a finance charge. That is why a lease payment is usually lower than a loan payment on the same vehicle, and why the numbers are built differently.
The three parts of a lease payment
- Depreciation — the cap cost minus the residual value, spread across the months of the lease.
- Finance charge — the dealer's version of interest, set by the money factor.
- Tax — in most US states, sales tax is applied to the monthly payment rather than the whole car.
Money factor and residual value
The money factor is just interest in disguise: multiply it by 2,400 to get the equivalent APR, so a money factor of 0.0025 is roughly a 6% APR. The residual value is what the car is projected to be worth at lease end, quoted as a percent of MSRP — a higher residual means less depreciation to pay for, and a lower payment.
A quick example
On a $40,000 car with a 57% residual, a 0.0025 money factor and a 36-month term, the monthly depreciation is about $419 and the finance charge about $152, for a payment near $571 before tax. A larger down payment (cap-cost reduction) or a higher residual lowers it; a bigger acquisition fee raises it.
Model your own lease and compare it against buying with the calculators below.