Figuring out an auto lease
By Lucy Lazarony • Bankrate.com

To get a good deal on a lease, you had better learn the lease lingo and be able to do the math.

The most important thing to understand about leasing is that your monthly payments are based on how much the car will depreciate during the term of the lease. That's figured by calculating the difference between the price of the car today (the "capitalized cost") and the estimated value of the car when you return it (the "residual value").

In addition, you have to pay a lease fee based on a different kind of interest rate called the money factor.

Comparing the leases -- do the math and save Click on the underlined terms to read a definition This table provides an example of how you would calculate your lease cost, and provides space for you to fill in two deals that you're trying to compare.

Example Your deal 1 Your deal 2 The capitalized cost of the car $25,000     Less your down payment -2,000 - - New capitalized cost $23,000     Less the residual value -11,250 - - Equals the depreciation $11,750     Divide by number of months in the lease ÷ 36 ÷ ÷ Equals monthly depreciation amount $326             New cap cost plus residual value $34,250     Times money factor x .0026 x x Equals lease company fee $89             Monthly depreciation $326     Plus lease fee + 89 + + Equals monthly payment $415

Auto leasing terms

Capitalized (cap) cost A leasing term that refers to the price of the car. The lower the capitalized cost, the lower the monthly lease payment. The cap cost is negotiable and can be reduced by a cash down payment, trade-in or a manufacturer's rebate; it can be increased by the loan acquisition fee or costs left over from a previous lease. Depreciation An asset's decline in value over the course of its useful life. Autos depreciate steeply in their first few years, beginning the moment they are driven off the lot. In an auto lease, a charge for depreciation is the chief part of a consumer's monthly payment. Money factor A leasing term that expresses the cost of borrowing. It is similar to the interest rate paid on a conventional car loan, but it is expressed as a difficult-to-understand fraction. To convert the money factor to a recognizable interest rate, multiply it by 24. For example, a money factor of .00345 x 24 = 8.28 percent interest. The money factor is negotiable, and consumers who lease a new car should look for a money factor close to the current interest rate charged for new-car loans. Residual value The amount agreed upon to represent the value of the car at the end of a lease.

For a complete list of terms, visit our Auto and leasing definitions page