How to Get the Best Car 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 APR interest rate but is called “money factor,” “lease factor,” or simply “factor.” It is also expressed differently than interest rate, as explained below. However, money factor can be converted to interest rate, and interest rate to money factor.
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 uses its own money to buy your vehicle from your dealer, and “lends” the vehicle to you during the course of the lease. The lease company 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 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. See our Money Factor Calculator.
The best lease rates are typically offered by finance companies associated with major car manufacturers. Called “captive” finance companies, Toyota Finance, Ford Credit, and Honda Financial are examples. Car makers have “deep pockets” and can afford to encourage sales by reducing monthly payments through low lease rates.
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. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com! You should always know your credit score before you visit a car dealer to lease.
People with poor credit scores will pay higher rates, or be refused altogether. Don’t let a dealer surprise you by knowing more than you about your credit.
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 2.66% APR for a 36 month new-car loan (36 months is the average lease term). Divide 2.66 by 2400 to get .0011 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 lease money factor of .0025, it doesn’t look much different than the .0011 rate discussed above. However, .0025 multiplied by 2400 is equivalent to 6.0% APR interest. This is not a good rate when the average new-car rate is only 2.66% (in this example).
If a dealer offers a higher-and-average rate, it might be based on your credit score. 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%.
How to get a better lease rate
Since banks and credit unions rarely finance leases anymore, you are pretty much stuck with whatever rate is being offered by a dealer’s “captive” finance company. However, there are several things you can do that might reduce your rate, depending on the finance company.
First, making a larger down payment (lease cap cost reduction) might get you a lower rate. Ask your dealer.
Second, a pre-paid lease (see Pre-Paid Leases for more details) will almost always get you a discounted rate.
Third, ask your dealer if making a security deposit will get you a better rate. If so, it’s a good deal because you get the money back at the end of your lease.
Finally, look for vehicles on which the manufacturer is offering special promotional lease deals. These almost always have reduced lease rates.
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 (money factor), lease-end residual value, and lease sale price that, together, make a deal.
A good money factor combined with a poor residual value and high lease price might still be a bad deal. Or an average money factor could be a good deal if combined with a good residual and good lease price.
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.