I don’t understand why there is an interest rate quoted on car leases. How is leasing something different than renting something? If I get an apartment I just pay rent. So how does interest come into play.
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When you sign apartment contract, you also allow them to raise the rent every so often for x reasons. Leasing a car follows the same idea. It’s no different other than from legislation standpoint(car and apartment are not the same).
When you lease a car you just pay lease.
When you take out a loan there is a both a risk to the person making the loan that they won’t get their money back and an incentive to make a business of it.
Loan companies (banks, car loan etc) aren’t charities, they want/need profit to be a business.
The interest is the cost you pay for the ‘benefit’ of being able to get something without having the money to pay it up front. It’s also an incentive to continue to repay the loan as the interest costs less as the borrowed amount is paid back.
Compared to renting a home: 1. You don’t keep the home, 2. You do pay extra, generally rent costs more than the actual ‘cost’ of the property (eg owners mortgage on that place plus upkeep). But mostly it’s not a loan because you are effectively paying for use of, vs for ownership of.
When you rent an apartment you aren’t given a predetermined price at which you can buy the apartment when your lease is up.
The interest (or money factor) is essentially for this, a rate covering the expected depreciation of the car’s value while in your possession.
Something no one seemed to have touched on.
Rent, you pay monthly to the owner.
Lease, you (or the bank 99.9% of the time) pay for the full X years balance upfront. So for the $40k car a 3 year lease might cost 20k. At the end of the 3 years you return you car back (generally with an option to buy but not always). A lending bank lends you the 20k and pays the car dealership up front the 20k while charging you monthly with interest.
Companies often “lease” their equipment because they know they aren’t going to want to own it indefinitely and its easier from an accounting perspective to deal with. They will pay the full amount upfront often.
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Home/Rent prices generally go up every year, cars generally go down in value as they age.
Car loan is paying off the car in monthly payments. It depends on the amount financed (selling price minus down payment and trade-in) and interest rate.
Car lease is renting, and paying off the depreciation (calculated by the car maker, this is non-negotiable) plus interest (sometimes called Money Factor, it’s just the interest divided by 2400). Interest is based on credit score and is to rate how good you are at paying on-time. Dealerships really don’t want to go thru the hassle of repossessing, they reward people with good credit scores with less interest.
There still is interest even for excellent credit scores for both leases and loans or else there is no incentive to just buy in cash (but then you get into economics of maybe less cars will be sold).
A car is a depreciating asset. You’re not just paying for the right to use something, you’re actually buying the amount of car value that won’t exist anymore at the end of the lease.
Let’s say the new car is worth 30k and they expect the car to be worth 10k at the end. What you’re actually doing is giving someone a 10k car in three years in exchange for a 30k car today. The difference you need to pay for isn’t only money but also time. Interest is the exchange rate between money and time.
I’ll do my best to explain this because most of the responses here make my brain hurt.
When you buy a car, you make payments with the expectation that it will be paid off in a certain amount of time. Like 3-5 years. Then the car is yours.
When you lease a car you are basically renting it but you usually have an option to pay off the remaining balance and the car and keep it.
Reasons one might lease a car could be. The lease payment is cheaper than regular financing because you aren’t buying it. You won’t get to keep it and sell it. Or, if you are the type of person that wants a brand new car with no issues and not have to be bothered with the maintenance that comes with higher mileage cars, you return the and lease a new one.
Keep in mind that you will still pay interest/depreciation/ mileage if you lease. Most leases have a maximum mileage and you pay X amount for each mile over and it sometimes forces your hand to just pay the thing off and keep it.
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