What Makes a Lease Deal

Any car lease deal is made up of several parts, any or all of which affect the monthly payment — and whether it's a good or bad deal. Let's take a look:

• MSRP (Manufacturer's Suggested Retail Price)

  • It's the sticker price. Dealers sometimes add to this price to make it seem "official."

  • The higher the sticker price, usually the higher the cost of a lease deal.

  • For most cars, you should expect the dealer to discount the MSRP.

• Negotiated Net Cost (Capitalized Cost)

  • You can normally bargain for a lower price than MSRP

  • Price is a major factor in a lease deal

  • Price is the ONLY major factor in a lease deal that you can negotiate

• Down Payment/Rebates/Discounts (Capitalized Cost Reductions)

  • You can choose to make a down payment, or not, in a lease

  • Some special deals offered by manufacturers require a specific down payment

  • A down payment lowers your monthly payment, but does not affect the overall deal

  • Special lease deals often offer rebates (taxable) or discounts (non-taxable)

  • Rebates and discounts improve any lease deal but do not necessarily make it a great deal

• Fees and Taxes (Additional Charges)

  • All leases include an administration fee (acquisition fee) and lease-end fees (dispostion fee)

  • Dealers typically add an "official" documentation ("doc") fee, that can often be negotiated lower or eliminated

  • Most states and some localities impose sales tax on car leases, which can be charged in different ways

  • Although fees and taxes are part of the cost of any lease, they don't affect whether the deal is good or bad

• Term (Lease Months)

  • Typical lease terms are 24, 36, 39, and 48 months

  • You can typically choose a different lease term (although some special deals have a specific term) to lower your monthly payment

  • Take care not to choose a higher term than is covered by the manufactuer's warranty — you'll be responsible for repairs after the warranty expires

  • Lease term directly affects Residual Value (see below). the higher the term, the more a vehicle depreciates, and the lower the Residual Value at lease-end

  • Higher lease terms induce somewhat higher finance costs, but it's not significant enough to make a large difference in whether a deal is good or bad

• Interest Rate (~Money Factor)

  • Interest rates can significantly affect a lease deal.

    • The interest rate is set by the car manufacturer's lease finance company and cannot be negotiated.

    • You should expect the lease interest rate to be about the same as for a new-car loan.

    • Your credit score affects the interest rate you get — a higher score will typically get a lower interest rate

    • The interest rate is sometimes specified as a Money Factor. The Money Factor is a very small number that, when multiplied by 2400, gives you the Interest Rate APR.

    • A leases' interest rate (or money factor) may not show up on the lease agreement form — instead, the form may show a Rent Charge, which is the sum of all monthly finance charges. (see our FAQs for an explanation of how to calculate Interest Rate from Rent Charge)

• Mileage Limit

  • Typical mileage allowances are 7500, 10000, 12000, and 15000 miles per year

  • You can usually choose your mileage allowance, although some special deals have set limits that cannot be changed

  • Mileage limit affects lease deals in that it changes the Residual Value (see below)

  • You can typically buy extra miles up front if you know you'll need them

• Residual Value

  • Residual value is a major factor in whether a lease deal is good or bad

    • Residual value is the estimated lease-end market resale value of the leased vehicle and is set by the car manufacturer, not the dealer

    • It's the value left over after the vehicle has depreciated in value after the mileage driven over the lease term months

    • Residual value is determined as a percentage of MSRP (not negotiated price)

    • Typical average 3-year residual percentages are in the 50%-65% range - luxury cars can be higher, unpopular cars can be lower

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