How to Determine If a Car Lease Deal is Good or Bad
Most car lease deals may all seem to be great deals because monthly payments are so low when compared to an auto loan for the same car. However this is not the way to evaluate a lease.
All car leases have four primary factors that go into calculating monthly payment:
- Capitalized cost – selling price of the vehicle plus any other costs, less any down payment (cap cost reduction)
- Residual value – estimated lease-end value of the vehicle
- Money factor – the effective finance rate, related to interest rate
- Term – number of lease months
Although Term is a factor, the other three factors are the most important in evaluating a lease deal.
One way to evaluate a deal is to simply look at each of the first three factors and compare them to averages. Let’s see how this might be done.
- Capitalized cost – Is the agreed-to or negotiated selling price of the vehicle a good deal when compared to MSRP for that vehicle?
- Residual value – Is the residual value better than the average 50% of MSRP for a typical 3-year lease?
- Money factor – Is the money factor converted to APR interest rate (multiply money factor by 2400) better than the current average interest rate for a new-car loan?
If it’s found that all three factors are good deals, then the overall lease is a good deal.
If only one or two factors evaluate as good, but the third is only average or worse, then the overall deal is still likely a good one.
If all three factors rate average or worse, then the overall lease deal is not likely to good.
What if we only know the monthly payment, MSRP, and not much else? How can we evaluate a lease deal in that case?
That’s where our Lease Deal Calculator and our more detailed Lease Evaluator (in our Lease Kit) come in. These calculators take into account the averages we discussed earlier and work backwards from the monthly payment to evaluate the lease deal. This is the quickest and easiest way to do it.
With this method, we only have to know the following information:
- Vehicle make/model
- MSRP sticker price
- Down payment amount
- Term months
- Monthly payment
Given this information, the calculator will then determine whether the lease deal rates as Outstanding, Excellent, Good, Average, or Poor.