How To Calculate a Car Lease Payment

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Many of us want the best car we can afford. Sometimes we go back and forth between the idea of leasing and buying (financing) a car. It is easy to calculate what car we can afford to buy. Here is an easy way to figure out which car you can afford to lease.

For this example let us use a highly configured Mercedes S560 4Matic Sedan. The MSRP is going to be around $150,000 (USD). We are in Massachusetts and are not willing to put any money down. We need a lease with 15,000 miles per year. We plan on leasing the car for 3 years (36 months).

Step 1: First thing we need to do is contact the dealership and find out what the money factor (MF) and residual value (RV) of the car are.

The dealership says the RV is 44% and the MF is .00208333. <--Money factor is essentially an interest rate.

What that simplifies down to, is that after 36 months of ownership (45,000 miles), the value of the car will be 44% of what the original MRSP was. That means we are going to be paying the 56% (total value - residual value, 100%-44%=56%) the car depreciates over the time we own it.

STEP 2: $150,000 * .56 = $84,000. <-- We are paying $84,000 to own the car for 3 years and put 45,000 miles on it.

Step 3: $84,000 / 36= $2,333.33 <-- Our monthly payment before interest and taxes.

Step 4: We need to include the interest rate and sales tax into the monthly payment. Some people are willing to pay these costs up front, for our example we are going to add them into the monthly payment of the car.

First, we need to convert the money factor into an interest rate. We do this by multiplying the MF by 2400.

Money Factor: .00208333*2400= 5% Massachusetts sales Tax: 6.25%

$2,333.33* (1.05) * (1.0625) = $2603.13 per month!

Having the ability to calculate your lease payment is very helpful when you are trying to figure out what makes the most financial sense. Most people will chose to buy a car because they would like to have an "asset" after the car is paid off. This example is primarily for small business owners who are unsure which makes the most financial sense.

Here is a link to a video I made explaining the same concept and using the same numbers.

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