How do you tell a good car lease deal from a bad one?
Leases nearly always seem be great deals — because monthly payments are so much lower than loan payments for the same car. But that is not the best way to evaluate a lease.
In fact, simply comparing lease payments to loan payments can be deceiving and can lure unknowing consumers into accepting a poor lease deal.
If you’ve read our Lease Guide you know that car lease deals are made of three important factors that affect monthly payment. Any one of these factors can make the difference between a good deal and a bad deal. Of course, the combination of the three factors is what determines the value of the final deal.
What are the factors that make a car lease deal?
ONE
First of the three factors, and most important, is PRICE.
The lower the price on which a lease is based, the lower the monthly payment. Many leasing customers don’t understand this fundamental fact and never discuss the price of the vehicle they intend to lease. This allows a dealer to base the lease on full MSRP sticker price — or higher — without disclosing it to the customer. It’s not scamming, but it is taking advantage of the customer’s lack of knowledge about how car leasing works. Don’t be that customer.
To get the best lease price requires the same kind of negotiating as for purchasing. Unfortunately, many leasing customers are focused on monthly payment and don’t understand the relationship between price and payments. See our article, Don’t Be a Payment Buyer, for more details.
You can spend hours haggling for a good price, or get an already good price from our own car pricing service, LeaseGuide Car Deal Finder. It provides previously agreed-to discounted prices that are honored by local dealers, whether it’s for a purchase or a lease. It’s also the best way to easily compare prices from different dealers by getting multiple price quotes.
TWO
The second important factor in a lease deal is RESIDUAL VALUE.
Residual value is the estimated resale value of a vehicle at the end of a lease of a specified term (lease months). The higher the residual value, the lower the lease payment. Lease finance companies set residual values at the beginning of a lease. Leasing customers can’t negotiate or change residual values but they can choose to lease vehicle makes/models that typically have high residuals. Vehicle brands that typically have high residuals are those from Honda, Toyota, BMW, Mercedes, and others. American brands tend to have lower residual values.
For a complete list of high-residual vehicle makes and models, see Vehicle Lease Ratings in our Lease Kit.
If the lease-end residual value for a vehicle is less than 50% of MSRP (for a 36 month lease), then it’s probably not a good lease deal. An excellent residual would be 55%-65% of MSRP.
THREE
The third factor that is important in a lease deal is MONEY FACTOR. Money factor is an expression of the finance rate, similar to interest rate in a loan. The lower the money factor, the lower the lease payment, and the better the deal. Currently, new-car interest rates, according to Bankrate.com, are about 5.5% which translates to a lease money factor of .0023 (divide interest rate by 2400). A lease deal with a money factor of less than .0023 might be a good deal. Anything higher, can mean less of a good deal.
SUMMARY
Of course, the best lease deals are made with a combination of low lease PRICE, high RESIDUAL value, and low MONEY FACTOR.
Since PRICE is the only factor in a normal lease deal that is not set by the manufacturer’s finance company, it’s always wise to look online for dealer already-discounted prices first through LeaseGuide Car Deal Finder. You can also visit car maker web sites and look for limited-time manufacturer subvented lease deals in which the car company has already discounted prices, boosted residuals, and lowered finance rates, assuming the deals are being offered on the vehicle model you are interested in. The are typically called, “Current Offers” in the site menu system.
Once you have collected a few prices and lease deals, you can evaluate and compare your deals using the above guidelines — or do it the easy way with our convenient Lease Deal Calculator. Just plug in the monthly payment and let us tell you if it’s a good deal, or not.