You're stoked. You've found a promotional offer on a car lease offering interest rates way lower than what you might have otherwise paid. As a starting point in your car-lease quest, you looked for the going national average interest rates offered to people with credit scores similar to yours. These typical rates helped you get a leg-up on spotting a bargain.
Your car lease interest rate will be directly affected by a number of factors, including your current credit score. With that in mind, there is no set interest rate for all individuals choosing to lease their automobile.
Exploring the Money Factor
Car leases have their own language, and while you may have dealt with interest rates with a car loan, you'll hear the term "money factor" for leases – which is essentially the interest rate charged on the lease. To translate it into annual percentage rate, multiply the given money factor by 2,400. Thus, a money factor of .0025 works out to an APR of 6 percent. Lease transfer service, Swap-a-Lease, says dealers typically receive commissions of between 1 and 6 percent of the car's final sale price based on the interest charged on leases.
Rent or Finance Charges
Another type of financing charge that comes up in relation to the money factor is the rent or finance charge. This is the charge added onto depreciation of the vehicle, which is then split over the number of months in the lease as part of your monthly payment. You take the net capitalized cost of the car, which is the base sticker price of the car, plus any warranties and acquisition fees, less trade-ins and down payments. From this, you subtract the residual value, which is the value of the car at the end of the lease. Multiply the result by the money factor, times the lease term.
Variances in Rates
Money factors are all over the map, varying by dealership and by region. They are also a function of your credit score, so what's typical of car lease interest rates will depend on where you fit in the spectrum. As car-leasing resource Lease Guide notes, scores of 680 to 700 should get you prime rates, or the lowest interest rates. Interest rates for leases follow a trend similar to that of car loans, so to determine the current national average, take the published annual percentage rate and divide it by 2,400 to get an equivalent money factor.
Lower Than Typical Rates
Of course, when shopping for car leases, your aim is to snag better-than-typical interest rates. You may not be able to change your credit scores in a hurry, but there are things you can do to help lower the offered lease rate, such as putting down a larger down payment or security deposit, or prepaying the lease for a discount. Leases offered by major manufacturers often offer captive rates, meaning there isn't much wiggle room to negotiate, not to mention the dealer may add 2 percent on top of that. Even with a better-than-average lease rate, you should also look for a good residual, or lease-end, car value.
- Swap a Lease: Finding the Best Money Factor
- Money Zine: Money Factors in Car Leases
- Lease Guide: Car Lease Rate – How to Get the Best Lease Rates
- Board of Governors of the Federal Reserve System. "Negotiating Terms and Comparing Lease Offers." Accessed July 28, 2020.
- Federal Trade Commission. "Should I Lease a Car?" Accessed July 28, 2020.
- Experian. "State of the Automotive Finance Market," Page 22. Accessed July 28, 2020.
- Kelley Blue Book. "Q: What Is Car Depreciation?" Accessed July 28, 2020.
- Board of Governors of the Federal Reserve System. "Frequently Asked Questions." Accessed July 28, 2020.
Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.