Car Leasing Tips: 3 Things You Need to Know About Leasing

Unless you're already experienced and savvy at leasing cars, you need to read these car leasing tips. Leasing a car is a lot more complicated than you might imagine. 

And, it's easy to want to believe them when you see how low the monthly payments are for leasing a car in comparison to financing one. These car leasing tips will help you save money and help you decide if leasing a car is the right option for you. 

Tip #1: Get to Know How a Car Lease Works

Very simply put, leasing a car is basically renting a car. However, when you lease a car, you are paying for the predetermined depreciation of the vehicle for the length of your lease (the lease period or lease term) and you are responsible for all maintenance. Your monthly car lease payments are determined by how much your car is estimated to depreciate over a determined period of time, plus interest, taxes, and fees per month.

For example, new cars depreciate in value between 50% to 60% in the first three years, which just so happens to be the length of most car leases- 36 months (car lease periods are presented in months). In fact, it is also the length of most car warranties- 3years/36,000 miles. And, guess what? Those 36,000 miles divided by 3 years averages to 12,000 miles each year, and equal to the mile restrictions for many car lease contracts.

If you are offered a lease with a different lease term or less mileage restrictions (see Car Leasing Tip #6), than you may want to consider walking away from that lease. As you read the rest of the car leasing tips, you will understand why.

Tip #2: Learn About Depreciation and Residual Value

Knowing the difference between depreciation value and residual value is crucial if you are planning to lease a car. Depreciation value for cars is the decline in a vehicle's value over time.

Most cars lose about 50-60% of their value in the first three years. So, at 50%, a car that had a manufacture's retail price (MSRP) of $24,000 three years ago would be worth around $12,000 today, thus its depreciation value is $12,000 after three years.

And, at 60%, then that same $24,000 car would be worth around $9,600 today, with a depreciation value of $14,400.

Tip #3: Know the Money Factor (Interest Rate on a Car Lease)

Car leases don't actually have interest rates, they have what is usually called a money factor.  You can convert the money factor to an approximate interest rate by multiplying it by 2400.

For example, a money factor of 0.0013 is an interest rate around 3.12%; a money factor of 0.0042 is around 10.08%. Sometimes dealerships will quote a money factor that looks like a low interest rate, like 2.75. Don't be fooled, 2.75 is still the money factor- just multiply it by 2.4 instead of 2400 to get your interest rate (6.6%).

Be sure that you know your credit score before you shop for a car lease, that way you'll know if the interest rate offered is fair. If your credit score is in the 800's and you are offered a really high interest rate, then you'll know there's something wrong.