How to Evaluate a Lease Before Signing

A lease payment is not calculated the same way as a loan payment, and dealers know that most buyers do not understand the math. This creates an environment where leases are easy to manipulate in ways that are difficult to detect without knowing the underlying numbers. Three figures determine whether a lease is priced fairly: the capitalized cost, the residual value, and the money factor.

Capitalized Cost

Capitalized cost is the agreed-upon selling price of the vehicle, adjusted for any cap cost reductions like a down payment or trade-in. This is the number you negotiate, and it functions exactly like the purchase price in a traditional sale. A dealer who refuses to negotiate the cap cost on a lease is keeping a larger margin than necessary.

Residual Value

Residual value is the manufacturer's prediction of what the vehicle will be worth at the end of the lease term, expressed as a percentage of MSRP. If a $40,000 vehicle has a 55 percent residual on a 36-month lease, the residual is $22,000. You are financing the difference between cap cost and residual, which is $18,000 in this example. Higher residuals produce lower payments and are set by the manufacturer, not the dealer.

Money Factor

Money factor is the lease equivalent of an interest rate. A money factor of 0.00125 converts to roughly 3 percent APR. Dealers can mark up the money factor above the manufacturer's buy rate, which is the same as charging a higher interest rate on a loan. Always ask the dealer for the base money factor and compare it against published lease rates from sites like Edmunds.

Putting It Together

Before signing any lease, confirm the cap cost, residual, and money factor in writing. Calculate your expected payment independently and compare it to the dealer's quote. If the numbers do not match, the dealer may have added fees to the capitalized cost or marked up the money factor.