So, you want to lease a car. While many people tend to only be drawn in by an attractive monthly payment in an advertisement, a good lease deal can be somewhat complicated. And first warning, the advertised lease deals are generally based on a fairly entry vehicle, which likely doesn’t exist on the dealer lot, and typically requires a substantial down payment (not something we’d advise on a lease).
Leasing can be attractive, because for a given monthly payment, a similar lease payment generally gets you a more expensive car than an average loan payment of similar magnitude. In a lease, you’re almost always going to be in a new car (although used car leases are starting to appear). But you’ll almost always have monthly payments. You’ll generally always be covered by a warranty for any major issues, but you’re often still responsible for typical standard routine maintenance.
Dealers will typically want to get you to offer up what your monthly budget is, and then they’ll offer up what they can give you. While simple, this is a bad way to negotiate a lease. As you’ll see, there are many different facets of a lease that a dealer can move around to mask the actual deal.
To get the best deal, a customer must arm themselves with information, and understand the mechanics of a lease.
First, the mechanics. If you’ve bought a car before, you negotiate the price of the car itself and then you determine what kind of loan/financing you qualify for. Average is a 5 year loan. A down payment can directly help bring that monthly payment lower, as well as pay down your balance. A lower interest rate or a longer term (how many years/months the loan is) also helps determine the monthly payment. A lease isn’t too different, but there are some fixed points.
From the 30,000 foot view let’s put it this way. A lease looks at the difference between how much you buy a car for and how much a car is expected to depreciate in the first ____ months (depending on how long you want your lease to be – commonly 24 or 36 months) given that you expect to drive _____ miles per year (this is generally anywhere from 7,500 miles a year to 15,000 miles a year). This expected resale value after this set time and mileage is called the residual value. A residual value is often expressed as a %, and that gets applied against the full sticker price of the car, even if you don’t buy it for that amount. The difference is split over the months of the lease and there’s an interest element, in a lease it’s called the MF, no not that MF, it’s the money factor.
While the residual value is pretty set from the bank running the lease for a specific term and mileage allowance, the money factor is one area that the dealer often pads the interest level. Of course there may be different money factors based on your own credit tier. The money factor is shown as a small decimal value, (example: 0.00150). Multiply that number by 2400 to get the rough interest rate equivalent (0.00150 x 2400 = 3.6% for our example).
That brings us to our next point: You absolutely should still understand how much the car itself is being discounted from its listed sticker price. In a lease, this is often referred to as the capitalized cost.
Determine if there are any incentives/rebates that you are eligible for that can be applied for a lease. I HATE when dealers apply every single incentive/rebate to their “internet” price to make it seem like an amazing deal, only for you to have to slowly peel those back. Oh, you don’t qualify for the military/new grad/recent parolee trifecta with a combination of loyalty and conquest?? They even combine discounts that can’t be combined! But I digress.
Some incentives are specific for lease customers and some can be specific for cash buyers and some are specific for buyers that do a loan through a preferred bank. Many electric vehicles and plug-in hybrid vehicles may have substantial lease discounts, as some auto companies leverage the federal tax rebates on those vehicles and can pass all or part of it through to the lease customer.
There are fees associated with leases, you’ll still pay for things like license plates and registration. There’s also an acquisition fee (there’s also almost always a disposition fee at the end of the lease).
The next mechanical piece of a lease is if you’re going to put any money down. I typically don’t recommend putting money down on a lease. Not in the traditional sense. I personally like to pay fees and any initial taxes up front, because I don’t like paying interest on those items. You may be asked to pay the first month up front as well. I associate these with “drive off” fees rather than a down payment. A down payment would reduce the capitalized cost we talked about earlier, and yes would bring the monthly payment down, but you’re essentially just paying a chunk of the depreciation off. It doesn’t mean it’s a better deal. Also, if something were to happen to the leased car (crash where the car is totaled), that money that you paid down is gone.
As a possible alternative to the down payment, look into whether the car company you’re interested in allows for security deposits, or multiple security deposits, sometimes referred to as MSDs. These security deposits, each equivalent to roughly 1 monthly payment, essentially buy down the interest rate or money factor by a set amount. By lowering the interest rate, you save on the monthly payments. Also, at the end of the lease, you get these MSD’s back. And despite the name, if something were to happen to the car that ends in a total insurance loss, you STILL get these back. Some car companies allow as many as 7 to 10 MSDs. So this can still be a substantial amount of money that you need to come up with at the start of the lease, especially if you’re also going to pay the initial drive off costs, but the lowered monthly payments and the fact that you get this money back can make it worthwhile.
To recap on a lease:
- Negotiate the discount of the car itself
- Determine all applicable incentives and rebates
- Look up residual value and money factor information for your specific mileage and term.
- Find out if security deposits/MSDs are allowed and if they are something you’d consider
- Run scenarios through a lease calculator to see what ballpark monthly payments and total money due at signing (drive off + MSDs) would be.