How to Negotiate Your Next New-Car Lease Like a Pro ""

By | January 29, 2018

Car Sales

Car Sales

Car salespeople will tell you that most people who end up leasing a new vehicle don’t walk through the door thinking of themselves as lease customers. Rather, like proposals on New Year’s Eve, leasing often just kind of happens, and the person has to live with the consequences of a spontaneous decision. The information here is intended to help you make good decisions as you negotiate a lease, so you can live happily ever after with your new vehicle.

We’ll avoid debating the overall desirability of leasing versus buying in this article, instead assuming that a two- or three-year lease term is a given and focusing on getting on a lease that is as financially advantageous as it can be.

Indeed, a rational, step-by-step approach to vehicle leasing is fairly rare in the typical dealership, but talking with veteran car dealers proved that it’s even rarer than we thought. “I don’t think I’ve ever seen such a thing in a dealership,” said Donald Fuller, a former car salesperson who has provided sales training to thousands of new-car dealerships. “I’ve seen a customer and a sales manager roll dice to settle a deal, but I’ve never seen a lease customer make a step-by-step effort to negotiate a lease.”

With that in mind, here are the steps you should follow to get the best deal on a lease.

Find and Examine a Deal

First, you should determine if there is a special lease offer on the vehicle you want. This shouldn’t take CSI-style detective work, because car manufacturers, dealer associations, and individual dealers usually scream such lease deals from the rooftops. Ads for such deals will most often feature an eye-poppingly low monthly payment in large type and are intended to get you excited about stepping into a vehicle you didn’t think you could afford.

But before you take the next step, examine the deal with these questions in mind:

  • Does the vehicle that qualifies for the special deal have the equipment you want?
  • Do the terms of the deal offer you sufficient miles per year to meet your needs?
  • Is there an upfront payment required, and, if so, how large is it?

If for whatever reason you didn’t find the special deal to be all that special, you should see about negotiating one that is. During negotiations, focus on the price of the vehicle, the price of the financing (yes, leasing is “financing”), and the overall mileage limit.

Price of Vehicle

In the arcane patois that surrounds leasing, the price of the vehicle is called the capitalized cost, often shortened to “cap cost.” It stands to reason that if you negotiate the price of the vehicle down, the monthly payment and the overall cost of the vehicle lease should also go down. The trouble is, as Fuller told us,  “Most consumers are payment shoppers, so they only look at the monthly payment.” Rather than agree to a lower purchase price, the dealership typically lengthens the payment period to bring down the monthly payment, which is how a 36-month lease can become a 39- or even 48-month lease.

But you can negotiate the cap cost downward, and it is to your benefit to do so, because that is what the financial institution acquiring the vehicle from the dealership will pay for the car. Negotiating this price downward is valuable because it narrows the gap between the purchase price and the residual value—the amount the vehicle will be worth when the lease ends. Since that period of usage is the portion of the car you are buying—day one through the day the lease term ends—that’s what you pay for when you lease.  A lower cap cost should lead to a lower monthly payment, all other things being equal.


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Price of Financing

Another item worthy of negotiation is the price of the financing, which typically boils down to an interest rate on the lease. In a purchase, the interest rate is expressed as a simple percentage such as 4.5 percent. But in the alternate universe of leasing, it is usually embedded in the “lease factor,” otherwise known as the “money factor.” The money factor is expressed as a number such as .00225 or, even more confusingly, by moving the decimal point between the third and fourth digits, so 2.25. You might think this means the interest rate is 2.25 percent, but it isn’t. To convert the money factor to an equivalent annual interest percentage rate (APR), the decimal is always multiplied by 2400. In the example where the money factor is .00225, the math indicates the APR is 5.4 percent. You’ll probably need to get your salesperson to tell you what the factor is, as it is not required to be disclosed on the lease worksheet.

Now you can do quick research on finance websites to see where interest rates currently sit. Having a working knowledge of market interest rates will enable you to determine if the money factor/interest rate you are being offered is competitive or completely out of line.

Mileage Limit

The third item open for negotiation is the mileage limit. This is the maximum number of miles you can put on the vehicle before you begin paying a penalty. It makes sense to specify a mileage limit, because the lessor (the financial institution funding the lease) needs to have a good idea of the value of the vehicle when the lease is over. That value is the “residual value,” literally the value that is left, and it is often called just “the residual.” If you opt for a low-mileage lease—say 10,000 miles per year—the residual value will be higher than if you opt to include 15,000 miles per year, so the monthly payment should be lower. But if you underestimate the miles you will drive, you will end up in a situation where you will pay a per-mile penalty on the total over the agreed-upon limit.

“Customers typically overlook the mileage limit,” Fuller told us. “They sign up for 10,000 miles a year or 12,000 miles a year without ever thinking about how many miles they will actually drive.” That can prove to be a major mistake, as the penalty per mile can add up quickly.

Checklist

With the above in mind, here’s a quick checklist:

  1. If there exists a special deal on a car you want with the equipment you want that has an appropriate mileage limit and either no lease acquisition cost or a manageable one, you may want to proceed. You have won the lease equivalent of the lottery.
  2. If that is not the case, negotiate on the purchase price—the cap cost—as if you were going to buy the car for cash.
  3. Negotiate the interest rate (money factor) on the lease to a level appropriate to current market interest rates. During the negotiation process, be sure the calculations are always using one lease term—36 months, for example—so that you are comparing apples to apples. Compare interest rates and then examine the commensurate monthly payments.
  4. Make certain the mileage limit is a number you can comfortably live within even if your life changes. Give yourself some leeway without grossly overestimating the number of miles you will drive.
  5. Understand what the residual value of the vehicle has been set at in the lease contract. You don’t have much wiggle room on negotiating this number because it is established by experts in predicting residuals, but knowing it will help you understand the entirety of the deal. Also, when the lease ends you typically have the right to buy the car at the residual value.

While this is certainly more complicated than signing a vehicle lease on a car you instead intended to buy, simply because the payments were lower, but it’s a proven, smart strategy. Not only might you catch the salesperson and dealership sales manager by surprise, but you’ll undoubtedly save yourself some money.

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