First off, I am against leases 99% of the time. To me there are only really two options that I consider ‘correct’ leasing and one that I accept is a personal preference. The three reasons you might lease a car are: you only need a car for a year or two, it is used strictly for business purposes or you turnover cars quickly and always want a car less than 5 years old. Like I said the last reason I don’t agree with but I also believe people get to spend their money how they choose. Heck, I spent close to $1000 dollars on hiking gear last year which most people would think is insane. However, let’s delve a little deeper into the first two ‘logical’ reasons and how to get a killer lease deal.

Case Studies for when to get a Killer Lease Deal

Tony lives in New York City and works a structural engineer. He never needed a car due to New York City’s great public transportation so he never had one. However, his company is asking him to oversee a project in Omaha, Nebraska for the next two years. The company will be providing living accommodations for him but no car while he is out there. Tony is okay for the first three months of his new position but begins to feel a little cooped up. After all he is used to the hustle and bustle of the big city. Tony decides he wants to get out of the city of Omaha more often and see more things around him. Public transportation isn’t great for long distance here. He decides to head down to the car dealership to see what his options are. Leasing would be a great option for Tony.

The next example is less straight forward but, if you need a vehicle for strictly business use leasing is a great option. It allows you to deduct the monthly payments off your business taxes. Just make sure to consult your accountant before running out and leasing a car for your business because we told you to.

I need a lease, how do I avoid getting screwed?

We need to first lay out all the variables that go into calculating a lease payment. Then we are going to figure out the equation and then solve for some missing parts. Lease payments are simply made up of three calculations, Depreciation Fee, Finance Fee and Sales Tax. These are key to understand to get a killer lease deal.

The Depreciation Fee is what you pay the company for allowing you to drive the car and put on miles spread over the term of the lease. It can be calculated as follows:

Depreciation Fee = ( Net Cap Cost – Residual) / Term

Net Cap Cost

So let’s break down each of these variables. Net Cap Cost, or Adjusted Capitalized Cost, is your Gross Cap Cost, or your negotiated selling price with the dealership, plus any add on fees or taxes that will not be paid up front, plus prior loan balances, minus Cap Cost Reductions such as down payments, trade-in or rebates. Net Cap Cost does not include any lease charges that you pay in cash.

Mazda currently has on offer for their 2020 CX-9 with an MSRP of $33,790 but they are advertising their gross cap cost as $31,290. This is the part that is negotiable! There is a $595 acquisition fee, a $1045 destination charge and a $360 dealer rebate. Let’s also assume $2,000 in taxes and other fees. Let’s also assume you exceed their 2,999 down payment and put down $5,000 in a trade in.

(31,290+595+1045+2000)-(5,000+360) = 29,570

Which brings us to a net capitalized cost of $29,570. Obviously your mileage(haha) will vary with exact negotiations, taxes and other fees but you get the idea.


Residual is the value of your car at the end of the lease based off of the miles and time frame you will be driving it. The term is the length of the loan.

Let’s take a look at that same Mazda CX-9 from above. The dealerships website actually tells us that for their 36 month lease the residual value is $21,249. They use a little tricky terminology here by saying “purchase option at lease end” but you can use that as the residual value. Using the MSRP we can come up with our ratio for the residual.

21,249 / 33,790= 63%

These residual values are set by the bank financing the lease and are typically not negotiable. You can try but usually a bank will just decline the loan if you try and negotiate this one.

Finance Fee

Warning: Lots of math and formulas ahead

Next we have the Finance Fee, or what you pay to the company financing your lease for letting you use their money. It is similar to interest on a loan and is calculated as follows.

Finance Fee = ( Net Cap Cost + Residual ) X Money Factor

Be aware that this means you are going to be paying finance charges on both the depreciation and residual of your car. Now your Money Factor isn’t going be listed on your paperwork anywhere, but you will see your “Lease Charge” or “Rent Charge.” Luckily the Money factor can be extrapolated through this.

 Money Factor = Lease Charge / ( (Net Cap Cost + Residual) x Term) 

Then to convert a Money Factor into an Interest Rate you just have to multiply it by 2400.

So your Monthly payment is made up of the Depreciation Fee, the difference between the cars value now and the cars value at lease end, and the Finance fee.

Putting it All Together

Going back to the Mazda CX-9 the monthly payment is $299 for 36 months.

That means Depreciation fee is their capitalized cost minus the residual value divided the term of the loan.

(31,290-21,249)/36 = 278.9

The Finance fee is the difference between the payment and the your depreciation cost.


Then our Money Factor can be calculated by dividing the Finance Fee by the Capitalized Cost Plus the Residual cost

20.1 / (31,290+21249) =.0003826

Now to find our Interest rate just multiple that number by 2400!

.0003826*2400 = 0.92%

So over the course the course of three years you are only paying $3,588 to use your car and an option to purchase it at the end for $21,249. Not only that but you are only paying an interest rate of 0.92% which is extraordinarily good for this rate environment. That means your money is earning more in most money markets than what the bank is charging you for your lease! You are eating the depreciation but that comes with any car buying experience. Talk about a killer lease deal!

How do I use this Formula at the Dealership?

You just need to understand at the dealership you are only really negotiating three things, Capitalized Costs, Residual Value and Money Factor. The key to negotiation and the key to turning a good deal into a great deal is to focus on the sale price of the car. The smaller the difference between the sale price and the residual, the less depreciation you are financing. The dealership generally can not budge on residuals as they are set by the Maker and the bank financing the deal. The Money Factor is usually set by the bank and can not be influenced except for one trick.

Refundable security deposit

Refundable security deposit are usually only used when you have poor credit to reduce the interest rate you are paying but it can even sometimes be used to get a lower money factor. Most dealerships don’t know about this and won’t offer it to you but if you ask them to call and ask you may be pleasantly surprised. For example if you can put down $3000 and save 20 a month at the end of 3 years you had a return of 7.44%.

The other thing to try and narrow down your negotiation is to do the math beforehand, get residuals and money factors and email their internet sales departments. This will weed out which dealerships want to play ball and which ones don’t. Stay firm and just make sure you stick to the numbers for your lease.

Some few other tips don’t put money down but pay any fees you can up front so you aren’t financing them at whatever interest rates. Don’t get caught up negotiating monthly payments, focus on the sale price.

Have you ever gotten a killer lease deal? Let us know in the comments below how you scored it!