Fall 2023 update: As of this writing, the semiconductor chip shortage and supply chain issues that wreaked havoc in the automotive marketplace have largely stabilized. But new car production and inventory remain a fluid situation, and prices for both new and used cars remain high, if not quite the record levels we saw over the past two years. While this article remains a great resource on the overall used car leasing process, it may be harder to find dealers willing to participate in used car leasing since they may profit more from selling the vehicle instead. Also, the numbers on leases may not make financial sense, as current lease rates are not as competitive as they once were.
Are you thinking about leasing a new car? What about a used one instead? Used car leases are a bit of a secret, but yes, you can absolutely lease a used car. It's often possible to lease a slightly used version of the new car you've had your eye on and save yourself thousands of dollars in the process.
If you've never heard of a used car lease, don't worry. Most people haven't. For one thing, not all dealers offer them, and it's unlikely you'll see them advertised online or elsewhere. Even people who work at car dealerships may be unaware that leasing a used car is an option.
But used car leases do indeed exist, and for shoppers willing to do the legwork to land one, the reward may be more than just savings. Because savings with a used car lease can be so significant, shoppers may be able to afford a nicer car and still save money compared to leasing a new vehicle.
How does used car leasing work?
As a rule, used cars available for lease from dealerships will be certified pre-owned (CPO) vehicles that are less than 4 years old and with fewer than 48,000 miles on the odometer.
Used car leases follow the same basic structure as new leases. The lender will determine the vehicle's residual value and determine the payments based on the difference between the vehicle's sales price and its residual value. Not all automobiles depreciate at the same rate, so the residual values vary. In most cases, the lender will be an automaker's "captive" financing company: Think Toyota Financial at a Toyota dealer.
The lender writing the lease will assign the deal a money factor, which is, essentially, the interest rate. That's the same as a regular lease. And just as interest rates tend to be higher on used car loans, the money factor will likely be higher than for a new car lease. So is leasing a used car still cheaper than financing one? Since the higher money factor of a used car lease is typically offset by a lower sales price and a lower rate of depreciation, this usually results in a lower overall payment. And shoppers who lease used are typically also able to buy out the vehicle at the end of the lease, just as they can with new autos.
During my 12 years of selling and leasing autos, I saw buyers shave anywhere from $40 to $125 per month off their monthly payments by leasing used. I worked in dealerships that sold regular, everyday vehicles. People looking to lease used luxury cars may see larger savings.
A note of caution: You may hear about used leases from independent "Buy Here, Pay Here" dealers. Such leases frequently come with lots of strings attached, and you should scrutinize the terms very carefully. Also, specialty car lots that deal in exotic, ultra-luxury or classic vehicles may offer in-house used car leases.
Primarily, this story deals with used leasing as handled by franchised dealers. They are the only ones that can offer true certified pre-owned automobiles.