Aaron McEneff put the Candystripes in control with two first-half penalties, both given for fouls on Lukas Schubert.
Nathan Boyle fired home early in the second half and Schubert hammered in the fourth before Keith Ward's late lob completed the Finn Park rout.
Derry go a point ahead of Cork City and the teams meet at the Brandywell on Monday night in a crunch encounter.
It was Derry's first win over their north-west rivals in three meetings this season and they were rarely troubled by a disappointing Harps side.
McEneff tucked away the opener on 17 minutes after Ciaran Coll's challenge on Schubert, although the foul appeared to be outside the box.
There was no doubt the second spot-kick, with former Candystripes midfielder Barry Molloy bringing downing Schubert and McEneff making it 2-0 three minutes from the break.
Boyle produced a clinical finish from a Dean Jarvis cut-back eight minutes after the restart.
City keeper Gerard Doherty had a quiet night but he made a fine save to deny David Scully in the host's best opening of the game.
Schubert flicked the ball past Coll before blasting in after 83 minutes and it was soon followed by Ward's clever chip over Harps stopper Richard Brush.
It was Derry's biggest win of the campaign and perfect preparation for the showdown with Cork.
Derry City have moved up to second in the Premier Division thanks to a thumping 5-0 derby win over Finn Harps.