I have reverse engineered the car lease so I could get an unbelievable deal and thought it could help you too. The key for me to go in to the dealership and come out confident is to know what I am doing. Below I will tell you what to focus on and what not to when negotiating. I will also explain the dizzying array of car lease cost components. This knowledge enabled me portray confidence when discussing with the dealer, helping me to get a great deal. It also avoided that I am getting hoodwinked when looking under the hood feeling. Saving thousands is as easy as knowing the cost components and where you can trim - for example, negotiating $75 per month off of a 3 year lease saves you $2,700 - I mean that is like free gas for a year, a nice gift for yourself, and/or more contribution to a savings account!
Let's get started...
1. Understand Where to Start From
Going in to a car dealer and telling them my monthly budget upfront -- such as, "I want to pay $450/month all in" -- can be like handing them a gift. With my budget in hand, the dealer can adjust different variables to structure a deal that may not be to my benefit. For example, they may offer a 39 month lease rather than a 36 month lease all in the name of getting it down to my $450/mo amount. In reality a 36 month lease may have worked for them at $450/mo. Just as if I was purchasing the car, I negotiate on the price of the car first which is the best way to reduce my overall lease costs. Let's take a closer look at the vehicle price.
First, I needed to understand the terminology around the different prices being offered. This is important to ensure I was negotiating from the right price. If you can, find or make assumptions on the Dealer Cost and negotiate up from there. Don't negotiate down from the MSRP.
2. Know What to Negotiate on
Second, the price I negotiate can be vastly different from the agreed upon price which is also known as the net capitalized cost or if you are cool: net cap cost. The agreed upon price includes the negotiated price but also other costs. The agreed upon price contains all the costs I will finance as part of the lease minus down payment type costs. So when negotiating it is easier to start clean by just talking about the cost of the car from the first chart above. If negotiating an agreed upon price, there are ways for the dealer to bring down my monthly costs most likely by me paying for it up front. I like to get the price of the car down as much as possible and finance as few costs as possible while at the same time pay as few costs up front as possible.
Also to mention here I know some people like to turn their car in early to get the newer model and think that there is no cost to that. As in the chart above, any loan balances from a previous lease are just add to the agreed upon price of the new car and spread throughout the term of the new lease.
3. Don't Forget About These One Time Costs
Next, there are some other one time costs that will part of the costs needed to drive the car off the lot. Some of these fees are negotiable too. Dealers can make up for some of the negotiated costs here so I would ideally try to find out what is the standard that is typically charged so the dealer doesn't go off script.
4. What I am Actually Paying Every Month
When I lease a car, I am basically paying the owner (the leasing company) of the car for the amount it depreciates (AKA: losing value) every month plus a fee for borrowing someones money. The depreciation fee is not a random number...the leasing company looks at the agreed upon price of the car and subtracts what is assumed to be the value at the end of the lease. So in short I am paying each month for the loss in value of the car, which is fair in concept. That assumed value of the car at the end of the lease is called the residual value and this is actually one of the first things I think about first when my objective is to optimize costs. Here is why: cars or brands that typically have lower residual values can mean that there is more loss of value from the agreed upon price. Doing the math in this case (agreed upon price minus residual value) means you will simply have higher lease payments (AKA: the leasing company has more depreciation in the same amount of time for you to cover). Also to mention as with most loans, the better the credit score the more advantageous it is for the financing fee - basically when you have good credit the lender can trust you more and this will be reflected in the how much they will charge you to borrow money (via the money factor variable). The lease company may not always disclose the money factor calculation (meaning you may be charged more for financing that you probably should be) so it could be worth getting an outside quote to compare.
5. Total Costs Don't End When You Sign the Lease
These costs are pretty self explanatory. Regarding the excess mileage penalty, every now and then I like to check in and track my mileage throughout the lease against the amount of total miles I signed up for on the lease. I break this down to a monthly value to see how I can adjust my driving so if possible I will not exceed my mileage limits and pay overage penalties. If I have an overage, I know for next time I will need to consider more mileage. When figuring out how many miles I need, I do some simple math to calculate how many miles it is to drive to your work each day there and back (multiply that by # of work days in a year). I also throw in a few road trips, weekly trips for errands, always welcome visits to the parents and inlaws, and other stuff, etc.
6. Costs Actually Incurred to Leave the Dealership With my Car
So with all of the above numbers, how much do I actually need to give the dealer day one? Good question (thanks Dan) and the answer is that it isn't just the down payment (assuming you have one). Looking at the charts above it is a combination of:
- Down payment
- Costs mentioned in the Other One Time Lease Costs chart
- At least 1 lease payment (see the Lease Payments chart above)
- And a vehicle registration fee
So when the ad says $3,000 down payment I know I will be probably putting my credit card down for more than that if any incentives don't offset these extra costs.
7. Cheat Sheet
Below is a cheat sheet you can print out - it is a holistic picture connecting all of the dots above. It has all of the above information on it plus more, such as a guide to which information you should know to calculate your costs, what is negotiable, and what are the fees you will pay to drive the car off the lot. I printed this out and actually had it in my back pocket when I went to the dealership!