Calculating a car lease in Canada involves understanding three key numbers: the vehicle's selling price, its predicted residual value at the end of the lease, and the money factor (interest rate). The core monthly payment is essentially the depreciation (the car's value you "use up") plus the finance charge, divided by the lease term, with sales tax added on top.
The most critical figure is the vehicle's selling price, which is often negotiable, just like when buying a car. A lower selling price directly reduces your monthly payment. This price is used to calculate the capitalized cost, which is the starting point for the lease. The other major component is the residual value, which is the leasing company's estimate of what the car will be worth at the end of the lease term. This value is usually expressed as a percentage of the Manufacturer's Suggested Retail Price (MSRP). A higher residual value means you're paying for less depreciation, leading to a lower monthly cost.
The difference between the capitalized cost and the residual value is the total amount you will finance, known as the depreciation. This amount is spread out over your lease term (e.g., 36 months). The financing cost, determined by the money factor (a decimal representing the interest rate), is then added. The money factor can be converted to a more familiar Annual Percentage Rate (APR) by multiplying it by 2400.
| Lease Component | Description | Example for a $45,000 MSRP Car (36-month term) |
|---|
| Negotiated Selling Price | The price you agree to pay for the vehicle. | $42,000 |
| Residual Value (%) | The predicted value of the car at lease end, as a % of MSRP. | 55% |
| Residual Value ($) | The dollar amount of the residual value. ($45,000 x 0.55) | $24,750 |
| Total Depreciation | The amount of value lost over the lease. ($42,000 - $24,750) | $17,250 |
| Monthly Depreciation | Total depreciation divided by the lease term. ($17,250 / 36) | $479.17 |
| Money Factor | The interest rate for the lease (e.g., 0.00125). | 0.00125 |
| Approximate APR | Money factor multiplied by 2400. (0.00125 x 2400) | 3% |
| Monthly Finance Charge | (Selling Price + Residual Value) x Money Factor. ($42,000 + $24,750) x 0.00125 | $83.44 |
| Pre-Tax Monthly Payment | Monthly Depreciation + Monthly Finance Charge. ($479.17 + $83.44) | $562.61 |
| Monthly Sales Tax | Pre-tax payment multiplied by your province's tax rate (e.g., 13% HST in Ontario). ($562.61 x 0.13) | $73.14 |
| Total Monthly Payment | Pre-tax payment + monthly sales tax. | $635.75 |
Remember, this calculation doesn't include potential down payments, which can lower the capitalized cost, or other fees like acquisition fees and freight/PDI, which are typically added to the capitalized cost.
