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AutoHow the lease payment is calculated
A monthly lease payment consists of two parts:
- Depreciation portion: the difference between the car's price (after down payment) and its residual value, divided by the number of lease months. This is the core "value loss" of the car that you pay for.
- Finance portion: interest charged on the average value of the car over the lease term — essentially the "cost of borrowing" from the leasing company.
What is residual value
Residual value is the car's projected worth at the end of the lease term, usually expressed as a percentage of the original price. The higher the residual value, the less the car "loses" during the lease, and the lower the monthly payment. Cars that hold their value well (certain premium brands, popular models) typically have higher residual values.
Lease vs loan: which to choose
- Leasing is better if: you want a lower monthly payment, plan to change cars every few years, and don't mind not owning the car outright.
- A loan is better if: you plan to keep driving the car long after payoff, want full ownership right away, and are willing to pay more monthly for long-term savings.
This is a simplified model. Actual lease terms may include additional fees, insurance, and other charges — check the full terms with the leasing company.
FAQ
How is the monthly lease payment calculated?
The payment consists of two parts: a depreciation portion (the difference between the car's price and residual value, divided by the term) and a finance portion (interest on the average value of the car over the lease term).
What is residual value?
This is the car's projected value at the end of the lease term. A higher residual value means a lower monthly payment, since you're only paying for the difference in value.
Lease or loan — which is better?
Leasing usually offers a lower monthly payment, but the car doesn't automatically become yours. A loan costs more monthly, but the car is fully yours after payoff.