How Car Lease Payments and Student Loan Payments Are Calculated
The depreciation-plus-finance-fee formula behind lease payments, and the standard amortization behind student loan payments.
Leasing a car and financing a student loan both produce a single monthly number, but they're built from genuinely different formulas — one splits a payment into two distinct fees, the other uses the same amortization formula seen throughout this site.
Lease payments: two fees added together
A lease payment is Depreciation Fee + Finance Fee, not a standard loan amortization. Depreciation Fee = (Vehicle Price − Residual Value) / Lease Months. Finance Fee = (Vehicle Price + Residual Value) × Money Factor. For a $35,000 vehicle with a $20,000 residual value, a 0.00125 money factor, over 36 months: Depreciation Fee = (35,000−20,000)/36 ≈ $416.67. Finance Fee = (35,000+20,000) × 0.00125 = $68.75. Total lease payment (before tax) ≈ $485.42.
Why "money factor" instead of a normal interest rate
Money factor is simply an interest rate expressed in a different, smaller decimal form — multiplying money factor by 2,400 converts it to an approximate equivalent APR. A 0.00125 money factor corresponds to roughly a 3% APR (0.00125 × 2400 = 3), a conversion worth doing whenever comparing a lease's financing cost to a loan's stated interest rate.
Student loans: standard amortization, nothing exotic
Unlike a lease, a student loan is a normal amortizing loan: M = P × [r(1+r)ⁿ] / [(1+r)ⁿ−1]. A $30,000 balance at 5.5% over the standard 10-year term: monthly payment ≈ $325.58, with total interest paid over the full term coming to approximately $9,069.
Why residual value matters so much in a lease
The residual value — the car's estimated worth at lease-end — directly reduces the depreciation fee, which is usually the larger of the two lease components. A car that holds its value well (a high residual) produces a meaningfully lower lease payment than an identically priced car expected to depreciate faster, even at the same money factor.
Common mistakes to avoid
- Comparing a lease payment directly to a loan payment without accounting for the fact that a lease doesn't build any equity — at lease-end, there's no asset, only the option to buy at the residual value
- Assuming income-driven student loan repayment plans use this same fixed-payment formula — they instead calculate payments as a percentage of discretionary income, a fundamentally different approach
- Forgetting that money factor conversions to APR are approximate, not exact, when comparing financing costs across a lease and a loan
Calculate your own numbers with the lease calculator and student loan calculator.