Leasing isn’t for everyone, but if it works for you, know that shopping for leases isn’t as simple as purchasing a car with a loan. You may be in the market for one car and be surprised to learn that you can lease a more expensive one for less.
Most people who lease are doing so because they want the lowest monthly payment possible while still driving a new car. One of the myths about leasing is that cheap cars equal cheap payments. While this is certainly true when it comes to financing a car, lease payments are calculated a bit differently.
Unlike an auto loan that is basically the total price divided by the term (let’s say 60 months) with an applied interest rate (for example, 4 percent), the bulk of your lease payments are primarily impacted by two primary factors: the sale price of the vehicle and its residual (or resale) value. The difference between the two of those divided over the term will give you a general ballpark on what the base payment would be.
For example, if a car has a sale price of $30,000 and a residual value of $18,000, the difference between the two is $12,000. If you are going to lease that car for 36 months, you are looking at a payment of around $333 a month. Now there are a few other costs to consider, namely taxes, fees, and an interest rate (otherwise known as a money factor) that will all impact the payment. The point is, in order to get the best value out of your leased car, you want to shop for vehicles that have the greatest amount of discounts combined with a high resale value. The goal is to narrow that gap as much as possible to get the lowest payments.
This is where things can get tricky. Cars with the same sticker price can have huge variations in resale value and discounts. Sometimes cars that are much more expensive but have stronger resale, can have lower payments than cheaper cars that have poor residuals.
Here is a great example with the Mitsubishi Mirage G4:
On the surface, the Mirage should be a great lease pick for someone on a tight budget. However, due to the fact that the markups on the Mirage are minimal, along with relatively small discounts combined with a dismal resale value, the gap between the sale price and the residual is wide, resulting in a relatively high payment for a $16,000 car.
Most buyers shopping for a Mirage may not be aware that something much nicer like a $23,000 Civic or even a $27,000 Kia Optima Hybrid can be had for a lower monthly payment.
If you’re shopping for a lease it’s crucial that you have a look at various manufacturer offers on cars with similar prices, or maybe even examine cars that are a class above what your target is. Now one thing to keep in mind is that the numbers you see on the automaker’s websites are just a general ballpark, and do not include taxes and fees.
I would also recommend cross-shopping a few leases with local dealers in your area. Often dealers may have specials or big discounts on cars that they want to move and this could mean getting much more car for your target payment. As always, make sure you get all quotes in writing and examine all the details.