An auto lease is quite different than an auto loan. In order to keep the total cost of leasing a vehicle as low as possible, it’s important to understand how key lease components help determine what you pay, and be prepared to comparison shop and negotiate for the best terms.
This is the purchase price the lender pays the dealer for the car. You negotiate this price with the dealer. The higher it is, the more you pay for the lease.
Before you visit the dealer, arm yourself with the same information as if you were purchasing a car: the manufacturer’s suggested retail price or sticker price, the dealer invoice price, the Kelley Blue Book new car price, any manufacturer’s rebates and dealer incentives, and the cost of any options the car comes with. Negotiate a price that falls between the sticker price and the dealer invoice price, less any rebates, incentives and mark-ups on options. Your goal is to pay no more than the Kelley price – less, if you can negotiate a deal.
This is any reduction in the capital cost due to a cash down payment or a trade-in. Most people lease a car in part because they don’t want to make a big down payment. However, it may be worthwhile using a trade-in to reduce the capital cost, especially if the dealer offers you a good price, because it will reduce your monthly payments. (Compare the price the dealer offers you to the Kelley Blue Book used car price for your make and model).
This is what the car will be worth when you turn it in at the end of the lease, and is usually expressed as a percentage of the sticker price. Your lease payments cover the depreciation of the car while you are driving it, which equals the difference between the capital cost and the residual value. So the higher the residual is, the lower the monthly payments and the total cost of leasing the car. Residuals are determined by lenders. You are unlikely to be able to negotiate residual value, but you can comparison shop for the highest available.
The money factor
This is a decimal figure that helps determine your monthly payment. Do not confuse it with the interest rate on the lease (multiply the money factor by 24 to get a rough idea of the interest rate). The lower the money factor, the lower your monthly payment and the total cost of your lease.
Term of lease
This is usually expressed in number of months. Your monthly payments will be slightly lower with a longer term, because the depreciation cost is spread over a longer period of time. However, if your lease term is longer than the manufacturer’s warranty—typically 36 months—you could get hit with major repair bills.
APR or annual percentage rate
The annual interest rate on the lease plus all fees and service charges, expressed as a percentage rate of the loan. You can compare the APR offered by different lenders to determine which loan will cost you least.