LeaseLoco

Do You Pay Interest on a Lease Car?

  • By Michael McKean
  • 2 min read

Sort of, but not in the usual way.

A hand pointing at a graph

Not in the same way that you would in other finance agreements, where interest and APR go hand in hand.

The long answer: yes . . . except it's described and calculated a little differently.

Here's what it means for you.

Do Lease Car Payments Include Interest?

Essentially yes, but it's not called 'interest'.

Car leasing isn't like other forms of finance (e.g. Hire Purchase or PCP) where the lessee (that's you) is charged interest according to APR.

That's because, unlike with PCP, you're not actually borrowing any money to pay for a lease car.

Instead, you're essentially renting the vehicle, meaning 'interest' in the normal sense doesn't apply.

What's the Catch?

So yes, there's no APR and no 'official' interest rate.

However, the funder of your deal may instead apply what is referred to as a ‘money factor’ that usually has the same effect, but which is often undisclosed.

Plus, with leasing, any interest rates are usually already calculated into the monthly payments.

This money factor is basically their fee for tying up the investment total of the vehicle over the course of the agreed term. It's directly related to the total funds 'borrowed' by the leaseholder in order to put through the lease agreement.

Once you’ve decided on the car, the lease terms (mileage, deposit amount, etc.) and provided more information about yourself, they will be able to calculate the cost.

Your credit score largely determines your lease money factor, which is usually expressed as a decimal instead of a percentage.

Will I Be Told What Rate of Interest I'll be Paying?

Usually not, as the funder is under no obligation to tell you.

However, if you're eager to learn the exact 'money factor' rate applied to you, then you can ask your leasing company directly and they should be happy enough to disclose it.

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