Automotive

Charge for Credit - Lease vs Finance

  • Last Updated:
  • Mar 3rd, 2018 12:59 pm
[OP]
Newbie
Oct 16, 2013
30 posts
North York, ON

Charge for Credit - Lease vs Finance

This screenshot is from subaru.ca - Forester 2.5 Touring with optional EyeSight Package

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From https://www.theglobeandmail.com/globe-i ... cle551390/

"It's the voodoo of leasing," Mr. DesRosiers says. "Leasing is absolutely the highest cost of borrowing in the market place. Hands down, no exceptions, but it doesn't look that way."

Why is that? Monthly payments are comprised of two components – interest on the principal or cost of the vehicle, and paying down the principal. On a loan, the paying down the principal portion can be quite steep because the buyer is paying off the entire cost of the vehicle during the financing term. On a lease, depending on the end residual value, the consumer may be only paying down half the cost of the vehicle.

That's why monthly payments are usually lower, but at the end of the lease, the consumer doesn't own the vehicle and will have paid more in interest than on a loan.

"The embedded interest in a lease is typically about $100 a month higher than the interest on a loan," Mr. DesRosiers says....


I don't understand why you "will have paid more in interest" if "only paying down half the cost of the vehicle"? What's "The embedded interest in a lease"? Could you please explain why the charge for credit is higher for leasing in the example above?

Thanks
4 replies
Deal Addict
Jan 15, 2017
2624 posts
1940 upvotes
Because with leasing you often hear, "you only pay for the car for the time you us it" or "you only pay for the depreciation on the car" many people believe that they only pay interest on the depreciated value of the vehicle. This is incorrect.

Interest on a lease is based on the Capitalized Cost + Residual Factor x Money Factor. This is an excellent link that demonstrates how lease pmts are calculated: https://leasehackr.com/blog/2016/4/17/h ... ts-by-hand
Deal Addict
Jul 2, 2006
1292 posts
411 upvotes
Toronto
Think about it this way. When you drive off the dealer’s lot, the dealer will get paid the full purchase price of the car, even when you lease, from the finance company. So in essence you are borrowing the full purchase price upon leasing hence you are charged interest rate on the full amount and not just the depreciated amount.
Deal Expert
User avatar
Apr 21, 2004
51223 posts
15859 upvotes
skeet50 wrote:
Mar 3rd, 2018 9:11 am
Because with leasing you often hear, "you only pay for the car for the time you us it" or "you only pay for the depreciation on the car" many people believe that they only pay interest on the depreciated value of the vehicle. This is incorrect.

Interest on a lease is based on the Capitalized Cost + Residual Factor x Money Factor. This is an excellent link that demonstrates how lease pmts are calculated: https://leasehackr.com/blog/2016/4/17/h ... ts-by-hand
money factor is used here in Canada too?

I thought lease interest was just on 100% of the car, possibly with declining principal balance over time.
Deal Addict
User avatar
Sep 9, 2012
3543 posts
2807 upvotes
Oakville, ON
On a loan, the amount you owe gradually reduces. Your last payment is almost all principal and a little bit of interest.

On a lease, the amount you you reduces much more gradually. Your last payment still has a lot of inrerest Ecuador you still owe a lot of money (the residual value).

If you finance a $50,000 car with zero down that has a value of $20,000 at the end of the term then you’re paying interest on a declining balance of $50,000 down to $0.00

If you lease, you’re paying interest on $30,000 down to $0.00 (the depreciation that you used it for) + you’re paying interest on a steady value of $20,000. This is the residual value and you pay interest on the full residdual value every month.

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