We’ve all seen those wonderful teaser rates in ads for car leases. For $249 a month for a new car, why would you continue to drive your rust bucket? When it comes to leases, often the obvious choice is the wrong one for many reasons. You can reach entirely different conclusions depending on whether you’re a Payment Person or a Cash King (or Queen).
The Payment Person views every cost in life as a monthly payment. They typically walk into a dealership with an idea of how much they can spend per month. The salesperson can take that payment requirement and put them into a nice vehicle with a lease – much nicer than if they had to pay cash or take out a loan.
Of course the Cash King will laugh at this short-term perspective. They know the Payment Person is merely renting the car. Once done with the lease term, usually 24 to 48 months, the Payment Person will not own the vehicle. He has simply agreed to always have a car payment and will pay the high depreciation costs of a new car ad infinitum.
While a good rule of thumb is that purchasing a car is a better long-term deal than leasing one, if you want to go the next step and see what option is the best for you, consider these tips.
Love new cars? If a three-year old car seems old to you, then you’re an obvious candidate for a lease. With a lease you won’t have to go through the hassles and transaction costs of buying a car, trading it in, and then purchasing a new one. Once your lease is done, you’re unencumbered by your old ride and can seek out your new steel affection.
Manufacturer lease incentives. Sometimes car manufacturers roll out lease offers that are true bargains. Even if you ultimately intend to buy a car, it may make sense to lease it first. A great lease deal cannot be found just by looking at the payment. You need to go deeper and consider at least three factors: the interest rate built into the lease, the price you’ve negotiated, and the residual value.
Low “Money Factor.” The lease interest rate is called the money factor and is generally not negotiable. The money factor is a number than when multiplied by 2400 is equal to the annual interest rate. So if you’re quoted a money factor of .0025, you’re paying six percent annual interest. So if the money factor is below .001 or 2.4 percent interest, the lease may be a great deal.
Good Pricing. The price, or in lease terms the gross capitalized cost, can be negotiated with your dealer as with a purchase. This cost is reduced by a down payment or trade–in. In essence the net capitalized cost is the amount you’re financing through the lease. Automakers that want to move a model quickly may reduce this lease price more than they would with an outright purchase.
High Residual Value. This is another manufacturer set figure that tells you how much value the leased car will have at the end of the term. If the residual value is high (let’s say above 50 percent of retail price for a three year lease), then you’re paying for less of the car’s depreciation. It keeps the lease payment low.
For true lease nerds, you can look up residual values and money factors at cars.com/go/alg. All you need to enter is the desired term and negotiated price including all costs to get your lease payment.