Do Leases Have Interest?

A lease rate, or the “lease money factor,” is the interest you pay on a car lease loan. It’s the cost of leasing the car that reimburses the leasing company or dealership for the car’s depreciation. Your credit score determines your lease money factor, often expressed as a decimal instead of a percentage, like an annual percentage rate (APR) found on a car loan. 

Dealerships and leasing companies are not required to disclose your money factor. However, you can ask them to share this information with you before you sign the lease agreement. Like many other associated costs, the money factor is rolled into the lease cost. It’s also responsible for determining your monthly lease payment. 

You can calculate interest on a lease by determining the money factor. You can easily convert your money factor to the equivalent interest rate by multiplying it by 2,400. For instance, a money factor of 0.003 equals 7.2% APR (0.003 x 2,400). This equation can help you determine the fairness of your lease money factor, given your financial situation. 

If your lease agreement doesn’t list your money factor explicitly, or the leasing company doesn’t share this information with you, you can use the following formula to find the lease factor: 

Lease Factor = Lease Charge / (Capitalized Costs + Residual Value) x Lease Term

The lease charge totals your remaining payments on the lease. Capitalized costs include the vehicle's selling price, while the residual value represents how much the car is worth at the end of the lease. Your lease terms are typically expressed in months. Many of these figures can also be helpful for a lease buyout calculator.

Here’s an example of how much interest you’d pay on a GMC Sierra 1500 with the following values: 

• Lease charge: $12,000
• Capitalized costs: $52,500
• Residual value: $42,000
• Lease term: 24 months

Lease Factor of 0.0053 = $12,000 / ($52,500 + $42,000) x 24

For this GMC Sierra 1500 lease agreement, you’d have a resulting money factor of 0.0053. Using our equation above to convert that to a percentage (APR), you’d have 12.72%. That’s a hefty money factor for this type of lease. However, you can see that identifying your money factor and converting it to an interest rate can help you compare offers to find the best lease. 

How to find your lease interest rate

Depending on how your car lease is structured, you can locate your lease interest rate (i.e., the money factor) without much effort. Sometimes, lease interest rates are expressed as a factor of 1,000. A 0.003 lease rate equates to 3.0 as a factor of 1,000. However, you can also derive the money factor from your lease with the formulas above. 

Historically, lease rates have mirrored the national average interest rate for new car loans. However, much of that has changed with the automotive industry as inventory numbers fluctuate and consumers adjust their spending habits. While you can typically negotiate a money factor with most leasing companies and dealerships, success rates tend to be lower now than previously. 

You pay interest on even the best car lease deals because leasing companies and dealerships must make a profit. Unlike car finance deals, lease agreements require lessees to compensate dealerships for the opportunity to lease a car without taking on the costs of ownership or the burden of disposing of the car once the lease agreement ends. It’s the same reason you pay to rent equipment, whether it’s a set of golf clubs, bowling shoes, or tools. 

Similar to these types of equipment, cars lose value over time. A lease agreement allows the dealership or leasing company to profit from that loss in value differently than selling the car outright. Leasing also caters to a consumer base that can only afford to drive a newer car for a few months versus owning the car and paying the high maintenance costs that come with it. 

No matter how you slice it, paying interest on a car lease is the cost of exercising your rights as a lessee. Your monthly payment depends on the depreciation of the car you’re leasing plus the cost the dealership assigns to bearing that loss in value. While this number can seem somewhat arbitrary, dealerships and leasing companies do compete with one another for your business. On these terms, you can negotiate a better lease interest rate to fit your budgetary needs. 

Then again, not everyone has a knack (or the patience) for negotiating. Avoid haggling over the money factor altogether by choosing a FINN car subscription instead. FINN subscribers don’t have to worry about money factors and calculating interest rates. Instead, you can count on a single monthly payment that includes practically everything. Did you know you can also have your new subscription delivered straight to your door? 

You take a risk by putting money down on a lease. At no point in the lease do you own the vehicle unless you buy out the lease once the agreement has ended. Therefore, should the insurance company total the car or list it as a loss due to theft, the leasing company or dealership receives reimbursement. 

When this happens, your down payment effectively disappears. Even if you have gap insuranceto cover the rest of your lease payments, you don’t get your down payment back to then put down on another lease. You may walk away from your lease without any further financial obligations towards the totaled car, but you also walk away with empty pockets. For this reason, many experts argue that it’s better to direct this money elsewhere. 

However, a down payment can help you obtain a lower money factor. Certain leasing companies will offer “multiple security deposits,” or MSDs. These security deposits demonstrate your financial ability to pay your monthly payments as listed in the lease agreement. The MSDs can lower your financial risk in the leasing company’s eyes, effectively lowering your money factor. 

Even with this arrangement, you can only reduce your money factor so much. Leasing companies will also keep your security deposits until the lease terminates. If the leasing company doesn’t assess any additional fees for excess mileage or wear and tear, they return your security deposits in full. Such an agreement can work wonders in specific circumstances, but not all leasing companies or dealerships allow multiple security deposits or even money factor negotiation.