How do they calculate the interest when leasing a car?

Question

Hi, I'm thinking of leasing a new car. How does the interest work? When a car has a 7% interest rate, is it calculated as 7% of the total car? Or is it 7% annually for the 4 years that your leasing? Or do they calculate it some other way

Thanks,

Oh and before anyone gives me any answers telling me that I shouldn't lease and that I should buy used instead. I've spoken to my book keeper and it actually benefits me to lease so that I have some business expenses to write off at the end of the year.

Answer 1

I have leased from GMAC for the last 12 years. I dont know if all places are the same but through GM here is an example.

You lease a chevy silverado msrp price $30,000. with a 3 year lease . So they take the 30,000 divide it into 3 yrs (10,000) then add sales tax and whatever leasing fees you may have then come up with your final total, we will assume $13,000 then your interset rate is on that final value and thats how you get your payment. I hope I explained that right. Its harder to type it out then putting it into words,lol.

But let me add, which I do know you dont wanna hear believe me I didnt wanna hear it either. But I just took a debt managment money course and leasing is just a horrible idea. I look back at the last 12 years and think of all the money I threw away and I have nothing to show for it ( because i always turn the vehicle back in). If you are going to lease for 4 years buying the same vehicle you can have a 5 year loan and OWN it. And even after that 5 years if you want to sell it your gonna make a profit no matter what way you look at it because you have it paid off and what you ever you sell it for is yours , if you lease after 4 years you have nothing, no car and no money back.

Also ask your book keeper how they figured leasing would make you more money in write offs then owning? Because you would have more interest on a 5 or 6 year auto loan.

Also if this is your first time leasing make sure you dont put any money down. This is a mistake most people make when leasing in order to bring the payment down, this money is wasted money, you will never see again. And another mistake is leasing for 4 years rather than 2 or 3 years. Because the rate goes up because the dealership has less chances of getting rid of that car when you turn it back in. Because its a more wear and tear, its older and more mileage.

Well Good Luck

Answer 2

Interest rate in leasing is called "money factor" or "lease factor" or simply "factor." It is always a very small number, like .0022 but can be converted to APR interest rate by multiplying by 2400. So a lease money factor of .0022 would be the same as 5.28% APR.

In your example, the 7% is of the AVERAGE lease balance over the life of the lease, and is applied in part to each monthly payment as a finance charge.

The formula for calculating a lease payment, with money factor, is different that calculating a loan payment. Here is an article that explains how it works:

http://www.leaseguide.com/lease08.htm

Answer 3

GM has a "lease rate". That's the same as an APR if you bought the car. Most other brands have a "money factor". That's a calculation that converts into an APR. It's easy to figure out. Take the money factor and multiply by .24. If the factor is 2.0, that comes out to a 4.8% APR.

Interest, whether it's on a purchase or lease, is always figured out on the selling price of the car. Or in a lease, the "cap" cost.

You've wise to lease. Even though leases today are no longer the savings they used to be versus buying, you still have your write-offs. Although I must implore you NOT to take out a 4 year lease. Leases are calculated to give you the best rates at 36 months. Your residual is much higher on the car making your payment affordable. If you go to 42 or 48 months, the residual takes quite a drop. Your payment could actually be higher than for 36 months.

And if the car has a 36 month/36,000 warranty, you'll be driving for a whole year without warranty coverage. That's too much of a gamble and liability hanging over your head. All cars can break down, since they're man made. Then you must also think of all the regular repairs you'll have to pay during those 48 months, such as new brakes all the way around, new tires, struts. If you don't replace them, the lessor will make the repairs and charge you for them. With a 36 month lease, chances are you won't have that burden.