You Are Paying for Depreciation
A lease is not a rental and not a purchase — it is buying the portion of the car you use up. The payment has exactly two parts:
Payment = (Cap cost − Residual) / Months + (Cap cost + Residual) × Money factor
The first term is depreciation. The second is the finance charge, called rent charge in lease documents. Everything a dealer can adjust changes one of these two.
The Money Factor Trick
Leases quote interest as a money factor — a decimal like 0.00250 — rather than a percentage. Multiply by 2,400 to convert:
| Money factor | Equivalent APR |
|---|---|
| 0.00050 | 1.2% |
| 0.00125 | 3.0% |
| 0.00250 | 6.0% |
| 0.00350 | 8.4% |
| 0.00450 | 10.8% |
The format exists because 0.00350 reads as harmless and 8.4% does not. The money factor is negotiable within limits — the captive lender sets a base rate and dealers may mark it up, usually by up to 0.0004, which is nearly a full percentage point.
Residual Value Is Fixed, and It Decides Everything
The residual is set by the lender as a percentage of MSRP, not of the price you negotiate. A high residual means less depreciation and a lower payment, which is why some cars lease far better than others despite similar prices. Because it is fixed, the only real levers you have are the negotiated price and the money factor.
Do Not Put Money Down
A cash down payment on a lease is called a capitalized cost reduction, and it is prepaid depreciation. If the car is totalled or stolen in month three, the insurer pays the leasing company its value and your down payment is gone — gap insurance covers the lender's shortfall, not your equity. Almost every lease expert advises putting as little down as possible and accepting the higher payment.
The End of the Lease
Mileage allowances of 10,000–15,000 miles a year are standard, with excess charged at 15–30 cents a mile. Wear-and-tear charges follow a defined standard, and a pre-inspection about 60 days before the return date lets you fix cheap items yourself. If the car's market value exceeds the residual, buying it out and reselling captures that difference — a real opportunity in years when used values run high.
Frequently Asked Questions
Is leasing cheaper than buying?
Cheaper each month, more expensive over a decade, because you never stop paying. Leasing suits people who want a new car every three years; buying and keeping suits people minimising lifetime cost.
Can I negotiate a lease?
Yes — the selling price and the money factor markup. The residual and the base rate are set by the lender and are not negotiable.
What happens if I end the lease early?
Early termination typically requires paying most of the remaining payments. Transferring the lease to another person, where the lender allows it, is usually far cheaper.