# How to Calculate Annual Lease Payments

Many people sign lease agreements for cars, computers, buildings, and other valuable pieces of property without knowing how their lease payments are calculated. A lease payment is based on the amount of depreciation that the property will experience due to the renter's use in addition to an interest expense to benefit the party that is leasing out the property.

## Step 1

Determine the value of the property that you are looking to lease. For instance, for a car, this value would be the MSRP of the vehicle.

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## Step 2

Figure out the interest rate that the lease will be based on. The interest rate is determined by the lessor or financier. Then turn the interest rate into what is called a "money factor" by dividing it by 2,400. This is a common factor used by leasing professionals.

## Step 3

Decide what will be the lease term for the property. Will it be for one year, three years, five years or longer? Most property leases tend to fall within three to five years.

## Step 4

Figure out what will be the estimated residual percentage value of the property once the lease term is up. Residual value is similar to the salvage value. It is the amount that the property will be worth when it is at the end of its use. Some lessors assume the residual value to be about 50 to 60% of its original price tag for a standard three year lease. The longer the lease, the less the residual value and the higher the expected residual value the lower the lease payment will be.

## Step 5

Multiply the property's value by the residual percentage to get the residual value. So for example, if you estimate that the \$10,000 piece of property will be worth 55% of its original value after three years of the lease, the residual value will be \$5,500. That means that you're expecting the lessee to use \$4,500 worth of the property.

## Step 6

Divide the value of the property that will be used (in this example, \$4,500) by the number of monthly lease payments that will be made. In the case of a three year lease you'll have 36 payments. The monthly payment (before interest) will be \$125.

## Step 7

Add in the interest cost. If the agreed upon interest rate is 10% annually, that means that the money factor is 0.00417 (10% divided by 2,400). To get the total lease interest cost, add the residual value (\$5,500) to the original agreed upon value of the property (\$10,000), which results in \$15,500. Then multiply the result by the money factor (0.00417). The total monthly interest cost in this example will be \$64.64.

## Step 8

Add the payment to cover depreciation of the property of \$125 to the monthly interest cost of \$64.58 to get the total monthly lease payment on the property, which is \$189.64.

## Step 9

Multiply the total monthly lease payment by 12 to calculate the annual lease payment (\$2,275.68 in our example).

#### Tip

For vehicle leases, you can best estimate the residual value based on mileage. The lease payment formula here does not take into account any taxes and other fees that could be built into your lease agreement.