Leasing a vehicle is not the same as renting a vehicle. You can rent a vehicle from companies like Avis and Discount Car and Truck Rentals. You can’t walk into an Audi dealership and rent a car.
Leasing is based on the concept that you agree to pay for the depreciated value of the vehicle over a set period of time. Depreciation is the difference between a vehicle’s MSRP at the time of purchase and it’s value at the end of the lease (residual value).
The smaller the difference between the MSRP and Residual value, the less you’ll pay for the vehicle monthly.
What Is The Depreciation Rate?
It all depends on the make and model of the vehicle. Let’s consider the following example:
You have a $40,000 vehicle from two different brands.
Vehicle A is worth $20,000 at the end of the lease.
Vehicle B is worth $25,000 at the end of the lease.
Unless it has an astronomically higher interest rate, Vehicle B will cost less to lease because it has a higher residual value.
The depreciation rate on different makes and models varies widely. When choosing to lease, it’s best to find a vehicle that has a lower depreciation value so that you can have a lower monthly payment. Luxury brands tend to have a lower depreciation that non luxury brands.
Having said that, not all vehicles are the same. A Cadillac won’t hold its value as well as a BMW.
MSRP (Manufacturer’s Suggested Retail Price)
The MSRP is the manufacturer’s suggested price that you’ll typically find advertised in newspapers and the sticker price you’ll see on the window.
This price includes the optional packages and destination charges. Dealer fees are not considered part of the MSRP but in most states and provinces, any dealer admin fee must be disclosed in vehicle advertising.
Dealers will typically be open to negotiating the MSRP of the vehicle, you simply have to ask. It may be uncomfortable but the worst thing they will say is no.
Capitalized Cost
After you and the dealer agree on a price for the leased vehicle, this price because the capitalized cost or lease price.
Dealers make their profit from the difference between the MSRP and their invoiced price. Some dealers may say that leased vehicle pricing cannot be negotiated. This is not true.
It is always worth your time to negotiate the best price possible the same way you would as if you were buying. The lower the lease price, the lower your monthly payments will be.
The capitalized cost of the vehicle may include certain fees that are not typically specified in lease agreements. While it may not be obvious that you’re paying them, it should be understood that it’s a normal part of a car lease.
Capital Cost Reduction
The capitalized cost can be reduced through factory and dealer rebates, trade-in credits, down payments and negotiating the purchase price from the advertised MSRP.
Net cap cost is the negotiated price of the vehicle minus any reductions listed above.
Residual Value
The wholesale value of the vehicle after the lease term is called the residual value. This value is calculated by the anticipated depreciation over the term of the lease. Put simply, the higher the residual, the more the car is worth. The more the car is worth, the lower your lease payments will be.
Residual values are determined by historical resale data for specific makes and models of vehicles.
Manufacturer’s leasing companies may offer a boost in the residual value for vehicles that don’t sell well so they can offer better lease deals.
Vehicles will usually lose more of their value in the first 2 years of the lease and then will depreciate slower in later years. This is why short term leases are more expensive than long term leases.
Which Vehicle Is The Best To Lease?
You’ll ideally want to lease a vehicle that has a residual value that’s around at least 48% of the MSRP after 3 years. While vehicles with a lower residual can still be a good deal, you’ll be able to get into a better car if it has a higher residual value.
Some companies may artificially increase the residual on certain vehicles to make leasing more attractive. This is a great incentive for the consumer because it will lead to lower lease payments.
Lease Rate – The Money Factor
The interest on leased vehicles is known as the money factor. When you choose to lease, you’re tying up the money of the leasing company so they expect you to pay interest on that money.
While 0.9% APR is a normally advertised rate, you won’t be eligible unless you have excellent or near excellent credit.
Lease money factors should be comparable or better than new car loan interest rates.
The money factor, or APR that you’ll pay is determined by your credit score. It’s always a good idea to know your credit score before going to a dealer. Knowing that will give you the chance to fix any issues that you spot, whether they are your fault or not.
Lease Term
The lease term is the number of months that a vehicle is leased. You’ll normally see leases for 24, 36, 39 or 48 months. Some dealers may show you odd month leases to get you back into the showroom during a slower sales period.
Leasing And Warranties
If you decide to lease a vehicle, it’s best to ensure you don’t lease for a period longer than the length of the new vehicle’s warranty. By doing this, you’ll ensure that your vehicle is covered in case something protected by the warranty breaks.
New vehicles typically begin to see issues 4 years after purchase, depending on the care taken. Because of this, it’s advised to not take out a lease for a term longer than the warranty. Even if the monthly payment is lower.
Summary
The residual value of the vehicle is determined by taking the lease price and subtracting the depreciated amount. The higher the residual value, the lower your monthly payment is going to be.
