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Once you’ve decided that you want to lease a car, it’s only natural to want to get the best lease deal possible.
You’ll be making monthly payments on the vehicle for several years, so if you’re like most people, you’ll want to keep your lease payments as low as possible.
How do you do this?
Understand how dealerships determine lease monthly payment amounts.
While each dealership may offer different vehicles and varying lease specials, they all follow a general formula for determining payments.
Here’s what you need to know about how it all works to ensure you are getting a good deal.
Primary Lease Payment Components
There are three main factors that make up the price on a lease:
1. The Price of the Vehicle
For starters, the sales price of the car you choose will play a significant role in the amount you pay each month.
Dealerships base their sales price (also known as the sticker price) on the manufacturer’s suggested retail price (MSRP). It also includes the cost of any special packages or upgrades that are added to the base vehicle.
Fortunately, this is also the area where you have the most room to negotiate. Just like when buying a new car, you can haggle over the initial purchase price of your leased vehicle. The lower you can get it, the better for your monthly lease payments.
Do your research to find out how much other dealerships charge for the same car. This way, you’ll be well-informed in your efforts to get your dealership to offer competitive pricing.
Don’t be afraid to walk away if a dealership refuses to budge on price.
Just because one won’t honor the price you are looking for doesn’t mean that others won’t as well. Keep shopping around until you find the best price for your chosen vehicle.
2. Residual Value at the End of the Lease
The next important factor in determining lease payments is the residual value of the car when you return it.
After your lease ends, the dealership will want to sell your vehicle to a new owner and make a profit doing so.
Cars depreciate over time, especially during the first few years. Your lease payments will need to make up for that loss in value. The more your vehicle depreciates during the lease term; the higher your payments will be.
It is important to note that some vehicles depreciate more slowly than others, resulting in high residual values. In general, luxury vehicles, like those from BMW, Mercedes-Benz, Audi, and Lexus, retain their value better than their standard counterparts. Honda, Toyota, and Nissan vehicles fair well also.
When it comes to setting lease payments, the dealer will set the residual value for the vehicle. You won’t be able to negotiate this figure, which is why it is so important to do your research in advance.
Residual value is typically expressed as a percentage of the original cost of the car.
In general, you should look to lease a car that will have a residual value of at least 50 percent. It will be even better for you if you can get it above 60 percent.
3. Car Lease Money Factor Rates
The final component in your lease payment is the money factor rate. This is similar to the interest rate you would pay if you were to take out a car loan to buy the vehicle.
There is one key difference between money factor rates and interest rates. With an auto loan, you’ll pay the same interest rate based on your credit score, no matter which car you buy. Money factor rates, on the other hand, can vary across manufacturers and even across models from the same make.
To find out if you are getting a favorable money factor rate, you’ll need to compare it to the current interest rates. According to Bankrate, annual percentage rates for new vehicles are around 4.75 percent for those with strong credit ratings.
To convert this to a money factor rate, divide 4.75 by 2400, resulting in 0.00198.
When shopping for leases, look for vehicles with money factor rates that are lower than the above value. If the money factor rate is higher, it’s like paying more in interest, so you are not necessarily getting a good deal.
The lower the money factor rate, the lower your monthly payments will be.
Additional Lease Factors that Impact Lease Deals
While the three factors discussed above are the primary drivers of your lease price, there are other factors that can sweeten or sour a deal.
Car dealerships often offer specials and promotions to encourage customers to lease cars. You may be able to qualify for rebates, cashback, and other specials, especially if you have a good credit score. Don’t be shy about using these specials as a factor in evaluating and comparing lease deals from various dealerships.
However, don’t fall into the trap of thinking you are getting a great deal just because of a special offer. A $500 cashback award won’t look as attractive when your monthly lease payments are $50 higher. Over the course of a 36-month lease, this would add up to $1,800 in additional payments!
On the other hand, if your monthly payments would be roughly the same, but one dealership is offering a rebate while another is not, by all means, go with the one offering the special. Just make sure to run the numbers to ensure you are actually getting a benefit, not being trapped in a marketing ploy.
Included Maintenance Costs
Because you’ll be leasing a brand new vehicle, any major repairs will likely be covered under warranty at no cost to you.
However, basic maintenance and upkeep, like oil changes, tire rotations, and other common tasks, typically do not fall under the warranty.
Policies can vary from one dealership to another.
Some include maintenance as a term on the lease, while others do not. Of course, included maintenance will likely add to your monthly payments, but you’ll also have the convenience and peace of mind of knowing that the dealership will take care of everything.
If you are responsible for completing the maintenance on your own, you may be able to save money by going to your preferred auto mechanic rather than to a dealer. Be sure to factor those costs into your evaluation of the various leases you are considering.
You should also be aware of the length of the vehicle warranty.
While many auto leases are for 3-year contracts, you do have the option of longer leases. However, the warranty may run out at the end of 3 years, leaving you responsible for any additional repairs.
Additional Car Lease Payments
Finally, you’ll need to think about other financial aspects of leases, like down payments and lease-related fees. Higher down payment will typically reduce your monthly costs. Be sure to evaluate these lease terms over the course of the entire lease to determine how much you’ll pay in total.
Leasing companies each set their own fees, so they can vary across dealerships. You typically won’t be able to negotiate these fees, but you can still inform yourself as to the going rates from other providers to see how yours measures up.
When you buy a car, you’ll pay sales tax on the full price of the vehicle. With a lease, on the other hand, you’ll generally only have to pay sales tax on the number of your monthly payments.
This isn’t always the case, though, so be sure to read your lease contract carefully to find out what you are truly paying.
Evaluating Your Lease Offer
Now that you have gathered as much information as possible about the leases you are considering, it’s time to determine which is the best deal. Before you do that, make sure that you have negotiated for the best possible MSRP as a starting point.
If you have chosen a vehicle with high residual value and a favorable money factor rate in comparison with current interest rates, you are likely getting a good deal on your lease. Even if you haven’t gotten the best possible money factor rates, you can still get a great deal if the dealership is willing to throw in additional benefits.
No two lease deals are exactly alike, so you’ll need to weigh all of the factors carefully to determine which one will save you the most money. Take the time to work through the numbers as best you can to figure out the overall cost over the entire lease term.
Don’t forget about the emotional factors of leasing a car. If you find a car that you truly love, it’s okay if it isn’t the best possible deal, as long as you are satisfied with the lease rates, and they work within your budget. You’ll have the car for several years, so beat yourself up if you have to pay just a little bit extra to get what you want.