What is the 1% rule when it comes to leasing a car?

Have you ever wondered how to determine whether a car lease takeover is worth it at first glance? Or whether you are getting a good deal on a car lease transfer? Even if math isn’t your strong suit or you don’t have a calculator nearby, you can start with the 1% rule to get an idea of whether you should explore the lease option further. This rule does not require complex calculations of the interest rate, residual value, or value in use or such (although we recommend performing all of the calculations before making a decision), the 1% rule is simple.

What is the 1% rule?

As a general rule of thumb, a lease is a good deal if the pre-tax lease payments are less than 1% of the Manufacturer Suggested Retail Price or MSRP of the vehicle. For example, if a car is listed as $68,000 MSRP, 1% of the price would be $680 and lease payments at or below the 1% mark would make it a good deal.

It is important to note that the lease payments that are taken into calculation for the 1% rule should be pre-tax. Therefore, when you are looking at the lease payments listed on carleasetakeover.ca, which are inclusive of tax, take a note of the province of the listing and remove the tax accordingly.

At the time of writing this post, in provinces such as Ontario and the Atlantic provinces where 15% HST is in effect, you need to divide the lease payment by 1.15 to get the pre-tax amount. In BC you should remove GST and PST (divide by 1.12) and in Alberta you should remove GST only (divide by 1.05). For example, a lease payment listed in Ontario as $1200 would be $1,043.48 pre-tax and this pre-tax payment should be used for the 1% rule.

Additionally, for best results, you should also include any required down payments in your calculations. This is done by dividing the down payment by the total lease term and adding it to the pre-tax lease payments. However, for a car lease takeover you will not have to worry about any down payments as it is often taken care of by the original lessee!

Is the 1% rule a hard and fast rule?

No! As with any general guideline, this rule should be considered while analyzing other factors that affect a lease deal. This rule is not an accurate lease estimate, rather it is best used to gage the value of the deal that you are looking at when faced with the numerous car lease transfer options available.  

While the test is best used for a standard 36-month lease terms, other factors such as the make, model, and year of a car might affect it. There are some makes that do not lease well and often land far above the 1% mark. However, you should not dismiss these options right away, rather, you should do some research to find out why the lease payments may fall above 1%. Similarly, other models may, on average, fall well below the 1% mark so shop around to ensure you aren’t paying 1% of the MSRP if other lessees are paying well below that!

There are of course other factors to consider as well. For example, if two identical lease takeover options meet the 1% rule, you can look at annual kms to determine which is the better deal. In this scenario, the car that has a higher km allowance or remaining kms would the better deal since the two lease payments are equal. The km limits are always listed on our website to make it easy for you to decide.

How does the 1% rule affect my existing lease?

Have a car lease already? You could calculate 1% of the MSRP as discussed above to see if your lease payments are a bargain. If you have a good deal, that’s great! Keep your lease and enjoy your vehicle. If not, consider listing your car on carleasetakeover.ca for free because surely there is someone out there who wants to take over your lease for a great reason other than the 1% rule.

So what do you recommend I do?

While the 1% is not a definitive selection method of a great lease deal, it provides a good start. Given that you are faced with dozens of options when taking over a car lease, you now have a tool to quickly assess whether you should further explore the lease option or not.

We encourage you to shop around and browse the numerous listings on our website, do your research, and find the best deal that fits your needs. Don’t forget to leave us your thoughts on the 1% test or your best tips to quickly spotting a good deal in the comments!

 

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