Car Leasing in Plain English

How a lease payment is built

A lease payment has three main parts.

1. Depreciation. This is the value the car loses while you drive it. You pay for that loss spread over the term. The Federal Reserve describes it as "the difference between the adjusted capitalized cost and the vehicle's residual value" (Federal Reserve).

Depreciation charge = (adjusted cap cost − residual) ÷ number of months

2. Rent charge. This works like interest. The Fed's formula is money factor × (adjusted capitalized cost + residual value) (Federal Reserve).

Rent charge = (adjusted cap cost + residual) × money factor

Adding the residual can look strange. The reason is that the lender has money tied up in the whole car for the whole lease, including the part you hand back at the end.

3. Tax. Your state or county sets the sales or use tax (Federal Reserve). In Florida, tax is charged on each payment (see Florida notes below).

Depreciation plus rent charge gives the base payment. Add tax and you get your monthly payment. Our free Packed Payment Detector runs this math using your adjusted cap cost, residual, money factor, term and tax. If the dealer's number comes out higher, something has been added.

Cap cost: gross, adjusted, and the down-payment trap

Gross capitalized cost is the agreed price of the car plus anything rolled into the lease, such as fees or add-ons. Florida law defines capitalized cost as "the agreed-upon total amount," which can include taxes, fees, insurance, GAP coverage, service contracts and prior balances (Fla. Stat. 521.003).

A cap cost reduction is money that lowers that amount: cash, a rebate, or trade-in equity. Florida calls it a payment "in the nature of a down payment" (Fla. Stat. 521.003). What is left after the reduction is the adjusted capitalized cost.

Here is the risk. A large down payment on a lease can simply be lost. The Fed warns: "Once you have paid a capitalized cost reduction, the money is nonrefundable." If the car is stolen or totaled, you can still owe early termination charges (Federal Reserve FAQ). The money you put down does not come back.

A down payment also saves less than it seems. It lowers the rent charge only by the "interest" on that money. In our example below, putting $2,000 down saves about $180 in rent charge over three years.

Residual value and money factor

Residual value is "the assigned value of the vehicle at the end of the lease" (Federal Reserve). Banks or leasing companies usually set it from industry data (Edmunds). The salesperson usually cannot change it. But it is not always fixed:

• A shorter term raises the residual. A higher mileage allowance lowers it (Federal Reserve).
• Different lessors assign different residuals to the same car (Federal Reserve).
• The CFPB lists residual value among the terms people commonly negotiate (CFPB). In practice, that usually means comparing lessors, not haggling with a salesperson.

Money factor is the rate used to work out the rent charge. It is a small decimal, such as 0.00250. Multiply it by 2,400 to get a rough APR. For example, 0.00250 × 2,400 = 6% (Edmunds). This is only an estimate. The Fed notes that a money factor is not a lease rate, and that it "typically is not disclosed to you" (Federal Reserve). So ask for it directly.

What you can negotiate, and what you usually can't

Negotiable:

• The selling price (cap cost). Treat it "as the vehicle's selling price; it should be negotiated the same as if you were purchasing it" (Edmunds). The Fed says a lower agreed value can lower your payment (Federal Reserve).
• The money factor, if it has been marked up. "Dealers sometimes mark up the money factor for additional profit." Ask for the lease at the lender's "buy rate" (Edmunds). Sometimes the rate is fixed and the dealer cannot change it (Edmunds).
• Mileage allowance and the per-mile charge (Federal Reserve).
• Trade-in value and the down payment (CFPB).

Usually set by the lessor:

• Residual value. Change it through the term and mileage, or by using a different lessor.
• Acquisition fee. This is a fee for arranging the lease. It is typically about $595 to $1,095 (Edmunds). The Fed says it covers things like credit reports and paperwork (Federal Reserve FAQ).

Worked example: building a 36-month payment

Example inputs only. These are not market rates.

Step 1: Gross cap cost. $36,500 + $895 = $37,395

Step 2: Adjusted cap cost. $37,395 − $2,000 = $35,395

Step 3: Residual. $40,000 × 0.58 = $23,200

Step 4: Depreciation charge. ($35,395 − $23,200) ÷ 36 = $12,195 ÷ 36 = $338.75

Step 5: Rent charge. ($35,395 + $23,200) × 0.00250 = $58,595 × 0.00250 = $146.49

Step 6: Base payment. $338.75 + $146.49 = $485.24

Step 7: Tax. $485.24 × 0.07 = $33.97

Monthly payment: $519.20

Over 36 months, the rent charge adds up to about $5,273.55.

Now drop the $2,000 down payment. The base payment rises to about $545.79, or $60.56 more a month. Over 36 months that is about $2,180 before tax. Only $180 of that is savings from putting money down. The rest is the same $2,000, just paid monthly. The difference is that if the car is totaled in month four, the monthly version leaves your $2,000 in your pocket.

Fees and costs at the end, or before the end

• Mileage. "Most leases restrict your mileage to 10,000-15,000 miles per year" and may charge for extra miles (CFPB). Your contract sets the per-mile rate.
• Excess wear. The standards, for things like body damage or worn tires, are in your lease (Federal Reserve). Federal rules require those standards to be reasonable (12 CFR 1013.4(h)).
• Disposition fee. You may pay this when you return the car (Federal Reserve).
• Early termination. Ending early can cost "up to several thousand dollars" (Federal Reserve FAQ). "The earlier you end the lease, the greater these charges are likely to be" (Federal Reserve).
• GAP coverage. This covers the gap between what the insurer pays and what you still owe if the car is stolen or totaled. "Some leases include gap coverage at no additional charge" (Federal Reserve FAQ). Not all do. Check before you buy it separately.
• Buying the car. Many leases let you buy the car at the end, or earlier (Federal Reserve). If the car is worth more than the purchase price, that difference is yours to keep (Federal Reserve FAQ). The contract must say whether you can buy and at what price, or how the price is set (12 CFR 1013.4(i)).

What the federal lease disclosure must show

Regulation M requires a standard disclosure (12 CFR 1013.4). It must show:

• The amount due at signing, broken out by item, including any cap cost reduction.
• The payment schedule and the total of periodic payments.
• Other charges, and the total of payments.
• A step-by-step payment calculation: gross cap cost, cap cost reduction, adjusted cap cost, residual value, depreciation, rent charge, number of payments, base payment and total payment.
• Early termination terms, with a warning that the charge may be several thousand dollars.
• Excess wear-and-use terms, the purchase option, official fees and taxes, and insurance.

The payment calculation box is where you check the dealer's math. If a line doesn't match what you agreed, stop and ask about it. For the numbers the dealer shows you before the contract, see How to read a dealer worksheet.

What to say

Before you sign: checklist

Florida notes

FAQ

Sources

1. 12 CFR 1013.4 — Content of disclosures (Regulation M), eCFR — required lease disclosures, payment calculation items, early termination notice, wear standards, purchase option (accessed Sep 2026)
2. Federal Reserve, Keys to Vehicle Leasing — negotiable terms, acquisition and disposition fees, excess mileage and wear, early termination, gap, purchase option (accessed Sep 2026)
3. Federal Reserve, Keys to Vehicle Leasing — FAQ — cap reduction is nonrefundable, theft/total loss, some leases include gap, acquisition fee, early termination "several thousand dollars," buyout equity (accessed Sep 2026)
4. Federal Reserve — Rent charge — rent charge formula, money factor not usually disclosed (accessed Sep 2026)
5. Federal Reserve — Depreciation — depreciation = adjusted cap cost − residual (accessed Sep 2026)
6. Federal Reserve — Residual value — definition, term and mileage effects, differences between lessors (accessed Sep 2026)
7. Federal Reserve — Monthly payment components — payment parts, tax set by state or county (accessed Sep 2026)
8. CFPB — Leasing versus buying a car — negotiable items, mileage limits, wear and tear, early termination (accessed Sep 2026)
9. FTC — Financing or Leasing a Car — mileage, wear, early termination (background) (accessed Sep 2026)
10. Edmunds Help Center — Car leasing basics — ×2,400 conversion, money factor markup and buy rate, residual set by banks, negotiate price, acquisition fee range (accessed Sep 2026)
11. Edmunds — 4 Ways to Spot a Good Lease — money factor sometimes fixed, ×2,400 conversion (accessed Sep 2026)
12. Capital One — What is the lease money factor? — confirms ×2,400 conversion (accessed Sep 2026)
13. Fla. Stat. 212.05 — 6% rate, tax due on lease payments for leases of 12+ months (accessed Sep 2026)
14. Fla. Stat. 212.054 — surtax, county of registration for vehicles (accessed Sep 2026)
15. Florida DOR, GT-800030 Sales and Use Tax on Motor Vehicles — tax plus surtax applies to leased vehicles (accessed Sep 2026)
16. Florida House staff analysis, HB 337 (2024) — current-law summary: lease payments taxed at 6%, surtax also owed (accessed Sep 2026)
17. Fla. Stat. 521.003 — definitions of cap cost, cap cost reduction, adjusted cap cost (accessed Sep 2026)
18. Fla. Stat. 521.004 — Florida lease disclosure requirements (accessed Sep 2026)
19. Fla. Stat. ch. 521 (full chapter) — 521.005 trade-ins, 521.006 remedies (accessed Sep 2026)