Car lease payments are calculated differently than if you were financing a car for purchase. For example, instead of taking into account the monthly interest rate itself, you consider the "money factor" (MF), which is a special percentage auto financial professionals use to express the value of the lease. The car's "residual value" (RV) is important too, also a percentage, this value represents how much of your car's value will remain at the end of the lease. Figuring both of these values is extremely easy and will help you determine whether leasing a car is a better value than purchasing one.
Consider the monthly interest rate of the car in which you're interested. You can find this in an advertisement or obtain it from the dealer or a bank. Divide this number by 2,400 to get your MF. For example, if your interest rate is 4.8%, your money factor would be .0020.
Determine your car's monetary RV. Upon request, your dealer will give you the RV expressed in percentage form. Convert the percentage to a decimal, then multiply it by the car's full retail price. For example, if the RV of your car is 60% and its MSRP is $20,000, its monetary RV is $12,000.
Express the amount of interest contained in each monthly payment by adding the car's price and monetary RV together and multiplying this sum by the MF. Using the same example in Step 2, a car with an MF of .0020, MSRP of $20,000 and monetary RV of $12,000, the interest amount is .0020 x 32,000, or $64 per month.
Compare this value to your full monthly payment in the form of a percentage. For example, if your monthly payment for the example car is $350, 18.2% of each monthly payment is interest.
While normal car loans consider interest on a yearly basis, lease interest compounds monthly. As a result, the term of your lease is irrelevant when considering the MF and interest rate, it only affects your car's RV.
The dealer will provide your full monthly payment amount, but you won't have any idea how much interest you're paying every month, which is why it's important to know the MF and RV.
Robert Schrader is a writer, photographer, world traveler and creator of the award-winning blog Leave Your Daily Hell. When he's not out globetrotting, you can find him in beautiful Austin, TX, where he lives with his partner.