First, you need to understand the different components that are used to calculate the monthly payment for your lease. Why should you care? Because if you don’t know these different components, the dealer already has an advantage over you when it comes time for negotiating the deal. You NEVER want him to believe that he knows something that you don’t know, because if he knows more than you do, and he makes this evident to you, you are in a position to be manipulated. Anyways, the three components of an automobile lease payment include:

2. The Finance Fee

3. Sales Tax

### The Depreciation Fee

The **depreciation fee** is basically the fee that makes up the bulk of your car payment. What you are mostly paying for in the total number of years that you lease a car is the depreciation fee. Depreciation is how much the dollar value of your car decreases over a certain number of years. For example, you may buy a car that is worth 20,000 dollars today, but 3 years from now it could be worth 12,000 dollars depending on its mileage, its overall condition, and economic conditions. If this were the case, your car would have depreciated by $8,000 in 3 years. If you were to lease this same vehicle for 3 years instead of purchasing it up front, you would need to pay for that $8,000 depreciation over the 3 year term of the lease. The monthly depreciation fee would come out to $222.22. In my case, the 2010 Honda Accord that I recently leased made up roughly 78 percent of my car payment. If I exclude sales tax, the depreciation portion of my car payment makes up 91 percent of the entire payment.

To come up with the monthly depreciation fee, all you need to do is take the net cap cost and subtract it from the residual value and divide that by the total number of months you are planning to lease. Don’t worry, I’ll tell you exactly what net cap costs and residual values are.

*Depreciation Fee = [(Net Cap Cost) – (Residual Value)] / Months of Lease*

What is the net capitalized cost? The net cap cost is the net price of the car you are looking to lease after you have deducted the down payment. For instance, if the dealer offers you a selling price of $20,000 on a car with $1000 down, your net cap cost is $19,000. This down payment is known as the cap reduction, because it reduces the price of the car, which allows you to get a cheaper monthly payment. The higher your cap reduction, the lower your depreciation fee, and the lower your monthly payment. One caveat you should be aware of is that your down payment includes your first month’s payment, registration fees, title fees, documentation fees etc. So if you hear commercials on the radio that say things like “Lease a new Camry for $199/month with $1,999 due at signing,” $1,999 typically is not the cap reduction; $1,999 includes the cap reduction and all necessary fees. The cap reduction is usually listed in fine print at the bottom of a car advertisement. Remember, the cap reduction is the portion of your down payment that actually reduces the cost of your car in order to give you a lower monthly payment.

What is the residual value? The residual value of a car is how much the car is worth after a certain number of years. The residual value is also how much you must pay to purchase a leased vehicle after your lease term has reached its maturity (meaning it has ended). When shopping for a new car to lease, you should look for cars that have a high residual value. You can find a specific vehicle’s accurate residual value by searching for the car on http://kbb.com. Cars with the highest residual values can give you the lowest monthly payment. Generally speaking, Japanese cars have higher residual values than American cars. This makes Japanese cars an ideal choice for a new car lease.

The residual value of a car is generally expressed as a percentage of the MSRP. In my case, the original MSRP on my vehicle was $22,565 and for my 3 year lease, the residual value is 61 percent of the MSRP. This is actually a GREAT residual value when compared to several competitors. So the residual value comes out to $13,764.65 on my 2010 Honda Accord. If I choose to purchase the car at the end of my 3 year lease, I will owe exactly $13,764.65. Keep in mind that the residual value depends on how long you decide to lease the car. For example, I had the option to lease my Accord for 30 months (instead of 36 months), which would give me a residual that is 5% higher. My residual value would come out to $14,892.90. The general rule here is that the longer you keep the car, the lower your residual value is.

One thing that I still don’t have a confirmed answer to is whether or not the dealer can raise or lower the residual value. Most dealers have told me that the residual value is set in stone by the finance company and cannot be changed. This seems to be the accurate answer. However, I have also heard that the residual value can be artificially raised to give you a lower monthly payment on your lease. My recommendation would be to try to negotiate the residual value with the dealer anyway.

Key point: You want the net cap cost and residual value to be as close to each other as possible in order to get the lowest monthly payment. In other words, the net cap cost should be as low as possible and the residual value should be as high as possible.

### The Finance Fee

What is the** finance fee**? The finance fee is the fee that you are required to pay for borrowing the leased vehicle. It’s really just interest that you pay on top of the depreciation fee. The first time I leased a vehicle, I didn’t even know there was an interest rate. You know why? The dealer is not legally required to tell you this interest rate and the lease agreement does not have to (and usually doesn’t) document it either. If you take a look at a lease agreement, this fee is generally expressed as the rent charge, which basically summarizes exactly how much interest you will pay over the term of your lease. Now this interest rate is just like the interest rate on any typical loan, except for the fact that it is more commonly called the money factor. Always ask the dealer what money factor they can offer and learn how to convert the money factor into an interest rate. To get the interest rate, all you have to do is multiply the money factor by 2,400. This is the formula:

*Interest Rate = (Money Factor) x 2400*

You should know how to convert the money factor into an interest rate because you need to compare the interest rate that is offered to you with the interest rate that dealers are offering for finance. If you find that the interest rate that you are being offered on your lease is much higher than the interest rates that dealerships are offering on financed vehicles, you are getting screwed. Typically, interest rates for leased vehicles shouldn’t be much different than interest rates for financed vehicles. Also keep in mind that the interest rate depends on your credit score.

So how do you come up with the monthly finance fee? You just take the net cap cost, add it to the residual value and multiply the sum by the money factor. Here’s what this looks like:

*Finance Fee = [(Net Cap Cost) + (Residual)] x (Money Factor)*

### Sales Tax

Sales tax makes up the third and final part of your monthly lease payment. There is no way to negotiate lower sales tax. It is charged every month on the sum of your depreciation fee and finance fee. Keep in mind that the sales tax portion of your car payment can change even after you have signed your lease agreement. If the law changes and sales tax goes up, it will be reflected in the next payment on your car. For instance, in that last year of my previous lease, my Los Angeles county’s sales tax increased from 8.25% to 9.75% which made about a $4.00 monthly difference in my payment. Not much to worry about here, but I’m just stating the facts. Here’s how you come up with the sales tax portion of your car payment.

*Total Sales Tax = [(Depreciation Fee) + (Finance Fee)] x (Sales Tax)*

For my new Accord, my monthly depreciation fee is $172.46, my finance fee is $28.00, and sales tax in the county of Los Angeles is 9.75%. So…

(172.46 + 28.00) x .0975 = 19.54

So I am paying a total of $19.54 every month in sales tax.

### Total Monthly Car Lease Payment

To come up with the entire monthly car lease payment, add together all three components of the payment.

*Total Monthly Payment = Depreciation Fee + Finance Fee + Sales Tax*

Before even stepping foot inside the dealership’s door, you should know exactly how to calculate the depreciation fee, the finance fee, and sales tax. You can also calculate your monthly car lease payment by using this car lease payment calculator.