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Car Lease Rate. How to Get the Best Lease Rates |
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Car leasing is similar to buying with a loan in that a finance charge, often called a lease rate, applies. The lease rate is like a loan interest rate but is called "money factor," "lease factor," or simply "factor." You may ask, "Why do I pay a finance rate when leasing a car when I'm not actually borrowing any money?" "Isn't leasing like renting?" In effect, you are borrowing money — in the form of the car you drive while leasing. And leasing is not at all like renting. Car leasing is a form of financing; renting is not. Your lease 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. You are therefore using and tying up the lease company's money and should be expected to pay for the use of that money just as you would do for any loan or home mortgage. Lease rates vary from one lease 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 best rates. Car lease rates (money factor) are expressed as a very small number, such as .00220 which is equivalent to 5.28% APR annual interest rate.
The best lease rates are typically offered by finance companies associated with major car manufacturers. Called "captive" lease companies, GMAC, Ford Credit, and American Honda Finance are examples. Car makers have "deep pockets" and can afford to offer lower-than-market promotional rates to encourage sales and lower monthly payments.
Lease rates, especially promotional rates from captive lease companies, depend on your FICO 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. People with poor credit scores will pay higher rates, or be refused altogether. See Credit Problems and Car Leasing for more details. 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. 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. If you are shopping for a specific car make and model, and visit a number of dealers who sell that make, they are probably using the same "captive" finance company and will offer the same lease rates for the same car. Of course, a great lease rate is not the only part of a good lease lease deal. It's actually the combination of lease rate, residual value, and 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 larger security deposit. It's a good deal because you get the security deposit back at lease-end. 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. 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
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