Negotiating a car lease

The art of negotiating a lease starts with a complete understanding of what is negotiable! Very often customers do not realize that many factors contribute to their final lease price, not just the selling price. Dealers can often confuse customers with terms that do not make sense to most people. Here we will uncover the secrets to negotiating the best deal.

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Absolutely negotiable! The gross capitalized cost (“cap cost”) is the value of the vehicle that is agreed upon (the sale price). It does not include anything that you agree to pay for over the lease term (amortized amounts), such as fees, services, insurance, taxes and any prior money balance. If you do not negotiate the value of the vehicle, you are losing money.

To get a sense for what the cap cost should be, see the section entitled "Shopping for your Car" to determine what a fair cap cost looks like. Your cap cost is one of the leading drivers in reducing your final lease payment, so it's important to negotiate the lowest possible cap cost.

Be sure to negotiate the cap cost separately from the lease price. The lease price should automatically change when you negotiate the cap cost.

You should be able to negotiate the same cap cost for a lease as you would for a purchase. Don't let a dealer tell you that the pricing should be different.

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Typically, a lease begins at 36 months and can range up to 72 months. The most popular leases are between 3-4 years. Dealers will often try to get you into a longer lease in order to lower your payments. If a low payment is a crucial element, this option is alright to consider. Just remember that the longer your lease, the larger your overall liability is. It is typically a smarter decision to choose a shorter lease if you can financially afford to.

The term is set by you, so while it is not "negotiable", it is absolutely your decision.

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When dealing with leasing you will most likely come across a different variation of an interest rate called a Money Factor. The Money Factor is just a simple calculation derived from the interest rate. As discussed in the "Shopping for your Lease" section, money factors are set by the lending institutions and are not easily negotiated.

However it is important to know that if you are going through a dealer, he may try to sell you a higher money factor than what you should be paying. The Money Factor is one of the most misunderstood terms in leasing and yet is one of the most important!

Financial institutions provide dealers with incentives to encourage use of their programs by offering a small percentage of the money factor back to the dealer. The difference between the money factors your bank charges and the money factor you pay could add up quite significantly.

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The easiest way to determine your Money Factor is to take the Money Factor number and multiply it by 2400. This will equate to a similar Interest Rate like you would see on a loan. While this is a good approximation of what you will be paying in interest, you need to remember that a money factor works slightly differently because of the structure of a lease. (For more information about how money factors work, see “Leasing Basics”) Typically a Money Factor will look something like this: .00250. If you multiply this Money Factor by 2400 you will get the equivalent interest rate:

.00250 multiplied by 2400 = 6%

OR you can work backward to determine your target Money Factor:

6% (or just the number 6) divided by 2400 = .00250.

If you are uncomfortable with this math on the spot with the dealer, you should consider waiting until you get home to make your final purchase decision. The dealership environment is a difficult place to make a sound business decision.

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If you are shopping through a dealer for your financing, you are probably going to pay a premium above the money factor your bank is actually charging.

The dealer is in business to make money like any other business, and this is a revenue center for him. It is important for you to know that if you are going to use the dealer, you are paying more than you have to. The dealer offers convenience above all else, but beyond that you can easily secure your own financing. (See "Shopping for your Lease")

Your focus for your money factor should be either getting the best rate you can find among lenders or to find the best rate among lenders and require the dealer only receive a small markup after that. If you would like to get a sense for actual money factors in real time, we suggest you visit LeaseCompare.com, which provides real-time quotes for leases including money factors, residuals and associated costs of a lease. (www.leascompare.com)

For more information about finding the best lease, see the section entitled "Shopping for your Lease".

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If you are shopping through a dealer for your financing, you are probably going to pay a premium above the money factor your bank is actually charging.

The dealer is in business to make money like any other business, and this is a revenue center for him. It is important for you to know that if you are going to use the dealer, you are paying more than you have to. The dealer offers convenience above all else, but beyond that you can easily secure your own financing. (See "Shopping for your Lease")

Your focus for your money factor should be either getting the best rate you can find among lenders or to find the best rate among lenders and require the dealer only receive a small markup after that. If you would like to get a sense for actual money factors in real time, we suggest you visit LeaseCompare.com, which provides real-time quotes for leases including money factors, residuals and associated costs of a lease. (www.leascompare.com)

For more information about finding the best lease, see the section entitled "Shopping for your Lease".

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Next to your Capitalized Cost ("cap cost") the biggest leverage item in your lease is your Residual Price. The Residual Price is the amount the car is expected to be worth at the end of the lease. The purpose for this price is to determine how much the vehicle will depreciate during the term of the lease so that you can determine how much you owe while you are making payments.

Here's an example of the same car with two different car payments based on nothing other than the residual price difference:

Notice that the Monthly Payment for Vehicle A is over 26% higher than the payment for Vehicle B. The difference is the Residual Price.

Dealers do not necessarily set residual prices. These are often set by banks that derive these numbers from statistics and reports on the values of vehicles when they are returned from leases. Companies like ALG (Automotive Lease Guide) provide these values to dealers and banks that use them as a reference point for designing leases.

You have more leverage in changing your residual price if you work directly with a leasing company versus through a dealer. The dealer will rarely present you with options on your residual price. Choosing a higher or lower residual price.

For most people, choosing the highest residual price is of no consequence to them - at the end of the lease they simply turn your vehicle into their leasing company and walk away. At that point the bank has to contend with the value of the vehicle and whether or not the residual is higher or lower than it should be.

For others who may consider buying the vehicle at lease end, a lower residual price makes the vehicle itself sound more affordable. But in reality, the consumer is just paying the difference during the term of the lease instead of at the end of the lease. It's the same amount of money, just over a different time period.

Our general recommendation would be to find the highest possible residual price that you can. Again, some lenders may adjust their residual prices to suit their own needs. Among lenders, captive leasing companies (leasing companies owned or operated by automotive manufacturers) are most likely to do this in order to drive more vehicle sales. They can afford to create higher residuals because they have the benefit of making more money in the sale of the vehicle. Independent leasing companies (those not owned by a manufacturer) do not make money on the sale of the vehicle, and therefore need to be more careful about setting higher residual values.

With a high residual, your lease end buyout price will of course be higher. We recommend a higher residual because you may or may not buy the vehicle at the end of the term, but you will certainly make the payments during the term. A higher residual gives you more flexibility during the term of the lease.

For more information about researching residuals and lending institutions, see the section entitled "Shopping for your Lease".

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Obviously you want to find a great deal, but negotiating a great deal starts with understanding the few key areas that will affect your lease. By trying to negotiate the wrong items you may confuse yourself and allow the dealer or the leasing company to take advantage of you.

Let’s review what factors each entity controls:

Contrary to popular belief, you can see the dealer only controls one of the 5 factors that make up your lease deal. Because the dealer often represents the leasing company, consumers believe he controls the rates a bank charges or other factors, like mileage allowance. By knowing where the decision points are being made, you can focus in on the only contributing factor the dealer really controls – the capitalized cost. You can then work either directly with the leasing company or manage your Money Factor and Residual through the dealer.

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OK, so you've done all your homework. You think you've found a great deal and you're excited about your vehicle. How do you know for sure you've found the best deal?

The best way to see what other people are getting is to see what other leases have already been written. Of course some of these may be bad leases to begin with, but they reflect the reality of what people are paying. Earlier we looked at "Shopping for your Car" to determine what the best capitalized cost is.

At Swapalease.com, we see thousands of in-market leases every month from every bank, dealer and vehicle available. Typically the best deals on the Web site are either situations where a customer put a lot of money down to get their payment down, traded in a vehicle that had positive equity in it, or is offering their own cash to subsidize the lease payment. Regardless of how they occurred, these still represent available leases that are on the market today. Often your best benchmark is to try to beat the lowest payment and terms on a similar vehicle.

Here are some other resources that you may use to benchmark your deal:

• Swapalease.com
• Edmund's True Market Value
• Kelley's Blue Book
• eBay
• Classifieds

Be sure that you are comparing the same vehicles, terms and trim-levels to be sure you have accurate comparisons.

Back to the top

OK, so you've done all your homework. You think you've found a great deal and you're excited about your vehicle. How do you know for sure you've found the best deal?

The best way to see what other people are getting is to see what other leases have already been written. Of course some of these may be bad leases to begin with, but they reflect the reality of what people are paying. Earlier we looked at "Shopping for your Car" to determine what the best capitalized cost is.

At Swapalease.com, we see thousands of in-market leases every month from every bank, dealer and vehicle available. Typically the best deals on the Web site are either situations where a customer put a lot of money down to get their payment down, traded in a vehicle that had positive equity in it, or is offering their own cash to subsidize the lease payment. Regardless of how they occurred, these still represent available leases that are on the market today. Often your best benchmark is to try to beat the lowest payment and terms on a similar vehicle.

Here are some other resources that you may use to benchmark your deal:

• Swapalease.com
• Edmund's True Market Value
• Kelley's Blue Book
• eBay
• Classifieds

Be sure that you are comparing the same vehicles, terms and trim-levels to be sure you have accurate comparisons.

Back to the top