The critical difference between leasing and financing is vehicle ownership. At the end of a financing agreement, you will own the vehicle. With a lease, you will not own the car. With financing, every payment you make goes toward paying off your loan. Once the loan is paid off, you have 100% equity in the vehicle.
According to Statistics Canada, the average interest rate for car loans in Canada is 8.19%. However, the actual interest rate you will be charged depends on several factors, such as whether you’re purchasing a new or used car, your credit score, the purchase price of the car, and whether the loan is based on a fixed or variable interest rate.
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Typically, car buyers can expect to pay anywhere between 6.7% and 9% interest on their car loan.
On the other hand, if you’re considering a car lease, the interest rate you’ll be charged will depend on your credit score and income. Generally, car lease interest rates range from 3% to 15%.
Example of how car loans for a leased vehicle work
Suppose you want to lease a car for $30,000 over 36 months. The dealer offers two financing options with different interest rates.
Option 1: 3% Interest Rate
Option 2: 6% Interest Rate
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Now, let’s break down the impact of these interest rates on your monthly lease payments:
Option 1: 3% Interest rate
The formula for calculating monthly lease payments can be complex, involving capitalized cost, residual value, and money factor. However, for simplicity, let’s use a rough estimate.
Lease Payment = (Capitalized Cost – Residual Value) / Lease Term
Assuming the capitalized cost is $30,000 and the residual value (the estimated value of the car at the end of the lease term) is $15,000:
Lease Payment = ($30,000 – $15,000) / 36 = $416.67 per month
Option 2: 6% interest rate
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Using the same formula, the lease payment with a 6% interest rate would be:
Lease Payment = ($30,000 – $15,000) / 36 = $444.44 per month
We can conclude:
Lower interest rate (3%): With a lower interest rate, your monthly lease payment is $416.67. Over the 36-month lease, you would pay a total of $15,000.
Higher interest rate (6%): Your monthly lease payment increases to $444.44 with a higher interest rate. Over the 36-month lease, you would pay a total of $16,000.
When considering a car lease, paying attention to the interest rate is important. A higher interest rate increases monthly payments and overall costs.
Source: https://tholansonnha.com
Category: Finance
