Leasing a new vehicle has many benefits over buying a new or used car. A typical two-year or three-year lease term usually includes a low down payment and lower monthly payments. It allows shoppers to enjoy a more expensive car than they may otherwise be able to afford. With a lease, drivers do not have to worry about finding lenders, getting a low-interest rate, or securing an auto loan. A leased car has that new-car smell and the latest driver technology, all for the price of monthly lease payments.
There are some downsides to leasing, of course. A car lease has an endpoint when the vehicle needs to be given back. There are also strict mileage limits; if a driver racks up a number of miles over the leasing company's set limits, the driver is charged for each additional mile.
Another flaw of leasing is high insurance limits. An insurance company generally worries more about a leased vehicle because the driver technically does not own it and so may not drive as carefully. Also, leased cars tend to be brand-new, so they have all of the latest gizmos and gadgets inside. If a power-folding heated side mirror or the panoramic sunroof breaks, it can be an expensive repair.
One of the similarities between leasing a car and buying is that there are better times to lease than others. Doing your research can help you save time, money, and headaches.
The best time to lease a car is usually when the vehicle model has recently been introduced to the market. That is because the residual value is generally at its highest point, meaning that you can save the most money on depreciation.
What Is Residual Value?
Residual value is the amount of money the vehicle leasing firm expects the value of the car to be worth at the end of the last year of its lease contract. It considers the value of the brand-new vehicle, the number of months a person will lease the car, the number of miles accumulated in that time, and the estimated market outlook two or three years down the line. Will the Ford Escape have the same desirability in three years? Will there be a redesigned Subaru Outback, leaving this current generation less attractive to used-car customers?
Residual value is one of the most critical factors banks and leasing companies consider when determining how much to charge customers for the car they are about to lease.
Leased vehicles are owned by a bank or similar leasing institution, not the driver. For that reason, those businesses care not just about how much money they will make throughout your lease. They also think about how much they will resell that same car for when you finish driving it.
This calculus doesn't just matter to banks; it applies to you, too. The difference between the purchase price as a new car and its predicted residual value is what you will need to pay for the lease. A car that costs a lot of money when new -- and one that is expected to depreciate quickly -- will likely be the most expensive kind of car to lease upfront.
Historically, high-priced European luxury sedans and cars with complicated technology that may break more easily lose their value quite precipitously. Those cars are often desirable to lease because they offer drivers fancy amenities without the worries about a skyrocketing repair bill. Leasing a car frees you from expensive repairs. But someone buying that car used later may not be so lucky.
ALG is the automotive industry's foremost authority when it comes to setting a vehicle's residual value. ALG has been in the business of residuals for over two decades. Residual value is primarily based on ALG's Residual Percentage Guide. ALG updates this guide every two months.
A vehicle's value gets lower even within one model year. For example, if you lease a car towards the end of the 2021 model year for 36 months, the vehicle will actually be closer to four years old than three at the end of the lease. Banks account for that fact, and so you could be paying for an extra year of depreciation.
On the other hand, the further into the model year you go, the lower the vehicle's negotiated price. So you have to weigh the pros and cons of the car you're considering.
What About Popular Models?
If the vehicle you have your heart set on is popular, you will find prices significantly higher than MSRP due to the demand. If that is the case, it is best to wait a few months into the model year to cool off.
New models are generally introduced sometime between July and October, though some can be earlier or later. If you start a lease within a few months of a brand-new car's release, you may get the best deal.
One of the only situations where timing does not matter is when the automaker offers special lease deals. These deals may include several perks like inflated residual values, low money factors, and lower capitalized costs.
How Is Residual Value Calculated?
Even though this value is represented as a dollar figure, residual value is a percentage of the MSRP. For example, if the leased vehicle has an MSRP of $30,000 and its residual value is half after a 36-month lease, the bank will calculate the car has a $15,000 residual value at the end of the lease.
As previously mentioned, leasing companies use ALG to estimate and track depreciation and residual values. ALG predicts wholesale values after two, three, four, and five years. The wholesale value indicates the likely price of a vehicle sold at auction. Auctions are how many leasing companies get rid of off-lease cars.
It's a good idea to remember that wholesale value is less than retail value. Leasing companies generally quote higher residual values due to manufacturer subsidies, which raise the values to lower payments.
Don't Get Too Particular
The more specific you get regarding a potential leased vehicle, the more you will likely pay. Prioritizing particular color combinations, option packages, and hot-selling cars are all going to cost you extra money in the long run. Look for vehicles selling at a slower pace, and be flexible on what options you want to get the best deal.
For example, if you are shopping for a car in a place that often gets snow, heated seats and all-wheel-drive will make that car more expensive. If you can live with front-wheel-drive and fewer electric amenities, you may be able to score a special deal.
Sometimes the release of a new generation of a vehicle can give you a good deal on the outgoing model since the dealership might be desperate to move it. This is true when a redesigned car has all-new styling. It can make the older model years look significantly outdated, but often, those cars ride on a similar platform and share many of the new car's features. If you are one of those customers willing to look past the latest and greatest style, it will help.
An area where it may help spend a bit more money is when a redesigned car includes modern driver safety technology. Items like this may help avoid accidents better than the same vehicle without that equipment. Those items may be worth the extra cost.
One tip: car dealership add-ons and accessories typically do not recoup their value, so you may be paying for equipment that you will only be renting, and it is the second owner who will benefit most. These include things like mud flaps, tinted windows, bike racks, and cargo area organizers. If a dealer tries to sweeten a deal by adding on accessories instead of lowering the price, do not fall for it.
Lease Vehicles With a Higher Resale Value
One of the more exciting things about leasing is that more expensive cars can cost less to lease than budget economy cars. The loss in car value, as previously explained, makes up a considerable portion of your lease payment.
We previously mentioned that more expensive European luxury sedans tend to have high monthly lease payments due to their high starting price, spotty reliability, and low residual value.
Meanwhile, Hondas and Toyotas tend to hold their value exceptionally well compared to other mainstream affordable vehicles. A Toyota Corolla could have a surprisingly low car payment, thanks to it likely being easy to sell three years down the road. Corollas are dependable, comfortable, fuel-efficient, and they remain in high demand.
Toyota also has excellent build quality and driver safety technology in its cars, making them generally more desirable than the competition. For that reason, it is not unheard of for shoppers to find a base Corolla for around $100 or $150 per month.
Cars do lose value, and some lose quite a bit more than others. Your payment is largely based on the lease-end residual price. Because of this, a Lexus, an expensive car brand known for its high resale values (and owned by Toyota), could end up costing less to lease than Fiat, a brand with lower sticker prices and reliability scores and, crucially, lower residuals.
As a percentage, the resale value can be almost twice as much for the Lexus as a Fiat. That factors into your payment, and it means you can drive a significantly more luxurious vehicle for less.
Examples of vehicles with high residual values in the 2021 model year include:
- Subaru Impreza
- Toyota Tacoma
- BMW 2 Series
- Mazda CX-3
- Lexus RX
- Hyundai Sonata
- Jeep Wrangler
- Chevrolet Corvette
- Lexus IS
- Subaru Forester
- Honda Passport
- Toyota Highlander
- Subaru Crosstrek
- Honda Odyssey
When Not To Lease
When is not the best time to lease a car? Usually, when everyone else is leasing or buying cars. It is a good idea to remember that dealerships always have monthly sales quotas they expect to meet. Salespeople need to meet these quotas to stay in business. As long as they are meeting or exceeding quotas, they will be less inclined to make deals.
You can do your research by keeping an eye on the market and checking sales reports. Most dealerships post inventory online, so you can keep an eye on what is moving and what is not. The good idea is to wait until the dealership you are watching gets desperate to move specific inventory. See if there are cars with particularly low pricing compared to the MSRPs. Also, check if a model you are interested in is in store for a redesign. Make a few calls and a few offers as long as they are realistic. If your dealership struggles to move the vehicles, they may be more likely to meet your offers.
The end of the year might be another opportunity, especially if your new model came out in October, which means it is only a few months old by December or January.
It is also beneficial to stay away from leasing if possible when you have a low credit score. Companies factor in a customer's credit score when determining the kind of deal they will give them. If you can afford to wait to get a new car, try to raise your credit score first.
Overall, it is essential to know what you are getting into with a lease. It is crucial to have a sense of the lease payments and how much the insurance will cost, what the expected residual will be, and if now is the best time to start a lease. Going into the process with reasonable expectations and the facts on your side will help you get the best deal and have the most optimal leasing experience.