How to Evaluate Lease Deals

Ever see one of those car lease deals advertised in the newspaper with really low monthly payments and wonder if it’s a good deal or not?

Let’s just start by saying that most advertised car lease deals are backed by the car manufacturer and are generally good deals. What’s the catch? Well, the special lease deals you see advertised are usually for only one (or a few) model of that car. Many times, but not always, it’s one of the low-end models with the lowest prices. If you like that model, great. If not, you might not be able to get such a good deal on another model since the other models don’t have the backing of the car manufacturer.

So how you know if a lease deal is good, or not?

First, it helps to understand how leasing works. You can use LeaseGuide.com for that purpose.

There are essentially three factors that determine whether a lease is a good deal or not.

One is the sale price of the car. Yes, price is just as important when leasing as when buying. The lower the price, the lower the monthly payment. So if the dealer is offering a low price (or you can negotiate a low price), compared to the sticker price on the car, then you’re headed toward a good lease deal.

Next, money factor is important. Money factor is another way of expressing finance interest rate. Yes, you pay interest on a lease, just like with a loan. Money factor is expressed as a very small number such as .0022 or .00175. To convert to conventional interest APR, simply mulitply the money factor number by 2400. For example, a money factor of .0022 x 2400 = 5.28%. You can compare that rate to the national average new-car interest rate at Bankrate.com. At the time of this writing, the national average rate is 6.43%. Therefore, your lease rate of 5.28% would be a good deal — not great, but good.

Next, residual value is important. Residual value is the estimated lease-end resale value of the car you intend to lease. The higher the value, the lower your lease payment. It is usually expressed as a percentage of MSRP (sticker price) — not negotiated sale price — such as 55%. In general, any residual value over 50% for a 36 month lease is considered good. Some cars, especially many American car models, have low residual values and don’t make good lease deals. Brands such as Honda and Toyota, are examples of those with higher residual values and generally make good lease cars, especially when high promotional residuals are being offered to create attractive low payments.

Factors that have some affect but are not really important in a lease deal are down payment, fees, and mileage limits. Making a down payment, for example, simply lowers your monthly payment, but doesn’t doesn’t change the “goodness” of the fundamenal deal. And up-front fees can’t change a good deal to a bad deal. Mileage limits should be considered before leasing (do you drive more miles than allowed?) but the difference in one mileage limit (say, 12,000 miles per year versus 10,000 miles per year) may change the payment amount, but won’t change the value of the deal.

To summarize, a the value of any car lease deal is determined by the 1) negotiated sale price of the car, 2) interest rate (lease money factor), and 3) lease-end residual value. Again, if you need to better understand how car leasing works, we recommend LeaseGuide.com.

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