Getting the best lease deal on a car can drive even the cleverest negotiator to do some head scratching. There are a lot of moving parts to grasp, as well as terms that are as foreign to most of us as Sanskrit. Simply put, leasing is markedly different than financing a new car.
Yes, some of the basics of financing and leasing are the same. In either case, you want the lowest price possible on the new car and the highest value on your trade in. Also, there is a monthly payment involved. The similarities between financing and leasing, however, pretty much end there.
With financing, you basically borrow the balance of the price of the new car minus the down payment (in cash or the value of a trade-in) for a set number of months. Each month you make a payment in an amount calculated to pay off the balance within the number of months established in the contract. These payments include monthly interest based on a rate agreed to at the contract’s signing. At the end of that period, if the payment schedule has been met, the car is yours free and clear.
Leasing is fundamentally different in that while financing is based primarily on the difference between the down payment and the purchase price, leasing is based on the purchase price (value) minus what experts believe the vehicle will be worth at the end of the lease. That is, monthly leasing payments are calculated based on an estimated amount of the car’s value you will use during the time period you are contracted to have it. Whatever that amount of lost value might be is what you are borrowing. Again, the monthly payment is based on paying off the balance of that amount plus whatever interest is agreed upon at the contract’s signing. When the contract expires, you return the car and walk away.
As with traditional financing, in leasing you don’t want to fall into the trap of judging the deal’s merits solely on whether or not you can afford the monthly payment. Nor should you focus only the purchase price because, as you will see, monthly payments aren’t dictated solely by the purchase price. If your intent is to strike the best leasing deal possible, you need to isolate each key element and make it work for you. The big question is, what do you need to know to determine if a lease deal is a good one or a stinker?
The best leasing deal begins with minimizing the difference between the car’s transaction price and its projected worth (residual value) at the end of the lease term. Historically, residual value is expressed as a percentage. The higher the percentage, the higher the residual value and the smaller the difference between the purchase price and the residual value. That’s where you want to be. Although it’s the individual lenders setting the percentages, most rely on numbers provided by the depreciation specialist ALG. Because of this, residual values are fairly consistent from lender to lender, but not always.
Based primarily on the past performance of the nameplate, the brand and the type of vehicle (sedan, CUV, pickup and so forth), establishing the residual-value percentage also involves a bit of crystal-ball gazing. In the end, different makes and models have varying residual value. A few percentage points difference in the residual-value estimate can make a big difference in the monthly payment for two models with the same price.
According to Kelly Blue Book, the average price of a new car is $35,000. Let’s say you are considering a 2-year lease on Model A or Model B, each of which costs $35,000. The experts assign a 75% residual value to model A and a 65% residual value to model B at the end of two years. Here’s how that shakes out:
$35,000 x 0.75 = $26,250
$35,000 – $26,250 = $8,750
$8,750 ÷ 24 months = $365
$35,000 x 0.65 = $22,750
$35,000 – $22,750 = $12,250
$12,250 ÷ 24 months = $510
So, in this example, model B will cost $3,500 (or $145 per month) more than Model A over the course of this 2-year lease. The higher the percentage, the greater the value!
As in traditional financing, with leasing you must pay for the money you borrow. In financing it’s called the interest rate or APR. When leasing, the interest rate is often expressed as the money factor, lease factor or lease fee. It doesn’t look anything like the interest rates (3.2%, 4.5% and so forth) we are accustomed to seeing. It is expressed as a very low fraction like .00275. What does this mean?
According to Leaseguide.com, if you multiply the money factor by 2400, it will translate it into a more familiar interest rate. For example, .00275 x 2400 = 6.6% APR. In this market and for someone with solid credit, this is a very high interest rate. A money factor of .00125, which translates into a 3% interest rate would be much better.
Here’s the ugly truth, though, often the money factor isn’t even disclosed in the lease contract because the government doesn’t require it. If the money factor does appear in the paperwork, sometimes a .00275 money factor will be expressed as 2.75, which makes it look like a low interest rate. It’s not. Unless you ask, you won’t know what the money factor is. If you don’t know what the money factor is and how to interpret it, there is no way to tell if you are paying too much interest. Just remember: Lower is always better.
When leasing, always demand a full written list of fees. This is an area where things can get very creative. The fewer the number of fees, generally the better the deal. There are some fairly standard fees, such as the Acquisition Fee, which is really the set-up fee. It can range from $500 to $1,000. You probably won’t get the dealer to budge on this fee, but others like the Disposition Fee, which covers refurbishing or cleaning the car at lease end, can often be negotiated. Some dealers are more receptive to negotiating fees than others. Find one who will negotiate. Find a New Car for sale
Be sure to verify the terms of an early-termination fee, if there is one. Everyone looks great at the starting line. Down the road, you may find yourself for one reason or another wanting or needing to get out of a lease before the expiration date. If that happens, you want as few hassles (and penalties) as possible.
And finally, make sure you get every incentive, rebate or other special deal currently offered on the model you choose. If it isn’t plainly itemized, ask to see where any down payment or trade-in has been applied to the net price (or capitalized cost in leasing speak).
As with any contract, the one you sign to lease a car has some wriggle room for negotiating. It’s up to you to get the deal you deserve.