Three key elements:

First, the adjusted capitalized cost is determined. This figure represents the real purchase price after elements such as the down payment, incentive discount and trade-in credit are deducted from the capitalized (actual) cost, while any fees or charges (e.g. destination) are added.

Second, the residual value, or estimated value of the vehicle at the end of the lease, is determined and then subtracted from the adjusted capitalized cost to yield a depreciation figure. The residual value depends on the length of the agreement, expected kilometres and make/model of the vehicle.

Finally, a lessor assesses the money factor, a number that correlates with the cost of borrowing money during the lease period.

While these terms may seem unfamiliar, full disclosure laws now require now requires dealers to publicize all leases’ down payment amounts, lengths, residual values and interest rates.