Important Terms When Calculating Your Car Lease Payment

Clay Johnson, CTO - June 10, 2019

Important Terms When Calculating Your Car Lease Payment

There's a reason why Carlease is the easiest way to lease your next vehicle.

Not only do we provide you with an easy platform where you can browse and select your next lease from the comfort of your home or office; our leasing experts work to provide you with 100% transparency throughout the leasing process. As such, we've built two of the most comprehensive leasing calculators on the web today: one for Traditional leasing (closed-end leasing) and one for TRAC leasing (open-end leasing). Below is a guide on how to use the calculators to accurately estimate a lease payment that's right for you.


MSRP is the manufacturer's suggested retail price, also commonly known as the list or sticker price of a vehicle. The MSRP is the recommended selling price that automakers give a new car when it comes to market. But that doesn't mean it's the amount you have to pay! You have room to negotiate the final, "out-the-door" cost of your vehicle which can often be less than the MSRP by thousands of dollars. Carlease's pre-negotiated pricing saves you the time and hassle of negotiating for these discounts. Conversely, a dealer or intermediary can mark a car above MSRP if it’s selling exceptionally well or fast. It all depends on the demand for the vehicle, current inventory, and time. The general rule of thumb is, the longer a car is on the market, the farther below MSRP it falls.

Amount Financed

The amount financed is the "out-the-door" price of the vehicle only - your negotiated vehicle price.

Usually, the final cost of a lease or purchase includes all costs in addition to the price of the vehicle. But here at Carlease, our calculators provide our clients with total transparency, so we break down our "out-the-door" price even further so that you can see where your money goes on each lease payment. The amount financed can also be strictly the cost of the vehicle if paying all fees and taxes up-front.

Desired Term

The desired term refers to the length of your lease. Generally speaking, leases are most commonly offered on a 24, 36, 48, or 60 month basis. A shorter lease will leave you with a higher monthly payment, whereas a longer lease will reduce your monthly payments - sometimes significantly. We recommend exploring all of the options when using the leasing calculator, allowing you to select the length of time and payment that's right for you. But how do you determine a lease length that's right for you? There are a few things (besides cost) to consider:

  • How long do you want/need the vehicle? 
  • What are the lengths of the vehicle's warranties?
  • How long are you willing to drive a vehicle with potentially out of date technology?
  • What schedule are your local fees and taxes due?

Down Payment

When looking at our leasing calculators, you'll notice that there isn't a space for a down payment. That's because our leasing experts don't recommend one! Here are a few reasons why:

  • If the unthinkable happens and your new lease is stolen or totaled, your current lease is terminated and all future payments are wiped clean. This does not include your down payment. Any money you put down at the start of your lease is lost, potentially costing you hundreds, if not thousands, of dollars.
  • A lease, unlike a loan, does not accrue interest on a principal amount. While it makes sense to put a down payment towards the principal of a loan to reduce the amount of interest you pay over the life of the loan, lease interest rates are fixed as a percentage of the calculated depreciation. A down payment only serves to move money around - you pay the same amount of money (interest or rent-charge) either way.
  • For business leases, eliminating the down payment on a lease or fleet of vehicles has a positive effect on cash flow i.e. freeing up capital to spend on other business expenses.

Residual Percentage

Residual Percentage, or residual value, is the value of the vehicle at the end of the lease. The quick overview is:

  • The longer the vehicle's lease period is, the lower its residual value.
  • And the higher the vehicle's residual value, the lower your lease payments will be.

The residual value is pre-determined value of the vehicle at lease-end. It's the reason it can actually be more economical to lease a nicer, luxury vehicle then a lower tier or base model - its value depreciates at a much lower rate leaving you with a higher residual vehicle. The leasing experts at Carlease are happy to answer any questions you have, and point you towards vehicles that have high residual value.

Effective Tax Rate

The Effective tax rate on a lease, commonly the use tax, encompasses all taxes related to the vehicle. This may include multiple taxes like city, county, and state tax, among others. Here's an example of the use tax for Chicago, Illinois:

Illinois (state): 6.25%
Cook County (county): 1.75%
Chicago (city): 1.25%
Special (misc.): 1%
TOTAL Effective Tax Rate: 10.25%

Some regions tax the total value of the vehicle, or the value of depreciation up-front. While our calculator supports these options it's important to know if you are in one of these regions/municipalities to calculate an accurate least payment and any initial fees.

Here's a helpful guide to state/city use taxes.

Interest Rate (or Rent Charge)

How interest rates work on a car lease payment may be the most confusing part of the leasing process. But with this article, we hope to break down and make sense of this charge so you know exactly where your money is going! The first thing to know when leasing a car is that interest payments work a little differently than they do for an auto loan. Say you take out a 5 year/60 month loan for a car. Your loan principal (the amount you borrow) is combined with the overall interest charge on the principal (the fee for borrowing money). Divide this sum by the length of your loan, in this case 60 months, and the resulting figure is your monthly loan payment. At the start of your loan, you're paying down more of the interest and less of the principal, and towards the end of the loan, you're paying down more principal and less of the interest, but your payments remain consistent over the life of your loan.

When you lease a car, your interest payments are calculated as a percentage of the depreciation of the vehicle, the decrease in your car's value. If your vehicle depreciates $10,000 over a three year lease, and your interest rate is 5%, you'll be paying $13.88 a month in interest on a consistent monthly basis.

But more often than not, the interest rate isn't broken out from the lease payments. Rather, they're lumped into the total sum, making it hard to figure out exactly what your monthly interest payments are. They're often referred to as the "Rent Charge" or "Lease Charge" when looking at a lease agreement. If the rent/lease charge isn't readily apparent, you'll likely see something called a "Money Factor". The money factor is very small decimal number that can be used to calculate interest on a lease. The rule of thumb is: the smaller the money factor, the smaller the cost of the lease. A money factor of 0.0017 is roughly 4% interest and considered a very good deal. Here is how you convert the money factor into your interest rate:

Your Interest Rate = 2400 x Money Factor
4.08% = 2400 x 0.0017

Acquisition Fee

The lease Acquisition Fee, sometimes referred to as a bank fee or an administrative fee, is the amount finance companies charge to broker your lease.

This fee is typically between $395 - $1,295, depending on the vehicle and leasing company. Note that acquisition fees can be bundled into the monthly lease payment, or paid up-front (see Amortize Acquisition Fee).

Amortize Acquisition Fee

Amortizing your acquisition fee spreads the single payment out over the life of the lease so you're paying a little each month rather than the full sum up front. Whether or not this is an option for you all depends on how the lease is structured, where you live/lease, and the finance company. If this is an option you're interested in, always ask your leasing specialist!

Disposition Fee

The Disposition Fee is the sum paid to the lessor at the end of the lease to cover expenses related to processing the vehicle upon return, i.e. cleaning and reselling the car. Most lessors charge between $250 and $450, but prices can vary. These fees are commonly waived by the lender at lease end when leasing another vehicle of the same brand.

Doc/Registration Fee

Doc/Registration Fees is a catchall term for the administrative costs associated with the purchase or lease of a vehicle. In essence, you’re paying for the paperwork associated with the transaction. All states charge a doc fee, and many of these fees are mandatory i.e. non negotiable. Doc fees can range from $75 to $500+ dollars with limits depending on the state you live in. For an accurate lease estimate, it's important know what you will be charged in doc fees. For more on the subject and to view state doc fees, click here.

Ultimately, these calculators are tools for research & estimates only. But when you work with the leasing experts at Carlease, you can rest assured that we're negotiating the best price possible for your next lease, with 100% transparency. Visit to browse our showroom, or call one of our leasing experts today at 847-714-1414 to find out how easy it is to lease your next car.

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