5 Essential Tips for Leasing a New Car

By Ryan Fuhrmann
April 07, 2011

Many people consider a car to be a household asset, but in reality, it isn't. Cars lose their value over time (depreciate), which is exactly what you don't want assets to do. 

New cars have the added drawback of depreciating quickly in the beginning -- but that doesn't stop many individuals from wanting the latest car or truck.  If you fall into that category, you may want to consider leasing as a potentially more affordable option for getting a new car.

It's important to note that leasing is very different from owning. The primary advantage of a lease is that you are financing only part of the car's value -- the portion that you will use up over the lease term. When you buy, you're getting the whole value of the car over the car's entire useful life.

To get the most bang for your buck, try using the following five essential tips for keeping car lease costs as low as possible:

Tip #1: Negotiate the Initial Purchase Price

Whether buying or leasing a car, the initial purchase price is vitally important and should be negotiated downward as far as you can go. Many dealers try to shift emphasis away from the purchase price by telling you there is no need to haggle over price because the monthly payment is the only consideration when leasing a car. However, the purchase price is a key determinant of the monthly lease payment, so spend the time to get the best deal out there.

Tip #2: Get a Good Estimate of Residual Value

The value of the car when the lease is up is referred to as its residual value. A car that ends up with a higher residual value is better because the lease amount depends on the value of the car at the beginning of the term and at the end of the term. A car that loses more value over the term of the lease will be more expensive. 

Residual value is the market value of a car or truck when the lease is up.  Leasing companies and others in the industry try and estimate this future value as accurately as possible, but the reality is it's difficult to predict with any certainty.  Like the initial purchase price, residual value can definitely be used as a negotiation point between the auto dealer and car buyer, so it helps to have a reasonable estimate for what the residual value should be during the term of lease. Look at prices of used cars (the same make and model you're looking to lease) to get an idea of what a new car may sell for after your lease term is up. 

Tip #3: Understand the Money Factor

The leasing agency you're leasing from purchased the car from a dealer. So you're technically driving the leasing agency's car, and not surprisingly, they expect you to pay interest. In the leasing world, "money factor" is another word for "interest." It can also be called the "lease factor" or "lease fee."

The main component of the money factor is the annual percentage rate (APR). The money factor is calculated by dividing the APR by 2,400. And conversely, the APR you're being charged is the money factor multiplied by 2,400.

Frequently, the money factor is the figure given when leasing a car, so simply multiply it by 2,400 to get the APR. Obv lower APR the better, so a lower money factor means a lower financing rate and can significantly lower the monthly payment. There are outside sources, such as car or leasing websites that can give you a good idea what the current money factor is in the marketplace. Know the number before you start talking to a leasing agent, and shop around to get the best rate.

#-ad_banner_2-#Tip #4: Compare Lease Terms Over Different Time Periods

Typical car leases last 36 months, 39 months, or 60 months. A longer lease term allows you to spread out the cost of a vehicle and can lower the monthly payments, but it also means that you are financing a higher percentage of the vehicle's useful life.

This consideration is somewhat offset by the fact that deprecation rates slow down after three or four years, which means that much of the cost of a car is paid up front or during the term of the lease. Overall, see what options are offered by the dealer and ask for all price options by lease term to see which best fits your budget.

Tip #5: Know How Many Miles You Drive

Car mileage also affects lease payment amounts. Typical mileage agreements are for 10,000, 12,000, or 15,000 miles, though there are also options for those driving above-average miles for work. Logically, lower mileage helps minimize monthly payments as it reduces depreciation and wear-and-tear on an automobile.

Before you go in to negotiate a lease based on lower mileage, make sure you know you won't go over. Going over the agreed upon mileage can become very expensive -- you're usually charged somewhere around $1 per mile over the mileage stated in the lease.  Again, have the dealer price out all available options to find which is best for you, and don't fool yourself into thinking you can drive less than you really can.

Bottom Line

The bottom line is that a lease covers the period during which depreciation of an automobile is at a maximum. As such, lease owners are financing a car during the time when it is most expensive to have rights to it. 

For those looking for the cheapest way to drive a car, look for an affordable used car and drive it until it dies from old age. You minimize the interest paid on car notes and spread a one-time cost out over many years. 

But if you really love the idea of a new car (is it that new car smell?) and are happy to pay for the right to switch into a new one every three years, a lease is one of the most affordable options.

To learn more about leasing your next vehicle, check out the article, "Understanding the Confusing Art of Leasing a Car."