Most car deals made at new car dealerships can be neatly lumped into one of three categories: new car purchases, used car purchases and new car leases. However, there is an often overlooked fourth category: used car leases.
Used car leases are a bit of a secret in the franchised car dealership world. Not all dealerships offer them, and it's unlikely you'll see them advertised on television, on a dealership website or in the Sunday paper.
You can get a used car lease, although it takes legwork. If you put in the time to find a franchised car dealer that can execute a used car lease, you'll likely be rewarded with a significantly lower monthly payment than that of a new car lease.
How Does Used Car Leasing Work?
Used cars available for lease from franchised car dealerships will, as a rule, be certified pre-owned (CPO) vehicles less than four years old, with fewer than 48,000 miles on the odometer.
Used car leases follow the same basic structure as new car leases. The lender writing the lease will determine the vehicle's residual value, and the lease payments will be determined by the difference between the vehicle's sale price and its residual value. In most cases, the lender will be an automaker's "captive" financing company. Think Toyota Financial at a Toyota dealership.
The lender writing the lease will assign a money factor (interest rate) to the deal, just as in a new car lease. And just as interest rates tend to be higher on used car loans, a used car's money factor will likely be higher than the money factor for a new car lease. Even so, the higher money factor is coupled with the used car's lower sale price and lower rate of depreciation, usually resulting in a lower overall payment. Shoppers who lease used cars are able to buy out the vehicle at the end of lease, just as they can with new leased cars.
During my 12 years selling and leasing cars, I saw buyers shave anywhere from $40-$125 per month from their monthly payments by opting to lease used instead of new.
A note of caution: This story only deals with used car leases done by franchised dealerships, which are the only ones that can offer true CPO cars. You may hear about used car leases from independent "Buy Here, Pay Here" dealerships. Such leases frequently come with a lot of strings attached and you should scrutinize the terms very carefully.
How To Do a Used Car Lease, Step by Step
Pick a brand that does used car leases: According to Edmunds data, these automakers' captives financed used car lease deals in 2015: Acura, Audi, BMW, Chrysler (which includes financing for vehicles from Dodge, Fiat, Jeep, Ram and SRT), Ferrari, Honda, Hyundai, Infiniti, Kia, Lexus, Lincoln, Mazda, Mercedes-Benz, Mini, Mitsubishi, Nissan, Porsche, Toyota, Volkswagen and Volvo.
Have a point of comparison: To effectively judge if a used car lease is a good enough value to bypass a new car lease, you have to have something to compare it to. If you don't already have a lease quote for a new version of the car you want, get one. With that benchmark in hand, you can start shopping.
Find the car: Edmunds.com has plenty of tools to help you find the right used car. Search for the model you're most interested in and remember to home in on CPO vehicles. Because you are shopping in the used market, you may not readily find your preferred color combination or mix of features. Be flexible. Select a few cars from different dealers. That way, if the first dealership you talk to isn't able to help with a used car lease, you'll have other choices.
Find a dealer who'll do the deal: Since used car leasing is not the norm in the car business, finding a dealership that can help you will likely take some time and patience. You may have to call a few dealerships to find one that is set up to lease used cars.
Reach out to a dealership that has a vehicle you like and speak with an Internet manager or sales manager. Tell the manager you've found a CPO car in the dealership's inventory and you'd like to know if the dealership is set up to lease used cars. If you get a quick, automatic "No," don't be afraid to ask the manager to check with a higher-up at the dealership to confirm. Since used car leasing is still relatively rare, the person you talk to may not know that it's an option. Don't be surprised if the manager says that he'll need to call you back.
If the dealership is unresponsive, move to the next on your list.
Get a price quote: Once you find a dealership that is set up to offer used car leases, ask for a price quote. All the standard car-shopping rules apply: Negotiate a fair sale price (using Edmunds' TMV® calculator, which will show you a CPO value), get the residual value (in the event you'd like to buy the vehicle at the end of the lease) and determine the total down payment and total monthly payment, including taxes and fees.
Compare again: Check the used car lease against the new car lease. If the savings are good, it might be time to set up a test-drive, and maybe even make your deal.
Pros of Used Car Leasing
Lower monthly payment: Just to recap this major point: The CPO vehicle has a lower selling price than its new car counterpart, and because it is used, you avoid the steep new car depreciation curve. These two elements combine to produce a lower monthly lease payment, even with a higher money factor.
Good candidate for a lease buyout: Since used cars are worth less than comparable new cars, their residual values will be lower, too. That makes them good candidates for a buyout at the conclusion of the lease. Just be sure you do your due diligence at the end of the lease, checking market prices and factoring in such costs as maintenance and future extended warranty costs that come with buying an older car.
Longer powertrain warranty: A CPO vehicle will typically have a powertrain warranty that goes to 100,000 miles. That's potentially a significant plus for shoppers who plan on purchasing the vehicle when the lease ends.
Potentially lower auto insurance costs: Because of the reduced value of the vehicle being purchased, insurance may cost less.
Cons of Used Car Leasing
In addition to the extra legwork it takes to set up a used car lease, consider:
Maintenance costs: By leasing a car that already has miles on the odometer, expect maintenance visits to occur sooner than you'd experience in a new car. Unless you purchase a prepaid maintenance package, count on higher upkeep costs than you'd have for a new car.
No new car smell: The car will be new to you, but it isn't fresh from the factory. Expect to find the occasional scratch, stain or ding.
Expect To Hear More About Used Car Leases in the Future
New car leases now make up more than 30 percent of all finance transactions at new car dealerships. Most of these new car leases will eventually find their way back to dealerships as lease returns. Dealerships will look for ways to off-load these extra cars, including expanding used car leases, according to dealerships that are already offering these leases on cars on their lots.
Used car leases aren't the only option for budget-minded shoppers. Because of aggressive incentives on some new cars, including cash-back rebates, lower money factors or end-of-model-year incentives, leasing new might be a better deal than leasing a used car that's just a couple of years old.
But let's say you want to lease a car that doesn't have a crazy special on it — perhaps because it's a hot seller that doesn't need any factory incentives to move it off the dealer's lot. In that case, leasing a used version of the same vehicle can be a nice way to get a car that's very close to what you want...for a lot less cash.
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.