The old truism is that leasing a car is never a good move financially. However, that does not need to be the case these days as long as you know the five keys to winning with car leases.
Key #1 – The first thing you’ve got to learn about leasing a car is that now is the right time to start a lease. Due to the short supply of used cars across the nation, lease return vehicles are holding their value incredibly well. This increased “residual value” has created a situation where lease payments are reaching historic lows. While your lease payments don’t generate any equity for you, they’re so low right now that it almost doesn’t matter.
For example, you can lease a new Hyundai or Toyota for $99 to $150, depending on the model being offered and the dealership…that’s incredibly cheap transportation by any metric.
Key #2 – When you go to lease a vehicle remember to negotiate, negotiate, negotiate! When leasing, you can negotiate the finance fees, called the “money factor,” of the deal along with the car’s sticker price.
Importantly, the money factor is not expressed the same way as a regular annual percentage rate (APR). Typically, the money factor is a decimal, such as .003, which you must multiply by 2400 in order to yield a true interest rate. In this example, .003 times 2400 equals an interest rate of 7.2% APR. If the salesperson gives you a regular number, such as 3.0, make sure to clarify whether this is actually a money factor of .003 – often it is. And there’s a big difference between 3% and 7.2% APR, obviously! Do not leave anything on the table when it comes to negotiating a lease. You might save just as much money from reducing your interest than you would from reducing the sticker price, if not more.
Key #3 – The third key to winning a lease deal is that you MUST go short term. Long-term leases aren’t nearly as beneficial to your wallet, because the whole point of leasing is to keep driving relatively new vehicles for a low price. Think about it this way:
- Leased vehicles don’t typically require maintenance, especially if it’s a 2 or 3 year low mileage (10-12k miles per year) lease
- Leased vehicles are typically completely protected by your warranty, so you don’t need to worry about paying for repairs
- Leased vehicles have the latest safety and fuel economy systems, so they’re safe to drive and typically more fuel efficient than a used car that’s just a few years old
If you lease long-term (more than three years), you lose most of the benefits listed. Additionally, the longer the lease, the more you’ll pay in finance fees, and the less likley you are to get a special “sub-vented” lease offer from the manufacturer. SO, stick with a 2 or 3 year lease.
Key #4 – If you drive a lot, you need to use the fourth key of paying an extra 10 bucks or so a month to have a higher mileage cap. Most leases have a yearly cap of around 10,000 to 12,000 miles, but according to the Federal Highway Administration (FHWA), the average male aged 20-54 drives 18,000-19,000 miles per year. Obviously, there’s a significant gap here, which could lead you to trouble if you don’t shell out that extra few bucks a month for more miles. Consider this: if you exceed your mileage cap, the average cost-per-mile is $.20, meaning an extra 5000 miles would cost you $1000.
What’s more, if you drive more than 15k miles a year, leasing probably isn’t for you. The cost of additional miles is usually too high to justify the lease.
NOTE: Business owners and/or self-employed people should check with their accountant, as leasing can sometimes be a very cost-effective option for business purposes…even if you drive a lot of miles.
Key #5 – Finally, as you must do with any financial agreement you sign up for, you have got to know what the early exit fees are. Some automakers will penalize you, while others will allow you to leave your agreement early under specific circumstances. The point is, you have got to know all about the early termination fees before you sign on the bottom line.
Author A. Greene has had a lifelong love affair with vehicles of every sort, from the bicycle he pedaled across the continent in 1991 to the armored personnel carriers he drove in the US Army. He is now a frequent contributor to Keystone Auto Loans, a leading provider of financial services for credit-seekers nationwide, as well as AutoFoundry.com, a fast-growing destination site that tracks the pulse of the automotive industry.
