4 Ways to Spot a Good Lease

For many shoppers, deciding if a lease is good can be as easy as collecting the answers to these three questions:

How much total money out of pocket is needed to start?
How much is the total monthly payment, including taxes and fees?
How many total miles are allowed on this lease?

With this information in hand, you could determine if you've spotted a good lease or if you need to do more shopping.

But what if you're looking for a more refined, in-depth way to analyze the merits of a potential lease? Here are four tips that the pros use to scrutinize a deal. By the way, even if you're not a car leasing expert, you can still use these metrics to understand if the deal you're considering is a diamond or a dud.

1. High Residual Value

Leasing experts agree that the most important factor in a lease is the vehicle's residual value, which is a prediction of what it will be worth at the end of the lease term. This "perceived value of the vehicle" is set either by leasing-information provider ALG Inc. or the bank that is writing the lease contract. Often, the residual is discussed as a percentage.

The residual value is important because the higher its percentage is, the lower the payment. A lease amount is determined by the difference between a vehicle's selling price and its residual value. Here's how that works:

Consider two $30,000 vehicles: One has a residual value of 65 percent after 36 months, and the other has a 40 percent residual for that period.

The vehicle with a 65 percent residual value is projected to be worth 65 percent of its original $30,000 price tag after 36 months (65 percent of $30,000 is $19,500). Since a lease payment is based on the difference between the selling price and the residual value, the lease on that particular vehicle would look something like this:

$30,000 x 0.65 = $19,500
$30,000 - $19,500 = $10,500
$10,500/36 months = $292 lease payment per month

A $30,000 vehicle with a 65 percent residual would have a base monthly payment of $292 before taxes, interest and fees.

Here is the other $30,000 vehicle, which has a 40 percent residual value. Here's how the numbers work out:

$30,000 x 0.40 = $12,000
$30,000 - $12,000 = $18,000
$18,000/36 months = $500 per month

Choosing the vehicle with the higher residual percentage would net a savings of more than $200 per month for a vehicle with the same selling price.

This example explains why you can sometimes lease a more expensive car and get a lower monthly payment than you would have been able to get for a less expensive competitor. The more expensive vehicle likely had a higher residual percentage.

So when you're shopping for a lease, the first rule of thumb is to look for cars that hold their value better — the ones that have high residual values. Residual percentages for 36-month leases tend to hover around 50 percent but can dip into the low 40s or be as high as the mid-60s. For a quick overview, try using the phrase "vehicles with the best residual value" in your favorite search engine.

And if you want to calculate your own lease payments, Edmunds can help. Be forewarned: You'll need a fair bit of information from the dealership in order to figure out a lease at home.

2. Low Money Factor

In leasing, the money factor is essentially the interest rate you'll pay during your lease. It's sometimes called a "lease factor" or even a "lease fee." Money factors look different from their annual percentage rate (APR) cousins, usually expressed like this: 0.00125. But like their APR cousins, the lower the number, the lower interest you pay.

To convert interest rates to money factors, divide the interest rate by 2,400. To convert money factors to interest rates, multiply by 2,400. So 0.00125 multiplied by 2,400 would equal an interest rate of 3 percent.

For quick reference, if the money factor you're offered starts with a decimal followed by three zeros, (0.0009) you're getting a very low lease rate. If the decimal point is followed by two zeroes and a 25 (0.0025) or less, you're getting an average rate. If the money factor is a decimal followed by two zeroes and anything above 35 (0.0035), you're getting an interest rate that would be at least 8.4 percent APR, which could be considered a high interest rate.

If you're not happy with the money factor you're offered, it may be possible to negotiate something lower. It is worth noting, however, that in some cases the money factor is fixed and can't be altered by the dealership. If you come across that scenario, ask the dealership if it could complete the lease with a bank that charges a lower money factor.

3. Low Fees

If you're looking to improve the dealership's lease contracts, you might also have success if you ask for some fees to be reduced or removed from the lease contracts. The fees — such as the security deposit, acquisition fee and disposition fee — vary from one lease and carmaker to the next. For example, depending on the brand, acquisition fees can range from roughly $600 to as much as $1,000. You'll almost always have to pay acquisition fees, but it may be possible to get the dealer to waive a security deposit or disposition fee. The key takeaway is that you should ask to have fees waived if they are included in the lease.

4. Customer Retention and Conquest Offers

Another sign of a good lease is that the automaker or dealership offering it is also offering aggressive rebates or incentives to get you into the driver's seat.

Some offer significant discounts to repeat customers for coming back to the brand. These discounts are usually in the form of "retention" rebates — they want to keep you as a customer.

Others offer deep discounts to customers who currently have a car from a competing brand. They hope to "conquer" customers, winning them away from the carmaker they're currently with, by offering a sweet deal.

There are other customer appreciation discounts for people in the military, recent college graduates, first responders and more. If you're able to combine any of these rebates with an existing widely advertised cash-back rebate, chances are good you've spotted a pretty good lease.