Car Lease Rate. How to Get the Best Lease Rates
Car leasing is similar to buying with a loan in that a finance charge, often known as lease rate, applies. The lease rate is like a loan interest rate but is called "money factor," "lease factor," or simply "factor." It is also expressed differently than interest rate, as explained below.
You may ask, "Why do I pay a finance rate when leasing a car if I'm not actually borrowing any money?" "Isn't leasing like renting?"
What is lease rate?
In effect, you actually are borrowing money when you lease — in the form of the car you lease. You are borrowing the car and the lease company paid a dealer for that car with his money, which means you are borrowing the lease company's money. And leasing is not at all like renting, as many people think. Car leasing is a form of financing; renting is not.
Your lease finance company or bank uses its own money to buy your vehicle from your dealer, and "loans" the vehicle to you during the course of the lease. The lease company or bank owns the car while you drive it.
You are therefore using and tying up the finance company's money and should be expected to pay for the use of that money — pay interest — just as you would do for any loan or home mortgage. The rate that you pay for use of the money affects your monthly payment. The lower the lease rate, the lower your payment.
Why do car lease rates vary?
Lease rates vary from one lease finance company to another, and from one region to another. Rates can change daily and generally follow the same pattern as new-car loan rates (see Bankrate.com for national average interest rates).
Lease rates also depend on your credit score, just like with a loan. Leasers with high credit scores get the lowest rates.
It's called money factor or lease factor
Car lease rate is called money factor and is expressed as a very small number, such as .00220, which is equivalent to 5.28% APR annual interest rate.
Convert money factor to interest rate by multiplying money factor by 2400. Or convert interest rate to money factor by dividing interest rate by 2400.
The best lease rates are typically offered by finance companies associated with major car manufacturers. Called "captive" finance companies, Toyota Finance, Ford Credit, and American Honda Finance are examples. Car makers have "deep pockets" and can afford to encourage sales by reducing monthly payments through low lease rates.
“ What you pay for your car loan or lease directly depends on your FICO credit score ” |
Rates depend on credit score
Lease rates, especially promotional rates from captive lease finance companies, depend on your credit score.
People who have "prime" scores of about 680-700 or higher get the best rates.
If you don't know your score, you should find out from an online service such as FreeCreditScore.comthat requires only a simple signup to see your free score. You should always know your own credit score before you visit a car dealer to lease.
People with poor credit scores will pay higher rates, or be refused altogether. See Credit Problems and Car Leasing for more details.
How to evaluate lease rates
How would you know if you are getting a good lease rate? The easiest way is to simply compare your rate with national averages for people with good credit. Bankrate.com shows you the national average car loan APR rates, but not lease rates.
So, to convert loan APR to money factor, simply divide by 2400. Let's say that Bankrate shows a 6.66% APR for a 36 month new-car loan. Divide 6.66 by 2400 to get .00278 lease money factor (lease rate). This would be the average rate being paid across the U.S.. Your rate could be somewhat higher or lower than the average.
If your dealer is offering, say, a rate of .00175 (equivalent to 4.2% APR), you know you're getting a good deal because it's significantly better than the .00278 national average, based on loan rates.
Conversely, if your dealer offers you .00395 (equivalent to 9.48% APR) your rate is higher than average and not so good. Make sure you know your credit score because it might be the reason for the higher rate. Otherwise, the dealer may be padding the rate being given by his captive finance company.
If you are shopping for a specific car make and model, and visit a number of dealers who sell that brand, they are probably using the same "captive" finance company and will offer the same lease rates for the same car. Dealers cannot negotiate lease rates set by their captive finance companies — although they can, and often do, pad the rates by as much as 2%.
Lease rate isn't everything
Of course, a great lease rate is not the only part of a good car lease deal. It's actually the combination of lease rate, lease-end residual value, and lease sale price that, together, make a deal.
A few captive finance companies offer lease rate "buydown" programs which allows you to reduce your rate by putting down a large security deposit. It's a good deal because you get the security deposit back at lease-end. If you don't need the deposit cash right away, it's a good way to save money when you lease. Ask your dealer about the availability of such a program.
Banks, credit unions, and other non-manufacturer finance companies sometimes offer good lease rates but watch for a corresponding not-so-great (low) residual value. They generally can't be as competitive as the "captive" manufacturer-owned finance companies.
Summary
In summary, you should shop for the best all-round lease deals. Lease rates are only a part of the deal. You can use the Lease Evaluator or Lease Inspector in our Lease Kit to analyze any lease deal.
Also see: How to Find the Best Car Lease Deals and Cheapest Car Leases
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