The simple way to think about it is as analogous to a regular car loan.
The key difference, is instead of financing the entire car, you are only financing a percentage of the car, the part you are going to use. Buying pizza by the slice instead of by the pie.
This percentage is calculated by the vehicle manufacturer, based on their best expectation of what the car will be worth wholesale, at the end of the lease. Sometimes they will inflate this residual value, in order to make the lease more attractive. (The higher the residual value, the smaller the percentage of the car you are paying for, and the lower your monthly payment.)
However leases are already a scary proposition, that’s why banks won’t touch them. If the cars are worth considerably less then the residual value, the manufacturer is taking that loss!
That’s actually why leases are often a good thing for consumers, by nature the manufacturer is shouldering some of that risk potential for you.
So say they say it will be worth 60% of the MSRP(Residual value is calculated as a percentage of the MSRP, but that doesn’t mean you have to pay msrp!) after 3 years and 36k miles.
You are basically financing 40%(or less, again, you don’t need to pay MSRP, if you got a 10% discount in this example it would be only 30%) of the MSRP over the term of the lease, usually 36 months, but some more or less.
So just like a loan, the more you put down, the lower your payment. Don’t get confused with adds that show a required down payment, that simply means you need that amount down to get that specific payment. You can usually do a lower down payment and pay a higher monthly, or vice versa.
The last part is the money factor, which is the interest. It is calculated differently however, to get a rough idea of an analogous APR, multiply the money factor by 2400.
For instance, a money factor of 0.00176% X 2400 = 4.224 APR.
In most cases the money factor is pretty similar to the apr you would get if you financed it, and of course is credit dependent.
Keep in mind, since you aren’t financing as much, down payment changes your payment by considerably more! A thousands dollars down tends to only change a 72 month buy payment by about 15 bucks, while for a lease, it’s closer to $30. So more down payment makes a lease LOOK better than it actually is. Keep in mind the total amount you are paying.
There are many advantages of leasing, it’s definitely the cheapest monthly way to drive a brand new car, it has nearly no risk involved because the car will be under factory warranty, and gap insurance is typically included.
However if you think you will own the car for a long time, it will be cheaper in the long run to simply buy it. But of course you have to balance that with the increased wear on the car, increased cost of maintenance, the decline in appearance and comfort, and the possibility of needing a new car and being stuck with negative equity.
A big advantage of the lease is you will NEVER have negative equity at the end of a lease. So you can switch to a new car with no penalties.
This is great for many people, take for instance the kid starting college. He leases a coupe. After his 3 year lease, now he’s going steady with his girlfriend and has become annoyed with not being able to have friends in the back seat, so he buys a compact 4 door.
Then they have kids, so 3 years later, he upgrades to a full-size car. 3 years later the kids are growing, and they like to go on “adventures” like to the beach etc, so now even the full-size car doesn’t have space, and they lease a mid-size SUV.
Then the kids have their own cars, they downgrade again. Then he gets a new job 50 miles away and buys the lowest cost of ownership commuter car he can find. Or needs a work truck.
ETC, you see how advantageous it can be to to be able to get a different car every 3 years with no penalty.