The first step is to determine the purchase price of the car to be leased. If the final price has not been negotiated yet, use the standard retail price (the MSRP) of the car.

The second step is to subtract the down payment from the purchase price. The down payment is known as a “capitalized cost reduction” in leasing calculations. The amount remaining after the down payment has been subtracted is known as the “capitalized cost.” If there is no down payment, the capitalized cost is simply the purchase price that was negotiated with the dealer.

The third step is to choose the lease term and estimate the average annual mileage that will be used during the lease. Common lease terms are 24, 36, and 48 months, though there are other options. The mileage allowance is typically 10,000, 12,000, or 15,000 miles per year.

The fourth step is to call a dealer and ask what the residual value is for the make and model being considered, given the lease term and annual mileage allowance chosen. This will be expressed as a percentage. An online search engine can also be used to look for this information, which is standard among dealers.

The fifth step is to get a pencil, paper, and calculator. Multiply the residual value percentage by the MSRP of the car, even if the negotiated price is less than the MSRP. The resulting amount is what the car will be worth at the end of the lease.

The sixth step is to subtract the residual value amount from the capitalized cost (not the MSRP, unless they are the same). This number represents the amount the car will depreciate during the lease term.

The seventh step is to divide the depreciation amount by the number of months of the lease term. This is the first part of a monthly lease payment.

The eighth step is to ask a dealer what the money factor is for the make, model, and lease terms desired. This will be expressed as a decimal, such as 0.0025, and is the leasing equivalent of the interest charged in traditional auto financing.

The ninth step is to use the calculator to add the capitalized cost to the residual value. Then multiply this number by the money factor. The resulting amount gets added to the monthly depreciation to create the pre-tax monthly lease payment.

The tenth and final step is to add tax to the monthly payment, if located in a state with sales tax. Use the calculator to multiply the monthly lease payment by the sales tax percentage, then add that amount to the initial lease payment to get the total monthly lease payment. Congratulations! You now know how to calculate a monthly auto lease payment.