Leasing a car is a matter of choosing the right leasing options that are best for you.
If you want to have low monthly lease payments, you need to:
- Choose the right car, at the best possible deal, by requesting a FREE New Car Quote,
- Consider a moderate down payment, and
- Choose the appropriate lease term.
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Guide To Understanding The Critical Importance of Lease Residual Values
We would like to help you understand the importance of knowing the residual value. In comparing vehicles, despite the similar MSRP (sticker price), the vehicle with the higher residual value is a better option.
Use this guide in order to better understand your car lease options. Leasing is considered to be an easy and cost-effective way to drive home a brand new vehicle.
Understanding car lease options will not only make it easier to understand the conditions of the lease, but will also help you get the lowest monthly lease payments!
For this example, we will use two similarly priced cars: the 2012 Honda Civic LX A/T and the 2012 Ford Focus SE. (Note: Vehicle prices are subject to change without prior notice. Facts and figures are only used as an example. Interest rates and finance charges were not reflected to simplify the equations).
Choosing Vehicle Make/Model
Did you know choosing the right car will give you lower monthly lease payments? Remember, lease prices are based on the estimated residual value of the car you choose. The residual value is the estimated worth of your car at the end of the lease term. The vehicle with a higher residual value will be cheaper to lease.
Take a look at these examples:
| Example 1: 2012 Honda Civic LX A/T | Example 2: 2012 Ford Focus SE A/T |
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MSRP: $17,855 Lease term: 24 months Down payment: $1,999 ALG residual value (24 months): 71% Using the figures given above, the estimated lease price of the Honda Civic LX A/T can be computed as follows: MSRP x 71% = $12,677 estimated residual value after 24 months $17,855 – $12,677 = $5,178 capitalized cost $5,178 – $1,999 down payment = $3,179 $3,179 / 24 months lease term = $132/month Therefore, the lease price of the Honda Civic LX is $132/month. |
MSRP: $17,500 Lease term: 24 months Down payment: $1,999 ALG residual value (24 months): 66% The lease price of the Ford Focus SE can be computed as follows: MSRP x 66% = $11,550 estimated residual value after 24 months $17,500 – $11,500 = $5,950 capitalized cost $5,950 – $1,999 down payment = $3,951 $3,951 / 24 months lease term = $164/month Therefore, the lease price of the Ford Focus SE is $164/month. |
Even though the Civic is more expensive compared to the Focus, it is cheaper to lease due to the higher residual value.
Making a Down Payment or Capitalized Cost Reduction
If you want to lease a car, you should consider making a down payment. This will reduce the capitalized cost, which will give you lower monthly payments. To illustrate, we will use the same example from above for the 2012 Honda Civic LX A/T.
| Example 1: Leasing a 2012 Honda Civic WITH a Down Payment | Example 2: Leasing a 2012 Honda Civic WITHOUT a Down Payment |
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MSRP: $17,855 Lease term: 24 months Down payment: $1,999 ALG residual value (24 months): 71% MSRP x 71% = $12,677 estimated residual value after 24 months $17,855 – $12,677 = $5,178 capitalized cost $5,178 – $1,999 down payment = $3,179 $3,179 / 24 months lease term = $132/month |
MSRP: $17,855 Lease term: 24 months Down payment: $0 ALG residual value (24 months): 71% MSRP x 71% = $12,677 estimated residual value after 24 months $17,855 – $12,677 = $5,178 capitalized cost $5,178 – $0 (down payment) = $5,178 $5,178 / 24 months lease term = $216/month. |
We can clearly see not making a down payment will result in higher monthly lease payments. The figures stated are meant for illustration purposes only. Lenders and car dealers usually offer $0 down lease offers for a longer lease term.
Choosing a Lease Term
The lease term will depend on the type of deal. Car makers normally offer lease terms in 24, 36, 48, and 60 months (we do not recommend you choose a lease term of more than 60 months).
Tip: Choose a lease term that is no longer than the standard vehicle warranty. This will help you save money on unnecessary repair costs.Remember, the residual value of the vehicle will change depending on the lease term you choose. As the vehicle ages, the residual value will decrease.
We will now use the 2012 Ford Focus SE as an example:
| Example 1: Lease a 2012 Ford Focus SE A/T for 24 months. | Example 2: Lease a 2012 Ford Focus SE A/T for 36 months. |
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MSRP: $17,500 Lease term: 24 months Down payment: $1,999 ALG residual value (24 months): 66% The lease price of the Ford Focus SE can be computed as follows: MSRP x 66% = $11,550 estimated residual value after 24 months $17,500 – $11,500 = $5,950 capitalized cost $5,950 – $1,999 down payment = $3,951 $3,951 / 24 months lease term = $164/month |
MSRP: $17,500 Lease term: 36 months Down payment: $1,999 ALG residual value (36 months): 55% The lease price of the Ford Focus SE can be computed as follows: MSRP x 55% = $9,625 estimated residual value after 24 months $17,500 – $9,625 = $7,875 capitalized cost $7,875 – $1,999 down payment = $5,876 $5,876 / 36 months lease term = $163/month |
These examples do not include the APR or interest rate. You can see a longer lease term will result in lower monthly payments, but you will have to pay for 36 months rather than 24 months.
Car dealers and lenders may also charge a higher interest rate for a longer lease term. This means you will eventually pay more for the car. It is best to choose a lease term within your stated budget and within the standard warranty of the vehicle, not necessarily choosing the cheapest monthly payment.
