Key takeaways

  • Car-lease incentives can help make leases more affordable.
  • The main three types of lease incentive programs are lease cash, subsidized interest rates and subsidized residual values.
  • You may have to watch out for balloon payments at the end of the lease and state taxes on incentives.

If you’re itching for the car of your dreams, lease incentives can make getting on the road more affordable. Lease cash, lower interest rates and higher residual value mean lower monthly car lease payments. However, there are a few drawbacks to consider before signing up so you don’t make any car leasing mistakes.

What are lease incentives?

Car-lease incentives are benefits automakers offer to entice consumers to lease a vehicle. Automakers regularly advertise lease incentives through their websites, commercials and radio and direct-mail ads. Car-lease incentives 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. Lease cash

Lease cash is similar to a rebate. Lease cash is a flat dollar amount set by the manufacturer and applied to the overall price tag of leasing the vehicle — thus lowering your costs. The total value of lease cash, however, may vary based on the lease term you select.

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

You may also see these referred to as cash rebates or lease rebates. Some examples include Captive Lease Cash through Honda and Acura or Red Carpet Lease Cash through Ford.

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 through another lender to see which is better. Look through all the details, not just rates.

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 the 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 increase the projected residual value in order to lower monthly payments, also known as subsidizing or subventing. Automakers will often offer either a subsidized interest rate or a subsidized residual value on a car, but not both. You can also check to see if it’s worth the deal by comparing the payments against an auto lease calculator.

The EV tax credit
Currently, lessors can claim a federal tax credit of up to $7,500 for qualified EVs. Lessors often pass that savings on to you if you lease the vehicle. While this is not a traditional manufacturer incentive, it may be a motivator to lease an EV to see if one works for your lifestyle and cut gas payments for at least two or three years. Leasing may also be a way to bypass stringent federal guidelines on which vehicles qualify for the credit.

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 incentives can keep your interest rates low or apply 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. But beware of any restrictions that may apply. For example, you may be required to use the auto manufacturer’s financing company to claim the 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.

What to watch out for

Although lease incentives are perks, there are two main potential drawbacks to signing off on a hefty cash rebate.

Balloon payment

The automaker may 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 damage your credit score and face other repercussions.

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

Potential state taxes

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:

  • Alaska Massachusetts Oregon
    Arizona Minnesota Pennsylvania
    Delaware Missouri Rhode Island
    Iowa Montana Texas
    Kansas Nebraska Utah
    Kentucky New Hampshire Vermont
    Louisiana Oklahoma Wyoming

The bottom line

Before you jump at any car-lease incentive read the fine print. Make sure you understand how lease cash, subsidized interest rates and residual values impact your out-of-pocket costs. Also note the drawbacks of incentives, like 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.

Anna Baluch contributed to a former version of this article.