The short answer
The real rate is the interest rate at which your finance payments, plus the residual (balloon) at the end, exactly repay the amount financed. It is calculated from what you actually pay, not from the label on the quote, so it works the same way for every provider. In Australia it is quoted as a nominal annual rate: the monthly rate multiplied by 12.
The four figures you need
- Amount financed — the amount lent to buy the car, ex GST. If the quote does not print it, it can usually be recovered from the residual (see the guide on working out the amount financed).
- The finance payment — the finance line only, ex GST, not your total pay deduction. The total deduction includes running costs and fees, which are not interest.
- The number of payments — the payments that actually go to the financier, at the frequency they are made.
- The residual — the balloon owed at the end, ex GST.
The calculation
Find the monthly rate i at which: amount financed = the present value of every payment + the present value of the residual. There is no closed-form answer, so it is solved numerically (any spreadsheet RATE function does it). Multiply the monthly rate by 12 for the nominal annual rate.
In a spreadsheet
=RATE(60, -904.64, 55000, -15471.50) × 12 returns 8.00%. Swap in the payment count, payment, amount financed and residual from your own quote. Use a negative payment and residual, positive amount financed.
Worked example (illustrative, not a millarX rate)
| Figure | Value |
|---|---|
| Amount financed (ex GST) | $55,000 |
| Term | 60 monthly payments |
| Residual (28.13%, ex GST) | $15,471.50 |
| Monthly finance payment (ex GST) | $904.64 |
| Real rate — nominal p.a. | 8.00% |
Three things that change the answer
1. Nominal or compounded
The example above is 8.00% nominal. Compounded monthly over a year, the same deal is 8.30%. Both are "correct", but they are different measures, and Australian credit rates — on loans, on lender disclosures, on government calculators — are quoted nominal. A compounded figure placed next to a quoted rate makes every lease look about 0.3 percentage points dearer at these rates, and more at higher ones. When you compare two rates, check they are the same kind.
2. Payment timing
Payments at the start of each period (in advance) cost more than the same payments at the end (in arrears), because the balance falls sooner. If the $904.64 in the example were paid in advance, the real rate would be 8.19%, not 8.00%. A calculation that assumes one timing for every quote will be slightly off for the quotes that use the other.
3. Which payments count
Some leases collect more pay deductions than the financier needs — for example 60 deductions on a loan the financier amortises over 59 — and hold the difference as a refundable reserve. Count the payments that go to the financier, not the deductions. Getting this wrong by a month or two moves the rate noticeably.
Or let us do it
Our Compare Your Quote tool reads these figures from your quote and calculates the real rate the same way, then prices the same car, term and kilometres as a millarX lease so you can see the difference per pay. You can correct any figure our investigator misread.