Car Research

Most car deals can be neatly lumped into one of three categories: new or used purchases and new car leases. But there is an often overlooked fourth category: used car leases.

Used car leases are a bit of a secret among franchised dealers. Not all offer them, and it's unlikely you'll see them advertised on television, on a website or in the Sunday paper.

How Does Used Car Leasing Work?

As a rule, used cars available for lease will be certified pre-owned (CPO) vehicles less than 4 years old and with fewer than 48,000 miles on the odometer.

Used car leases follow the same basic structure as new leases. The lender will determine the vehicle's residual value, and the payments will be determined by the difference between the vehicle's sale price and its residual value. (Not all automobiles depreciate at the same rate.) In most cases, the lender will be an automaker's "captive" financing company. Think Toyota Financial at a Toyota dealer.

The lender writing the lease will assign a money factor (interest rate) to the deal, just as in a regular lease. And just as interest rates tend to be higher on used car loans, the money factor will likely be higher than in a new car lease. Even so, the higher money factor is coupled with a lower sale price and a lower rate of depreciation, usually resulting in a lower overall payment. Shoppers who lease used are able to buy out the vehicle at the end of lease just as they can with new autos.

During my 12 years selling and leasing autos, I saw buyers shave anywhere from $40 to $125 per month off their monthly payments by leasing used.

A note of caution: This story only deals with used leasing handled by franchised dealers, which are the only ones that can offer true certified pre-owned automobiles. You may hear about used leases from independent "Buy Here, Pay Here" dealers. Such leases frequently come with a lot of strings attached and you should scrutinize the terms very carefully.

How to Do It, Step by Step

Pick a brand that offers used leases: According to Edmunds data, these automakers' captives financed used auto leases 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.

The exceptions are Ford Credit and GM Financial, which finance automobiles from Buick, Chevrolet, Cadillac and GMC, according to spokespeople from those captive finance companies.

Have a point of comparison: To effectively judge if a used lease is a good enough value, you have to have something to compare it to. If you don't already have a lease quote for a new version of the auto you want, get one. With that benchmark in hand, you can start shopping.

Find the car: Edmunds 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 certified pre-owned 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 from different dealers. That way, if the first one isn't able to help, you'll have other choices.

Find a dealer who'll do the deal: Since used vehicle leasing is not the norm, finding a dealership that can help you will likely take some time and patience. You may have to call a few to find one that can do these lease deals.

When you find a vehicle you like, call and speak with an internet manager or sales manager. Say that you've found a certified pre-owned car in inventory and you'd like to know if you can lease it. If you get a quick, automatic "No," don't be afraid to ask the manager to check with a higher-up to confirm. Since used leases are 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 you don't get anywhere, move to the next option on your list.

Get a price quote: Once you find a dealership that is set up to offer used vehicle leases, ask for a price quote. All the standard shopping rules apply: Negotiate a fair purchase price using the Edmunds appraisal 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 one. 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 of that, 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 brand-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, 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 runs 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 automobile's reduced value, 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.

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 automobiles will find their way back as lease returns after a few years. Dealers will look for ways to offload them, including expanding used car leases, according to those who are already offering these leases 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.