Whenever people find out that in many cases I recommend leasing a car (instead of purchasing one) they are surprised. As a result, I thought for this blog I would walk people through my reasoning and provide some insider tips for the leasing process.
Leasing a car has several benefits. First, car payments through a lease are often lower than a monthly payment for financing and ultimately trying to purchase a car. This is because with a lease you are paying for the depreciation of the car during your lease term instead of the cost of the whole vehicle. Second, you can drive something newer with more features. Third, you have none of the hassle and headache about maintenance and repair. Most leases include all the maintenance and come with some type of roadside assistance. Unless you cause an accident, you will most likely not be responsible for any defects or parts that break down and need repair. Four, leasing gives you the opportunity to efficiently switch brands and models every couple of years. Here are five tips to help you through the process:
Tip 1: Familiarize yourself with the proper vocabulary.
- Dealer’s Price / Capitalized Cost / InvoicePrice / “Sticker” Price is how much for which the dealership would sell the car.
- Residual Value / Residual Price is how much the car will be worth at the end of your lease.
- Estimated Depreciation is how much the car will decrease in value from the time you drive it off the lot to when you turn the car back in at the end of your lease. This is the number that is going to determine your base monthly payment prior to interest.
- Lease Factor / Money Factor is the interest rate for your lease.
Tip 2: Know the Residual Value prior to negotiation. For any car you might be interested in leasing, know what the residual value for that car will be in 2 or 3 years so that you can provide support for your number at the dealership. You can find a lot of calculators online like here or consult the Kelley Bluebook. You will most likely have to estimate the number of miles (most leases assume you’ll drive 10,000 to 12,000 miles a year) to make this calculation. Ask yourself honestly how many miles you drive on average a month and make sure you use this number in the estimate. You don’t want to overestimate because that will increase your lease payments. Knowing the residual value in either percentage or total value will give you a leg up and give you an advantage.
Tip 3: Set a favorable Dealer’s Price. Never say the words, “I’m here to lease a car” before you negotiate the dealer’s price. Like determining the residual price, there are websites online where you can research this figure. You want the lowest possible dealer’s selling price because this is going to determine how much you’ll pay per month (and a lower dealer price, higher residual value means the lowest possible payments for you). The dealer wants to establish the highest selling price as possible, so having figures for your negotiation will only help support your argument. Establish the most favorable number for the dealer’s price. Then, indicate you are interested in leasing and start negotiating the residual price.
Tip 4: Needs, Wants, and Expectations. Prior to a trip to the dealership, you should figure out your needs vs. wants. Needs are your “musts” or “deal breakers” whereas wants are your “preferences” or “wish list.” This creates your expectations. Do you need an SUV or do you want an SUV? If you need to be able to fit two car seats in the back, then an SUV might be easier than a car. Do you need all-wheel drive or do you want it (perhaps you live in an area where it often snows and rains)? Do you and your partner constantly bicker about the temperature in the car? If so, then dual climate control might be more of a need than a want. How important is the sound system? This might dictate whether you add a car with a technology package to your lease. Don’t rely on the dealership to create this list because it’s to their advantage to convince you everything is a need. Create your expectations before you set foot on the lot.
Tip 5: Interest Rates are Flexible and Negotiable. This is where it is going to pay to shop your competition. Don’t accept the first interest rate the dealership gives you, instead call the finance managers at competing dealerships to find the best interest rate available.
Bonus Tip – Don’t forget to add all the one-time fees into your calculation. There will most likely be a security deposit, acquisition fee, and disposition fee possibly a registration and other miscellaneous costs. Always ask to see if these can be waived or reduced and compare leasing companies. Some companies charge $300 in fees, but others may charge more than $650.