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How to lease a car the right way in 2020
Miguel Guinard • May 13, 2020
In this article, I'm going to show you how to lease a car the right way and set you up to not only feel good about the process but save money in the long run.
Here is a list of what I'll cover on this article:
- Acknowledgment of Financial Independence Advice
- Safety Features to consider
- Guidelines to see if leasing is beneficial to you
- Explanation of the math
- Suggestions for 2020
Acknowledgment of Financial Independence Advice
If you listen to anybody in the financial independence community or consumer advise experts, you will hear that leasing is terrible and that you should buy a cheaper used vehicle to save money and invest the rest. This advice is great if you only look at dollars and cents, but life is more than dollars and cents.
I'm not writing this article to change your mind about your purchase habits but to make the case that if you lease, you can do so smartly, have peace of mind, reliability, and even save money.
Safety Features to consider
Most new cars have pre-collision systems that keep you in your lane and stop the vehicle in case of an emergency. This feature alone can not only save your life, but it will offer significant savings on insurance premiums.
With the proliferation of mobile devices, distracted driving accounts for a significant percentage of accidents on the road today. Cars today also have features such as android auto and apple car play that mute notification and help you stay focused on the road. Yes, you can add an aftermarket system for android auto and car play but not for the safety systems.
Guidelines to see if leasing is beneficial to you
- You must have an excellent credit score. It's the only way to get the manufacturer incentives and the lowest possible lease factor. Have you set up your credit karma to see where you are?
- You must take care of your leased car as if you paid cash for it. Not doing so can cost you at the end of the lease if you don't plan to keep the vehicle. Please read your contract!
- If you lease a vehicle with the mindset of buying it at the end, you can save the difference when compared to purchasing the car to fund a Roth IRA or emergency savings. You may even negotiate the residual value at the end of the lease for an even better deal.
- Leasing requires higher insurance coverage, usually 100/300, which may mean higher premium but, most leases come built-in with gap insurance, so in the event of a total loss, you're not on the hook for the difference.
- You must get the lease factor and residual percentage, not just the payment. These two pieces of information will help you determine if the car your leasing is going to be a good deal to buy at the end of the lease if you want. If a dealer is not willing to disclose those numbers, I would walk away.
- The sweet term to lease a car is 36 months for the best rate and residual. There are sometimes deals for 24 months, 30 and 39, but be careful with 39 since there are vehicles that only have bumper to bumper warranty for 36 months.
- You must not drive more than 15k miles per year, ideally 12k, so that you can be under warranty with most car manufacturers.
- If you like a newly released car, you must be patient and wait until the hype is over. These cars never have incentives or discounts.
- You must never put money down on a lease. It only lowers the payment, and the money your put down gets taxed. And if the car is involved in an accident totaling the car, you will likely lose the down payment. The insurance company will only want to pay fair market value, while the gap insurance in the lease will take care of the rest.
- If you have a trade, don't mention it to the sales team. Get your car appraised at CarMax or come well educated about the value of your vehicle. Trading a car will avoid the down payment taxes, but I recommend that you cash out most of the value of your vehicle based on my previous point.
Explanation of the math
The lease factor looks like this .000395 or .000095. The way to convert that factor to a rate you can understand is to multiply it by 2400. Or if you multiply .000395 x 2400, you get 0.948%. If you multiply .000095 x 2400, you get 0.228.
The residual value or percentage is the amount the car is estimated to be worth at the end of the lease. A residual of 50 means that a car with an MSRP of $30000, will have a residual of $15000. This residual amount will be in your contract, and its the price that you can purchase the car at the end of the lease plus tax, tag, and title fees. The residual value is always based on the MSRP, not the selling price. A lower sale price will mean a lower payment.
The payment is, of course, essential, but you must also look at the lease factor and residual if you plan on buying the car at the end of the lease.
If you see a deal with a high residual, in the 60s, the brand's bank will likely want those vehicles back at the end of the lease because they predict the car will sell well in the used car market. It is also meant to discourage you from purchasing the vehicle at the end of the lease.
But don't be dismayed. If the car value is lower than the residual value, you can use this to your advantage and try to negotiate. It is cheaper for the banks to sell you the car at a fair price than having to deal with picking up the car, taking to an auction, paying fees, etc.
There are some anomaly scenarios where a car may be worth more than the residual. If this is the case, then you will be protected by the lease contract to buy the vehicle at the residual value.
My favorite combination is a low rate and lower residual in the 50s.
For my last car, I got a 0.2 interest and a residual of 55%.
Since my car is a sedan, and right now, sedans are in low demand, you bet I will negotiate the residual value for a better deal.
Suggestions for 2020
Right now, in 2020, the deals are even better, because of Covid-19. If you are in the position to buy or lease a new car, you will find no better time to buy than this. I suggest that you inquire about quotes at multiple locations to get the best deal. Make sure that when you get a quote, It should show the out-the-door price, including estimated tag and title fees.
If you are at the tail end of your lease, once you negotiated a lower residual value to purchase your car, you will be able to find excellent rates to finance your vehicle.
If you leased for three years and want to buy at the end of the lease, you should try to finance for three years. Financing for longer than that will mean higher finance rates destroying the savings you acquired throughout the lease-term.
I worked for over a decade in the auto industry. If I can be of any assistance, feel free to leave me a comment.
Many factors can affect your decision to lease or buy a new car, or to buy an older but reliable vehicle. If you decide to lease, I wish you the best and enjoy your new vehicle!
What car do you want to buy or lease next?
Let me know in the comments.
Miguel Guinard
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