Shopping for a Lease

Despite its complexities, a lease is simply a finance method, as is a traditional bank loan. Leasing can be more confusing due to its unique terminology and innovative approach, which charges a consumer only for the portion of a vehicle's life that he or she uses. In the end, both a lease and a loan can be measured by the net interest rate, or APR, meaning there is a common basis for understanding.

Although many factors influence how much a lease will cost and what the monthly payments will be, the three most significant ones are purchase price, residual value, and base interest rate (also called the money factor). Never enter into a lease agreement unless you know and are comfortable with all three of these factors.

Purchase Price: Whether you're leasing or buying, there will be a purchase price for the vehicle. There's absolutely no reason why the price of a vehicle should be higher if you lease rather than buy the car. If the purchase price in a lease is higher than you would pay to buy the car, you're simply paying too much, and the difference is additional profit for the dealer.

Sometimes, however, the purchase price in a manufacturer-subsidized lease is actually lower than what you would pay to buy the car. This tends to reduce the depreciation and is a common way for manufacturers to lower the net interest (cost) of the lease.

Residual Value: Just as the purchase price sets the value of the car at the start of the lease, the residual value (in a closed-end lease) is the predetermined value of the vehicle at the end of the lease. The difficulty here is forecasting what the car will be worth in 24, 36, or 48 months.

This is key because the difference between the residual value stated in a lease and the purchase price is the amount of depreciation, which is what you'll be paying for. If the residual value is set too low, you'll pay more for depreciation. Sometimes manufacturers will subsidize a lease offer by setting the residual value artificially high. This reduces the depreciation you pay for and lowers the cost of the lease. With vehicles that have a poor value rating (as seen in this buyer's guide), there may be attractive lease deals available due to subventing, as the manufacturer is reducing the depreciation cost to the consumer to move product.