Next: Buy new or used car?
Are you confused as to whether you should buy or lease your next car? Learn the pros and cons of auto loans and leases.
When leasing a vehicle, there are finance charges you have to pay which are associated with the capital a lease finance company has placed into service during the term of your auto lease. The lease finance company actually owns the vehicle you're leasing. And you are paying them to drive the car for a few years and then return it to them. They are entitled to a return on their investment by charging you interest on the money they invested up-front to purchase the vehicle you want to lease. This concept is similar to purchasing the vehicle directly and then taking out an auto loan to finance that purchase. The lease rate therefore is the cost of leasing during the auto lease term.
This lease rate is expressed as a money factor, and is specified as a small decimal number, such as .0025. Please be advised that in some cases with some dealerships, the salesperson, finance manager or general manager may try and make the lease offer appear more attractive by stating the money factor as a larger decimal by multiplying it by 1,000, such as 2.5 in the example above. Many consumers are lead to believe that this is actually a really low APR, which in this case seems very attractive, but if they say the money factor is 2.5, that converts to an APR of 6% by taking the money factor stated in a larger decimal and multiplying it by 2.4. The money factor when expressed as a more traditional small decimal number of .0025 can be converted to an equivalent APR by multiplying by 2400 to arrive at 6%.
What if you don't know the lease rate? Generally, you can estimate it by shopping for a comparable APR on an auto loan covering the same term as the auto lease. So a 24-month lease rate could be estimated by using a 24-month auto loan rate. The lease rate would always be comparable to that auto loan rate (although never exact), and in some cases might actually be a little lower than an auto loan interest rate over the same term. Like interest on an auto loan, the lower the money factor, the lower your monthly auto lease payments will be. You can also ask the finance manager or sales manager at the dealership what the money factor, or lease rate, is for the car you're interested in leasing.
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