Four Ways To Spot a Good Lease
How To Keep Leasing Simple and Save Money
A car lease contract may appear complicated, composed of a dizzying array of figures and fees. But you can spot a good lease quickly, once you learn how to X-ray the deal. And once you understand what goes into a good lease, you can more easily see which manufacturers are offering deals worth your time.
Here are four ways to spot a good car lease:
1) High residual value: Leasing experts agree that the single most important factor in a lease is the vehicle's residual value, which is a prediction of what it will be worth at the end of the lease term. This "perceived value of the vehicle" is set either by leasing-information provider ALG Inc., or the bank that is writing the lease contract, says David Cavano, manager of the Automobile Club of Southern California's car-buying service.
Here's why residual value is key to the car shopper: The higher the residual value, the lower the monthly payment. Knowing this will explain why you can sometimes lease a Lexus for less than a Toyota, says Sergio Stiberman, CEO of LeaseTrader.com, a company that helps consumers transfer leases. The Lexus likely has a higher residual value, which offsets the higher price of the car, Stiberman says.
Take the example of a $30,000 car that a consumer wants to lease for three years. In most cases, the average car will be worth half its value after three years, Stiberman says. So the residual value of this hypothetical car is $15,000. Over three years, it has lost $15,000 of its value.
Here's a simple way to estimate what your lease payment would be for such a car. Take that lost value and divide it by the number of months in the lease: $15,000 divided by 36 months equals a $416 monthly payment. Keep in mind, however, that there are additional fees, sales tax and interest that will make the actual monthly lease payment higher.
Compare this scenario to another $30,000 car that has a residual value of 65 percent. This car will be worth $19,500 at the end of the lease — it only lost $10,500 (35 percent) of its value. Divide $10,500 by 36 months and you get a monthly lease payment of $292, to which you'd add fees, tax and interest.
So when you're shopping for a lease, the first rule of thumb is to look for cars that hold their value better — the ones that have high residual values. This means the monthly payments will be lower. Stiberman says an old leasing adage is true: "When you lease, you can drive more car for less money."
If you want to calculate what the lease payments would be on a car you're considering, you'll need to know that residual value. You can call the dealer for an exact residual value or make an educated guess. Fifty percent residual value is the average, while 64 percent is about as high as the value ever gets for three-year leases.
2) A competitive interest rate: A high residual value "gets you 80 percent of the way to a good deal," Stiberman says. The interest rate also affects the monthly payment. In leasing, many of the terms that salespeople use are different from those used in buying, so it can be confusing for the average car shopper. In leasespeak, the interest rate is called the "lease factor" or "money factor."
Cavano says car salesmen often suggest leasing to shoppers as a way to reduce their monthly payments. These customers might not be familiar with leasing terms and are unprepared to negotiate the interest rate, however. Rather than just accept the interest rate a dealer offers, Cavano says shoppers should call the finance managers at competing dealerships to find the best interest rate available. It makes the most sense to talk to other dealerships. In the past, many banks offered leases. Now, however, just a few big banks will write them, and the dealerships generally handle such deals, Cavano says.
3) Low fees: Shoppers looking to improve their lease contracts might also have success if they ask for some fees to be reduced or removed from lease contracts. The fees — such as the security deposit, acquisition fee and disposition fee — are not the same from one leasing company to the next. In recent years, Cavano says, they have crept up from $300 to more than $650. Sometimes shoppers can get the security deposit waived. The other fees may be harder to remove but it doesn't hurt to question them all, he adds.
4) Customer retention Another factor to consider is how well leasing companies retain their customers. Data from Leasecompare.com shows that 41.7 percent of customers who leased from Honda didn't return to another Honda lease, indicating they were displeased with either the fees or the structure of the lease, says Stiberman. Acura, Infiniti and Nissan all had low lease retention rates, the data shows. Conversely, Stiberman says, he never hears complaints about BMW leases.
An increasingly important aspect of leasing is the ability to transfer the lease to another person before the end of the contract, according to Stiberman. He says that today's consumers expect more flexibility and want to be able to change cars more often, which used to be difficult to do under a lease contract.
Leasing can seem complicated, but shoppers need only pay attention to several core figures, says Darrell Parrish, author of Lease Cars: How to Get One. Particularly important are the car's residual value and the interest rate, which have the greatest effect on the monthly payment.
While it's often true that the devil is in the details, a firm grasp of just a few key numbers will guide you toward the right lease for you.