Experts share their secrets to choosing a good lease car
As the end of summer nears and dealers discount their 2016 cars to make room for next year’s models, shoppers who want to lease could find some hidden bargains. The key is to understand – and maximize – two little-understood aspects of leasing.
It all comes down to finding cars with high resale value and then negotiating a low purchase price. “This is what I like to call ‘the leasing window,’?” says Scot Hall, executive vice president of WantaLease, which posts leasing bargains.
Michael Sin, co-creator of Leasehackr.com, adds, “People don’t know about it, but there are many underappreciated cars you can lease at bargain prices.” The forums on his site are filled with shoppers exchanging details of leasing deals.
The popularity of leasing has shot up to a historic high: 31 percent of all new cars driven off the lot are now leased, according to data from financial services firm Experian. Even used cars are being leased, although Experian says it’s only at 3.98 percent. Meanwhile, Edmunds data show trucks and SUVs to be the fastest-growing vehicle segment for leasing.
“This is going to be a fantastic time to lease,” says Steven Szakaly, chief economist for the National Automobile Dealers Association. “Interest rates will stay low; there’s a good amount of sales incentives. And the vehicles, from a safety and technology perspective, are the best cars ever produced.”
Depreciation and leasing
Still, not all cars are created equal when it comes to leasing, and you need to know how to lease the diamond in the rough. All cars depreciate (lose value) at a different rate. Take two cars, both selling for $30,000. One depreciates rapidly, and the other holds good resale value. At the end of three years, the length of a typical lease, one car has lost half its value, $15,000, while the other has lost only $10,000. That, my friend, is the car you want to lease.
“The biggest component of your lease payment is going to be depreciation – no doubt about that,” Hall says. In lease-speak, this is called the “residual value,” which ranges from a low of about 45 percent to a high of 60 percent over three years. Residual values are set by analysts and banks and basically are a prediction of what a new car will be worth at the end of the lease contract.
German luxury cars, the top Asian brands and domestic trucks and SUVs are among the categories that hold their value, Hall says. “Some cars are fundamentally cheaper to lease than others because they have stellar residual values,” Sin adds. Many members on his site chose “leftover” Chevrolet Cruzes from the previous model year and got them for next to nothing because of discounts and rebates.
What about electric?
If you’re in the market for an electric car, Szakaly recommends leasing instead of buying – and not, in this case, because of its residual value. For one thing, the technology in EVs will be outdated by the end of the lease and the all-electric range is growing steadily because of advances in battery technology. For another, manufacturers often offer lease-only incentives.
Many shoppers are confused by leasing, so it’s important to know where to find solid information to help negotiate a low monthly payment and good terms. Furthermore, it’s important to find a car’s residual value or, barring that, at least know whether a car has a strong resale value. Picking a similarly priced car, but one that is good for leasing, could save you $50 a month – $1,800 over a three-year lease, Hall estimates.
Automotive sites compile lists of vehicles with strong residual values. Lease specials are listed on automakers’ websites. And Edmunds.com has a monthly roundup of $199-a-month leases – but read the fine print carefully. If you are interested in a specific car and want to see how it holds its value, check a pricing guide to see what that same car, 3 years old, is now worth, Szakaly suggests.
Victoria Xie, also a co-founder of LeaseHackr, says their site’s calculator rates lease deals by showing how long it would take for monthly lease payments to total the purchase price of the car. The higher the number of years, the better it is to lease the vehicle. “It gives consumers, especially those who are skeptical of the economic value of leasing, an alternative way to approach leasing,” Xie says.
Besides purchase price and depreciation, it’s important to follow several leasing guidelines:
Consider the leasing term: Lease for no more than 36 months. That way, you will always be under the included bumper-to-bumper warranty and, in some cases, free maintenance.
Watch for out-of-pocket costs: Many advertised leases require large out-of-pocket payments, called “drive off fees.” Experts recommend paying only about $1,000 even if it means making higher monthly payments. After all, the attraction of leasing is better cash flow.
Keep an eye on the miles: Most leases allow 12,000 miles. But some permit only 10,000 miles and charge 25 cents per mile for driving more than that.
This column was provided to The Associated Press by the personal finance website NerdWallet.