How to Calculate Capital Lease Payments

Calculating Lease Payments

Calculating capital lease payments can often involve difficult math. The best way to approach the problem is step by step. Keeping track of the main variables and double checking math after each step will reduce the possibility of mistakes.

Instructions

1. Determine the lease amount, the residual value of the leased asset, the number of payments and interest rate for the lease. For example, let's use a $5,000 lease with a $1,000 residual value, paid over 24 months with an interest rate of 5 percent.

2. Convert the interest rate to a monthly interest rate by dividing the interest rate by 12. In the example, 5 percent divided by 12, or 0.05 / 12, equals 0.004167.

3. Add 1 to the monthly interest rate, then raise the sum to the power of the number of payments the lease requires. In the example, 1 + 0.004167 equals 1.004167. Then 1.004167 ^ 24, which equals 1.104941.

4. Divide the residual value by the number calculated in Step 3. In the example, $1,000 / 1.104941 equals $905.0254.

5. Subtract the lease amount by the number calculated in Step 4. In the example, $5,000 - $905.0254 equals $4,094.975.

6. Divide 1 by the number calculated in Step 3, then subtract 1. In the example, 1 / 1.104941 equals 0.905025. Then 1 - 0.905025, which equals 0.094975.

7. Divide the number calculated in Step 6 by the monthly interest rate. In the example, 0.094975 / 0.004167 equals 22.7939.

8. Divide the number calculated in Step 5 by the number calculated in Step 7. In the example, $4,094.975 / 22.7939, which equals a monthly capital lease payment of $179.66.

Tips & Warnings

• The easiest way to make these calculations is with an online lease calculator. Some websites that have lease calculators are listed in the References section.

References

• TVMCalcs: Lease Payments
• TCalc: Lease Calculator
• Efunds: Lease Calculator