When leasing a luxury car costs less

What if you have Mercedes tastes but a Mazda budget?

Consumer Reports Magazine: February 2015
Photo: Paul Sahre

 Are those ads for $299-per-month BMWs and Acuras for real? Yes. That’s because dealers of luxury cars are offering lower leasing payments that make their vehicles much more attainable.

Of course, with a lease, you never own the car outright. And you’re paying for the biggest depreciation hit over a shorter period of time. That’s why, in general, Consumer Reports recommends that you purchase a car as a long-term hedge against its depreciation.

Photo: Paul Sahre

But could leasing be the right move for you? Ask yourself these questions:

  • Does the prestige of driving a luxury vehicle matter to you?
  • Are you planning to keep the new car for less than four years? (Most leases run for three years.)
  • Do you need the security of a bumper-to-bumper warranty?
  • Do you hate the vehicle trade-in process, or are you wary of selling your used car to strangers?
  • Do you drive less than 12,000 miles per year?
  • Do you keep your vehicles clean and free of dings, scratches, dog hair, and spilled sodas?

If you answered “yes” to most of those questions, leasing might be a viable option. Most luxury brands have lease deals with incentives based on the end of the model year, holiday promotions, and annual sales targets. For many import brands, leasing makes up as much as half of their transactions.

Comparing leasing to financing for different term lengths might seem like comparing apples and oranges, but consumers do it all the time. And there are lease deals on luxury vehicles that allow you to get more car for your money than if you were purchasing a mainstream-brand automobile. As the chart below shows, you can lease a snazzy BMW 320i for about $330 per month; purchasing a more-pedestrian Honda Accord LX would cost you about $385 per month.

Of course, at the end of three years, the BMW lease will expire and you’ll have to give the car back; as the Honda owner, you will be well on the way to owning the car—though still making payments. But if you want to “own” the car for just three years, leasing removes the hassle of haggling over a trade-in or selling your used car.

Many luxury automakers are offering free maintenance for the duration of a lease, covering oil changes, wiper blades, brake pads, and even major service intervals. As a result, luxury cars are being returned in better condition, which means that their residual values are climbing. Less depreciation from a new car’s price means smaller monthly payments.

Automakers want you to return the car in good shape because they’re also creating an investment for themselves in the certified preowned vehicle market. But if you return a leased vehicle in ratty condition or it’s over your mileage allowance, prepare to pay additional charges.

Also, depending on where you live and your family situation, it might actually be cheaper to insure a leased luxury vehicle. In northern climes, selecting an all-wheel-drive luxury vehicle can result in lower insurance premiums. So can a vehicle-tracking system, often standard on luxury vehicles. And automakers often give greater incentives for leases than they would for purchases of luxury vehicles that are seasonally unattractive, such as convertibles in winter.

But leasing involves many more financial machinations than buying a car. Navigating a lease agreement can be tricky, and there are more ways that a dealership can take advantage of your naiveté. It pays to familiarize yourself with commonly used terms (see below). And when it comes time to make a deal, consider having an accountant or financial planner check the math before you sign on the dotted line.

Leasing terms to know

Out-of-pocket expenses. The total amount you’ll be paying to get a car off the dealership lot, usually $3,000 to $4,000 for luxury leases. That includes the first month’s lease payment, cap-cost reduction (see below), security deposit, and various fees and taxes.

Cap cost. Formally known as capitalized cost, it’s the starting value your leasing company puts on the financing. Consider it the equivalent of the transaction value of your new car after you finish negotiations on the sticker price.

Cap-cost reduction. You can make a down payment or offer a trade-in to reduce your monthly costs. Negotiate the cap-cost reduction only after you have agreed to the cap cost.

Acquisition fee. It’s the processing cost, usually $800 or so, for the leasing company to purchase the car from the automaker. It’s rarely negotiable.

Residual value. It’s how much the car is expected to be worth at the end of the lease. This is where you have flexibility: If your car is worth more than its residual value at lease-end, it’s a great deal to purchase the car. If it’s worth less, walk away.

Payoff balance. The amount you have to pay if you terminate the lease before the end of the term.

Money factor. Multiply this “rent charge” by 2,400 to get the equivalent annual percentage rate on your lease.

Gap Insurance. If you get into an accident that results in a total loss of the car, or if your car is stolen, this will cover any difference between what you owe on the lease and what the car was worth.

Mileage allowance. This is how many miles you’re allowed drive during the lease period. If you exceed it, there are penalties. If you’re substantially under the mileage allowance, you may actually have equity in the car that gives you leverage for a possible purchase.

Editor's Note:

This article also appeared in the February 2015 issue of Consumer Reports magazine.

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