Approximately one in five new-car transactions are lease agreements rather than traditional purchases. While leasing a vehicle is more akin to renting, lessees also face finance charges similar to those incurred when borrowing money to purchase a vehicle. Some lease agreements don't advertise their interest rates, although automotive manufacturers create nearly every lease option to incur interest on the amount that a vehicle's value depreciates during the lease term.
Common Lease Interest Rate
Many lease agreements are built around a 9 percent interest rate, according to Edmunds.com. Interest rates may vary widely depending upon manufacturers, consumers' credit ratings and other factors among dealerships. For example, in a 36-month lease where a car's value depreciates from $30,000 to $22,000 over the course of the lease, consumers pay interest charges on the difference between the capitalized value -- purchase price -- and residual value -- depreciated value at lease end -- which, in this case is $8,000.
The Money Factor
In many lease structures, dealers substitute the "money factor" for interest calculations. To convert money factor to an estimated interest rate, multiply it by 2,400. A 9-percent interest rate has a money factor of 0.00375. Dealers use the money factor to calculate monthly finance charges rather than applying a direct interest rate to the depreciated balance. To compute monthly finance charges, add the purchase price of the vehicle to its depreciated value at the lease's end, and multiply that figure by the money factor. In the example above, finance charges would be computed as ($30,000 + $22,000) * 0.00375, or $195 per month. Over a 36-month lease, that equates to $7,020 in finance charges.
Calculating Monthly Payments
After the dealer applies the money factor formula to determine monthly finance charges, he adds that to the monthly base payment. A lease's base payment is calculated by dividing the amount of depreciation, $8,000 in this example, by the number of payments, or 36 because it's a three-year lease. This lessee's base monthly payment is $222.22. Combined with $195 in money-factor charges, that totals $417.22 monthly. Over a three-year life of the lease, the consumer will pay $15,019.92 in monthly lease charges.
Comparison to Common Auto Loan Interest Rates
Automotive loans' interest rates vary around the country and may vary significantly between lenders, and, as with most forms of financing, may be impacted by a consumer's credit score. Average new auto loan rates vary between 4.77 and 6.93 percent as of December 2010, according to HSH.com. Rates on loans for used vehicles are typically higher, and range from 5.47 to 8.54 percent around the country.
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