Do You Pay Interest On A Car Lease?
Car leasing payments cover the depreciation of a new car for the time that you have it and the miles you drive it for. The monthly payments for a car lease deal includes interest, the price of which depends on the vehicle’s value and your credit score.
Want to find out exactly how much interest you pay on a car lease and how it’s calculated? Discover everything you need to know about leasing interest rates in this guide.
How much interest is charged for a lease car?
Car leasing isn’t like other forms of car finance (e.g. Personal Contract Purchase and Hire Purchase) whereby you’re shown an APR (annual percentage rate) of interest for borrowing money for a car.
You won’t be shown a rate of interest in your contract when leasing a car, but you can request this information from the dealer/leasing company. For this reason, it’s impossible to say how much interest you’ll be charged. This will depend on the type of vehicle you’ve decided to lease and your contract term, both of which dictate how much the finance provider will need to recoup on the car for the period that they’ve allowed you to borrow it.
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Why do car leasing companies charge interest?
You have to pay interest on a lease car as compensation to the finance provider for using a car which belongs to them.
The finance provider will approach dealerships to make cash purchases of the vehicles it leases. As well as the cost of the car, the purchase will include additional costs associated with registration, number plates and the first year’s road tax.
Interest for a lease car is a way of the funder getting back some of the money it spends on the OTR (on the road) price of each vehicle, mentioned above.
How is the interest on a car lease calculated?
The interest on a lease car is calculated using a number of factors, including:
- The total of the monthly lease payments
- Lease term (length of your contract and annual mileage)
- Residual value of the car (i.e. how much it’s estimated to be worth worth at the end of your agreement)
- Purchase price of the vehicle
- Credit score – i.e. higher interest for those with a poor credit score
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Will I pay more interest if I have bad credit?
Having a good to excellent credit score (881-999 using Experian’s credit margins, or 420-700 using Equifax) will help you qualify for the lowest interest rates on a car lease. This is because funders work on a ‘rate-for-risk’ basis which determines the amount of interest payable based on the level of risk you present for the monthly payments.
Even people with ‘fair’ scores (721-880 using Experian, 380-419 using Equifax) will often have to pay higher monthly rentals and place a much higher initial rental down than those with good to excellent ratings. Those with bad credit will find it very difficult to be approved for a car leasing deal in the first place.
How can I get a better interest rate on a car lease?
The best way to pay less interest on a car lease deal is to improve your credit score. Finance providers will give you a better price if they know that you’re less of a risk to lend to.
You can find out how to best improve your score in our other guide about leasing and bad credit.
Remember: before signing an agreement for a lease car, ask the finance provider for a full breakdown of the costs, including the APR on the monthly payments.
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Do you need more information about financing your car? Then head over to our car finances guides page for more information.