How to shop for a lease

Many consumers assume that the dealership is where both the sale of the car and the financing take place. We cannot stress enough the importance of separating these two items!

Your car dealer is simply a proxy between you and the leasing company. Typically banks and leasing companies (which operate the same in this case) work through dealerships to represent their financing because it is the most obvious place they can find new customers.

In order to create an incentive to dealers to represent their leasing products to customers, leasing companies pay dealers a percentage of the total funding as a commission. Dealers will often receive commissions ranging from 1 – 6% of the sale price of the car just for referring the financing business. This is of course rolled into your lease payment and paid for by you.

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Now that you know that the lease is a separate component of your vehicle transaction and that the dealer is likely to make additional money on this component, it’s time to search for your own financing under your terms, not theirs!

Before you begin shopping for your lease, though, you need to understand the mechanics of a lease. We covered the basics in the chapter entitled “Leasing Basics” where we explained terms such as money factor, term, and residual. If you haven’t read that section yet, we would recommend you do before continuing on in this section. You can’t shop for the best rates if you don’t understand the fundamentals of a lease.

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In the section entitled “Shopping for your Vehicle” we pointed out resources you could use to find a competitive price for your car. Remember that you must negotiate the sale price of your vehicle regardless of whether you lease or buy. Your final monthly payment will certainly be affected by this negotiation.

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Residual values are set by banks and 3rd party data information services such as ALG (Automotive Lease Guide). Generally speaking, you cannot negotiate these rates but you may find that different leasing companies offer slightly different residual values.

It is in your best interest to find the highest residual value offered with the lowest money factor. A high residual will decrease the amount of money you are paying during the life of your lease and leave the liability of the vehicle on the leasing company, not you.

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Out of all the elements of a lease, the money factor is easily the most negotiable. This is where consumers also find the most frustration because they do not understand money factors. One simple way to translate a money factor into a comparable interest rate is to multiply the money factor by 2400. For example, if you are presented with a money factor of .0025 you can multiply this number by 2400 and get a comparable interest rate of 6%.

This is where your dealer makes his money (well, that and the acquisition fee, but we will address that charge in a moment.)

In many cases the dealer can make more money on your financing than on the sale of your car – and you would never even know it!

Although financing programs differ, most dealers will receive between 1 – 6% of the final sale price of the vehicle as a commission for securing your leasing with a particular bank. So if your vehicle sells for $30,000 and your dealer is getting a full commission, he is earning $1,800 on the value of your lease alone!

When you are discussing financing with the dealer you will also need to keep in mind that the dealer is likely to connect you with the finance company that is in his best interest, not yours. There may be leasing companies who are willing to offer you better rates, but do not pay the dealer as much incentive in commission. Therefore the choices being presented to you are not necessarily the best out there, and most likely not the best for you. Because of this, it is important to do some of your own comparison shopping before visiting the dealer to know what your target rates should be.

A popular site that we like to recommend to customers to compare leasing payments and money factors across multiple lenders: LeaseCompare.com.

This company offers real-time access to money factor, residual and acquisition fee information for free and from multiple lenders. You can also apply for approval and get your lease fulfilled on-line without having to use a dealer in the process.

Be sure to use these calculators to get a good sense for how adjusting the term and sale price can affect your monthly payment. If you are concerned about working with a finance manager in a dealership, these are also great alternatives that allow you to make important finance decisions from the privacy and comfort of your own home, on your own time.

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You may find in your travels that there is a sharp difference in some lease programs over others even though the vehicle is exactly the same. Often the reason for this difference is that one of the lessors is the finance arm of a vehicle manufacturer.

Car manufacturers own automotive finance divisions to help finance the sale of their products. Because the automotive company is making money on the sale of the vehicle itself, they can usually create better incentives than an independent leasing company who does not make any money on the actual sale of the car.

Researching manufacturer lease programs is very simple. All of the vehicle manufacturers that we have seen offer finance calculators on their Web site, usually attached to some sort of vehicle configuration tool. In addition to special leasing programs, the manufacturers may also have special rebates available only on new cars (rarely are these incentives on “used” cars, though some do occur on models that are about to replaced in a new model year).

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If you look closely at your lease contract (or the research you’ve done on a lease) you’ll see a special line item called the “Acquisition Fee”. The Acquisition Fee is charged by the bank to cover the costs of initiating a lease, which is mainly clerical in nature.

The leasing company will make an Acquisition Fee available to the dealer with a little markup in most cases, so the $795 fee that you see on your leasing contract may only represent $395 of the cost applied from the bank, and $400 applied by the dealer as pure profit.

As you can imagine, the dealer is not going to discuss this fee with you at all, and he would prefer you didn’t bring it up. Not every bank allows for markup of an acquisition fee, but you can bet that your dealer is going to opt for the leasing company that does, regardless if it is the best option for you. You can protect yourself somewhat by asking to see what the bank’s acquisition fee is and what the markup on that fee is that is being charged. From there you have a leverage point to negotiate the final price of your lease downward a bit.

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Leasing a new vehicle is a great option if you are looking to secure a low monthly payment on the vehicle of your dreams. It affords you the opportunity to drive a new vehicle, which is typically fully covered by warranties, for much less per month than it would cost to buy the same vehicle. By leasing a new vehicle, you are able to choose the vehicle itself and the terms for the lease. Money will almost always be required up front in the form of down payments, security deposits, and/or acquisition fees.

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Leasing a used vehicle can be a good option, but it can also be a bad idea if you do not understand the process. It is a good idea when the vehicle is relatively new and in good condition. Little repair work will be necessary and the vehicle is likely still under factory warranty. If the vehicle is much older, though, or has any damage or problems, it is not a good option.

Be careful about leasing a used vehicle that is off warranty! The maintenance costs can add up very quickly.

With a used vehicle, maintenance costs and repair work become much bigger issues, as you are still financially liable for any damage and problems with the vehicle at lease-end. Another option is to simply assume an in-process lease on a vehicle. In-process leases are available on low mileage, late model vehicles, and no down payment is necessary.

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When you lease a vehicle, your payment is based on the value of the vehicle's expected depreciation throughout the course of the lease.

New vehicles tend to depreciate more over the course of a few years than used vehicles.

Thus, the payments on the new vehicle would be much higher than those for the used vehicle, as more depreciation must be paid off.

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