What is a Lease?
A lease is a contract made between a lessor (the legal owner of the asset) and a lessee (the person who wants to use the asset) for the use of an asset, bound by rules intended to protect both parties. In a typical contractual agreement, the lessee obtains the right to use an asset or multiple assets belonging to the lessor for a specific term in return for regular rental payments.
Leasing is often associated with living spaces, working spaces, and cars, but mostly anything that can be owned can be leased. Other examples of leasable items include storage, conveyor belts, lighting, furnishings, software, server hardware, aircraft, cleaning equipment, and many more.
How to Use This Calculator
This lease calculator works in two distinct modes depending on what information you are trying to find:
- Fixed Rate Mode: If you know the price of the asset, its estimated residual value, the lease term length, and the annual interest rate, this mode will calculate your exact monthly payment.
- Fixed Pay Mode: If a dealer or lessor has given you a quoted monthly payment along with the asset value and residual value, this mode will reverse-engineer the true interest rate (or return rate) you are being charged.
Rent vs. Lease
Although they are often used interchangeably, "lease" and "rent" technically have different meanings. By definition, a lease refers to the contractual agreement or contract itself, while rent refers to the periodic payment for the use of an asset. In neither case is equity of the asset being rented or leased actually gained by the lessee.
Understanding Residual Value
Residual value, sometimes called salvage value, is an estimate of how much an asset will be worth at the end of its lease. It is most commonly associated with car leasing. As an example, a car worth $30,000 that is leased for 3 years can have a residual value of $16,000 when the lease ends.
Residual value is not exclusive to car leases, but applies to leases of any type of asset, as long as it depreciates and can be sold for value once again. For most assets, the longer the lease period, the lower the residual value. The term "residual value" is also often used to refer to the value of an asset after standard depreciation.
The Formula / The Math
The standard calculation for a lease typically mirrors the Time Value of Money (TVM) formula for an ordinary annuity or annuity due, depending on when payments are made.
PV = PMT × [ (1 - (1+r)-n) / r ] + FV × (1+r)-n
Where:
PV = Asset Value (Present Value)
FV = Residual Value (Future Value)
PMT = Monthly Payment
n = Total number of months
r = Monthly interest rate (Annual Rate / 12)
For leases that use a "Money Factor" instead of an APR, you can convert the money factor to an APR by multiplying it by 2,400. To find the money factor from an APR, divide the APR by 2,400.
Frequently Asked Questions
The money factor is an alternative method used by dealers to present the amount of interest charged on a lease. It determines the finance portion of your monthly payment. You can convert a money factor into a standard Annual Percentage Rate (APR) by multiplying it by 2,400.
A capital lease acts like a loan where the lessee is treated as the owner of the asset for accounting purposes, and the asset is depreciated on their balance sheet. An operating lease is treated as renting, and payments are considered operational expenses without transferring ownership.
For individuals leasing a personal vehicle, payments are generally not tax-deductible. However, for businesses, lease payments considered as operating leases are often tax-deductible as standard business expenses, which can help reduce a company's tax liability.
The residual value determines how much the asset depreciates during your lease. Because you are only paying for the depreciation (the difference between the initial asset value and the residual value) plus interest, a higher residual value typically results in lower monthly payments.
Yes. Just like a standard loan, the money factor or interest rate on a lease is often negotiable and heavily dependent on your credit score. Using the "Fixed Pay" mode on this calculator can help you uncover the true interest rate a dealer is charging you so you can negotiate effectively.