When you lease a car, it’s a good idea to understand whether there is interest on the payments you make and if so, how much. Learn more with this guide.
In this guide…
As we know, leasing a car involves paying a fixed monthly fee. But many drivers out there wonder if those payments include interest charges. The short answer is yes – car lease payments do have an interest component built into them, but not in the way you may expect. In this guide, we break down the common thoughts around interest in car leasing and give you the facts and details on how it’s included, how the rate works and whether it differs for personal and business leases
Do You Pay Interest on a Lease Car?
Yes, you do pay interest when leasing a car, but not in the same way you’ll see it in a traditional car loan. It’s important to know that the leasing company has purchased the vehicle, including registration and tax, and your payments compensate them for the car’s value depreciation. You’re not borrowing money in the traditional sense, you are renting the vehicle for an agreed period, and as such, there is no loan principal as you find in a personal loan. Thus, you won’t see a typical APR percentage interest rate listed in your lease contract. Instead, it appears embedded in the lease costs as a “finance rate” or “money factor”. So part of your monthly rental is an unseen interest charge for renting the car.
What is the Interest Rate of a Lease Car?
Unlike a loan, you won’t typically be told an interest rate for a car lease. That’s because there is no official set interest rate on a lease contract, and each company has its own rate. Instead, the leasing company uses a money factor, which is the company’s interest rate expressed as a decimal number. Lease providers aren’t obligated to tell you outright, but if you ask for the money factor, they will usually be happy to disclose it. Crucially, the money factor is unchanging once the agreement is in place, so you don’t have to anticipate any surprises around the corner.
The lease term and mileage limit affect the interest rate expenses. A longer lease term or higher mileage limit means the car depreciates more, influencing the financing charge. And, just like loans, drivers with weaker credit will pay higher interest because the provider sees a greater risk.
Does Interest Differ Between Personal and Business Car Leases?
Fundamentally, the way interest is applied in a lease is the same for both personal leases and business leases. Personal contract hire (PCH) and business contract hire (BCH) agreements involve the same implicit money factor charge as part of monthly payments. There is no special business interest rate that makes it easier for businesses, but fear not – there are still plenty of financial benefits to make business leases an attractive option. Find out more in our guide to electric car leasing for business.
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