Car-lease incentives: what you need to know

If you are considering leasing a car there are a few important factors you should know about the incentives that may be offered. Incentives for auto leases are not exactly the same as incentives offered when you purchase a new car. And it’s vital to understand the ins and outs of these perks to ensure you get the best deal when leasing a vehicle. 

What are car-lease incentives?

Car-lease incentives are benefits offered by automakers to entice consumers to lease a vehicle.  Automakers regularly advertise car-lease incentives and may promote them on their websites, as well as through commercials, radio and direct-mail ads. The goal of car-lease incentives is to make leasing a specific type of car more affordable and enticing. 

3 types of car-lease incentives

Before heading to the dealership, there are three common types of car-lease incentives to be aware of. 

1. Cash rebates

Cash rebates offered when leasing a car are similar to those provided when buying a car. The rebate, which is for a flat amount, is set by the manufacturer and applied to the overall price tag associated with leasing the vehicle — thus lowering your costs. The total value of a rebate, however, may vary based on the lease term you select.

Any restrictions on the rebate are spelled out on the automaker’s website, usually in the fine print under the offers section.

2. Subsidized interest rates

A subsidized interest rate involves the auto manufacturer offering a lower rate for customers with good credit who use the automaker’s lending arm, such as Ford Credit or Toyota Financial Services. It’s often referred to as a “lease deal” for a specific monthly payment.

You will need to compare this interest rate with financing you could obtain on your own through another lender to see which is better. Look through all the specifics of the lease terms to ensure an accurate comparison.

3. Subsidized residual values

Residual values — and subsidized residual values — are important factors associated with the cost you pay to lease a car. A vehicle’s residual value, which is set by the leasing company, is an estimate of what the car will be worth once the lease ends.

This figure is key because the amount you pay for the lease is the difference between the price of the car at the outset of the lease and its residual value at the end of a lease. If a car’s price is $25,000 at the start of a lease, for example, and its residual value is $10,000, then your cost to lease that car is $15,000 — an expense that’s divided into monthly lease payments.

As an incentive, automakers or leasing companies may subsidize leases in order to lower your payments. Automakers will often offer either a subsidized interest rate or a subsidized residual value on a car, but not both. These details aren’t obvious however, so you may have to ask.

The perks of car-lease incentives

If you can lock in a car-lease incentive, you may benefit in one or more ways.

Lower payments

You may enjoy lower monthly payments, which can free up your cash flow and make it more affordable to drive the car you want. These lower payments are possible through the “lease deal” that the automaker will offer which can keep your interest rates low, or by applying the cash rebate as a down payment.

Cash in hand

You may receive a check from the automaker or apply the money toward the total cost of the lease. Extra money in the bank is always a plus when it comes to vehicle financing but beware of any restrictions that may apply. For example, you may be required to use the auto manufacturer’s financing company to take advantage of this incentive. 

A better car for less

You may go home in a car with all the bells and whistles at a price you can afford. If you’ve always wanted to drive a certain vehicle but don’t have the money to buy it, an incentive may help you drive it for a few years. The key to driving away with a great car with less money spent comes from the subsidized residual value offered. It keeps your monthly payments low, while keeping the value of the car high.

What to watch out for

Although car-lease incentives come with quite a few perks there still are two main potential drawbacks to signing off on a hefty cash rebate.

Extra excess mileage fees

It is important to read the fine print when it comes to a high cash rebate. In many cases, you may be charged costly fees for exceeding mileage limits. Every dealership is different, but this can cost you between 15 to 25 cents a mile. Consider the number of miles you clock on a day-to-day basis — and whether you have any upcoming trips — when deciding to sign off on a cash rebate.

Balloon payment

The automaker may also require a balloon payment, which is a larger one-time payment at the end of the lease. If your budget won’t allow you to make this payment, you may put yourself in a bad position.

Just keep in mind: If you come across a car-lease incentive that’s too good to be true, it probably is.

Know your state

While car-lease incentives come with notable advantages, they do have one major drawback: Some states tax car incentives and rebates. If you live in a state that does, you may have to pay taxes on the full price of the vehicle before the incentive is applied.

You don’t have to worry about this if you live in one of these states that don’t tax incentives:

The bottom line

Before you jump at any car-lease incentive read the fine print. Make sure you understand how lease cash rebates, subsidized interest rates and residual values impact your out-of-pocket costs. Also note the drawbacks of incentives, like penalties for exceeding mileage limits and steep, one-time balloon payments. Most importantly, consider all the lease terms and whether a lease makes sense for your budget before signing on the dotted line.

Learn more

• Auto loan rates
• Car leasing traps you should avoid
• The basic elements of a car lease agreement