But there’s a lot of factors that make up the total amount of the cost to lease a car. Your monthly payments are calculated based on features like the purchase cost of the car, the rate of depreciation, and the mileage limit.
An additional aspect you may have never considered, however, is the interest rate.
As an incorporated component of your payments, it’s not always clear how much interest you’re paying or why. To help you understand the interest rate on your car lease, we’ll cover everything from how the leasing brokers calculate it, to how you might be able to lower it.
Why do car leasing companies charge interest?
Leasing companies charge interest because when you agree to a lease deal, the company has to go and purchase your chosen car.
The leasing company will make a cash purchase for your new car that includes additional costs like the registration fee and road tax. They are the registered keeper of the lease car. You’re essentially providing compensation for loaning their investment until the end of the contract.
Will I be told what rate of interest I'll be paying?
With other car financing such as car hire purchase (HP) or personal contract purchase (PCP), you’re typically told the annual percentage rate (APR). The rate for car leasing is usually undisclosed.
Rather than a cheeky move from the leasing company, this is a general practice as it’s trickier to determine the rate than you’d think.
The rate depends on a variety of different factors, so if you’re eager to know what you’ll be paying, you can ask your leasing company directly. Once you’ve decided on the car, the deal specifics, and provided more information about yourself, they will be able to calculate the cost.
How is the interest on a car lease calculated?
The interest rate you pay comes included in your monthly payments, so you might be wondering why the leasing companies can’t just stick the interest rate next to the cost.
If it was that simple, they probably would! But as we previously mentioned, the interest rate varies per driver and actually depends on all of the following:
- The purchase price of the car
- The residual value of the car
- The cost of your monthly lease payments
- The annual mileage
- The lease term (car lease contract length)
Will I pay more interest if I have bad credit?
With almost every car lease, the leasing company is going to require a car lease credit check. Having a very good to excellent credit rating usually means you qualify for lower interest rates, as you pose less of a risk to the leasing and finance companies.
You can still lease a car with an average credit score, however it may be more complicated and impact the interest rate you’re required to pay.
Even those with fair credit scores may face higher rates, as they aren’t afforded the same benefits as the customers considered to be most reliable.
You generally do need good credit to lease a car though you can still get a bad credit car lease. You’ll likely have to offset the risk factor with a greater upfront initial rental, i.e. leasing’s version of a down payment. Alternatively you can ask about using a car lease guarantor.
Lenders can equally be more reluctant to offer deals to drivers with fair or poor credit histories, so if you’re accepted you should bear in mind that you could be looking at higher monthly payments than expected until the end of the lease.
How can I get a better interest rate on a car lease?
The simplest way to get a better interest rate is to work on your credit score. It’s a good idea to know your rating before you start shopping around for leases, as it could heavily influence your decision to lease or buy.
Your credit score affects both the interest rates, and whether you get accepted for car leasing at all, so checking in advance can save you both time and money!
Nobody likes to think of additional costs being added on, but regardless of whether your car finance method is buying, PCP or lease, you’re going to have to pay interest.
The best way to improve your interest rate and reduce what you’re paying really comes down to improving your credit rating.
But if a better rating isn’t within reach, you can always try to lower the payments through other methods. You can try your hand at some car lease negotiation, or you can get a head start on your repayments and trade in your used car in car lease part exchange deal.
Leasing is a big commitment, so if you’re still on the fence, check out our articles on the pros and cons of leasing a car and whether to lease or buy a car to see which is right for you. We’ve also rounded up some car leasing tips to help you find a budget-friendly lease deal.