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Leasing a Car: What's a Subsidized Lease?

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author photo by Doug DeMuro August 2016

If you're interested in leasing a car, you may have heard the term "subsidized lease" used to describe a lease offer on a certain type of vehicle. This term is often used in conjunction with incentives, with manufacturers offering subsidized leases to improve their vehicles' popularity. But what exactly does the term mean? And how does it apply to you? Here's what you need to know.

What Is a Subsidized Lease?

Although leasing may seem like borrowing a vehicle for a monthly fee, it actually involves a sale -- from the dealership to the leasing company. The leasing company then leases the car to the person who drives it for a monthly fee.

When automakers refer to a subsidized lease, they're often talking about subsidizing, or lowering, the sale price to the leasing company. For instance, if you're thinking about leasing a $30,000 car, an automaker might subsidize the lease and instead sell the car to the leasing company for $28,000.

How Does a Subsidized Lease Help?

By lowering the car's sale price to the leasing company, the automaker is lowering your monthly payments. Since drivers who lease a car essentially pay the depreciation, a lower starting price means less depreciation to pay, and that means lower monthly lease payments.

The result is that a subsidized lease is often an attractive proposition for shoppers interested in leasing a vehicle, since it makes the vehicle less expensive. If you think about subsidized leasing as the leasing equivalent of an automaker offering a lower financing rate or cash back, and you wouldn't be too far off.

Other Subsidized Leases

Although lowering the sale price of the car is the most common form of a subsidized lease, there are other ways an automaker can subsidize a lease price, too. One is by increasing the car's predicted residual value, which has the same effect -- by increasing the vehicle's future value and thus decreasing its predicted depreciation, the monthly payments will drop. Another is by decreasing the interest rate, or money factor, which allows for lower monthly payments.

But regardless of how an automaker structures a subsidized lease, it's generally a good thing for shoppers interested in leasing a car and saving some money in the process.

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This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Leasing a Car: What's a Subsidized Lease? - Autotrader