Lowest Cost Car Leases. How?

new carsTo many people, all car leases seem inexpensive because the monthly payment is always 40%-60% lower than comparable loan payments for the same car, same term. But that doesn’t mean all leases are good or smart deals.

Let’s take a closer look.

If you are not familiar with leasing, you may not realize that PRICE is negotiable, just like when you buy. In fact, a lower price results in a lower monthly payment and the effect is more significant than then buying. In other words, even a small decrease in price creates a much greater lease payment decrease than the same price reduction when buying with a loan.

If you fail to negotiate a better price for your lease, or don’t know that you can, a dealer will simply base your lease payment on full MSRP sticker price.

The only time you won’t need o negotiate price is if the dealer or manufacturer is already offering discounts or rebates, or special lease deals in which price and other factors have already been set to make for an attractive monthly payment.

If you get price quotes from dealers in your area through car buying services such as Edmunds.com, those quotes will already include any available discounts and manufacturer incentives being offered at that time.

Be aware that manufacturer incentives are usually time-limited and can change month to month. Also know that some incentives, especially low interest rates, 0% loans, and special lease deals require a good credit score. If you think you might be interested in such deals, you should know your credit score ahead of time so that you are not disappointed to find you don’t qualify for the special deals during your visit to a dealer.

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There are other factors that make up a good car lease deal but are more difficult to affect than price.

There is residual value, which is the estimated value of the leased vehicle at the end of the lease. Price minus residual value is essentially the amount you pay in a lease, instead of paying the entire cost of the vehicle. A higher residual value means a lower monthly lease payment. Of course, a low price in combination with a high residual value is even better.

Lease residual value and other leasing factors are explained in detail at LeaseGuide.com.

Residual values are set by the lease finance company with which your dealer works, not by the dealer himself. Therefore, you as a leasing customer have no control of residual values for a specific vehicle make and model.

However, you can choose a different make and model with a better residual value for the same vehicle price. Some brands, for example, have higher residual values, in general, than other brands. For example, Lexus has higher (better) values than Lincoln, Honda, higher than Ford, Toyota higher than Chevrolet, Mercedes higher than Buick, and  Volkswagen higher than Jeep. Generally, Japanese and Korean brands have the highest lease-end residual values, and American brands the lowest. European brands are spread from high, middle, to low.

Residual values are specified as a percentage of MSRP. 50% of MSRP is considered about average for a 3-year lease of an average vehicle.

The final factor that determines a lease deal is money factor. It’s essentially an expression of the finance charge, similar to interest on a loan. The lower the money factor, the less your monthly payment.

Money factor is expressed as a very small number such as 0.002, which is equivalent to 4.8% APR interest. (Convert money factor to APR by multiplying by 2400).

Again, money factor is set by a dealer’s lease finance company and cannot be negotiated or changed. But it depends to a great degree on the customer’s credit score. We mentioned previously that your credit score determines if you qualify for incentives, but even if there are no incentives, your finance rate (money factor) depends on your credit score. Obviously, you should want to know your credit score before you visit your dealer and if you find that there are errors, you should get the issues resolved with the associated credit bureau before proceeding any further.

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In summary, the way to get the lowest cost, cheapest, car lease deal is to 1) negotiate price (not monthly payment), 2) look for special deals being offered by manufacturers (Edmunds.com), 3) lease vehicles that have high residual values, and 4) get a low money factor — with a good credit score.

It also helps to understand how leasing works, whether you make a good leasing candidate, and how to calculate your own payment numbers. Visit LeaseGuide.com for all this and more.

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