So you’ve decided you’re going to go ahead and enter into a new car lease. Getting a new car can be very exciting. But in order to get behind the wheel and drive off the dealer’s lot, you need to get through negotiating with a car salesperson. If you’ve done this before, you know how uncomfortable this can be. Some may feel very confident with the whole process. But for many, it’s a stressful experience.
Leasing is a very popular way to acquire a new car these days. Although it may not be for everyone, it does have many benefits. See Rent or Buy? How To Choose The Best Option For You for more information on the pros and cons of leasing.
Here we will focus on tips to properly negotiate a car lease. Some of the principles discussed, however, may also be applied to negotiating a car purchase. We will also take a look into how to calculate what your approximate lease costs should be based on the value of the car.
How do you know what to say? Is the dealer’s offer a good one? What should you counter offer? Can you possibly get a better deal than what is initially offered? Let’s look at some things you can do to save some money.
You Most Likely Should Not Take The Dealer’s First Offer
This may be good advice for any sort of negotiation. But it is especially useful when negotiating a new car lease. Obviously the dealership is in business to make money, and their salespeople are often experienced and savvy. Some will not budge or negotiate from the initial offer they make to you. But that’s not a good way to get a deal done. So because they want to make sales, the vast majority will be open to negotiation.
There are factors that may make a dealer or salesperson more willing to negotiate with you. For example, the dealership as a whole may be having a slow month. Or the particular model car that you are interested in isn’t exactly flying off the lot. You may not be aware of these situations ahead of time. However, you can usually get a sense of a salesperson’s willingness to negotiate once you start throwing out some counter offers.
If you find yourself dealing with someone who is not willing to negotiate, you have options. In many parts of the country, you will have several auto dealerships to choose from. Competition is great for the customer. There may even be multiple dealers selling cars from the same company within a short drive in some areas.
So go to another dealer and see if they will be more receptive to negotiating a more attractive car lease agreement. Alternatively, you can come back to the same dealer you previously visited with and deal with a different salesperson. You may or may not get the same results.
Look Out For Unnecessary Extra Fees and Add-Ons
Sometimes all the fees are transparent and reasonable in the initial phase of the negotiation. You feel good about the way things have gone up to that point. Then you typically go into a separate room with the finance representative.
Here is where you are supposed to iron out all the final details of the car lease deal. This can include reviewing the contract and any potential credit issues, and discussing any additional services or add-ons you may wish to purchase.
But this is also where the dealer sometimes attempts to squeeze in an extra fee or two into the contract. A common one is an extra “delivery” fee, or “dealer prep fee.” With regard to any such fees, you must recognize them and insist that they be removed. You must be willing to walk away from the deal otherwise.
The representative will also offer add-on services or products on which the dealer makes a good profit. But these are things that you may not necessarily need or want. Or that you may be able to get elsewhere for a lot less.
This can include offerings such as key replacement coverage, dent or scratch protection, or maintenance agreements. It is usually best to decline such offers. Otherwise, your monthly payment can shoot up significantly. However, the ultimate decision is up to you. If you must have what is offered, at least negotiate a price that is palatable to you.
So you must be cognizant at this stage in the leasing process. Otherwise you may undo the good deal you thought you had already negotiated.
Perform a Rough Estimate of What You Should Pay For The Auto Lease
One critical aspect of a successful negotiation is knowing what a reasonable cost would be for the car lease you are considering. The cost of the lease will generally be the total amount of your monthly payments, plus the amount due at lease signing.
Computing your own estimated cost can allow you to “sanity” check any numbers the salesperson or finance representative may throw your way.
You will likely not go over every number discussed here with the sales agent. But you will know what the cost should be, given the numbers you plugged into your calculations. This way you have base numbers to work with.
If an offer seems way out of line, you can ask why it is so high. Is the sticker price too high, the money factor, etc. You will know the lingo and can therefore understand better during the negotiations.
MSRP and Sticker Price
Generally, the window sticker (aka Monroney label) price is a good place to start with your calculations. The sticker price is generally the Manufacturer’s Suggested Retail Price (MSRP) plus a destination and handling fee. This fee can be around $1,000.
It’s important to understand that whether you are buying or leasing a car, the dealer is selling it either way. The only question is if the sale will be to you (buying) or to the leasing company (leasing). When you lease, the leasing company is effectively purchasing the car from the dealer, and then leasing (renting) it to you. So the starting point of the negotiations will be the price of the car regardless.
Sticker price can also sometimes include manufacturer option packages such as an automatic transmission, sun-roof, etc. Sometimes you will also see a separate sticker next to the Monroney label, which lists dealer add-ons. These add-ons help the dealer make a greater profit on the transaction. This can include tinted windows, alloy wheels, floor mats and splash guards, alarms, wheel locks, and other anti-theft devices, etc.
If you do not want such add-ons, you can request that they be removed if possible and practical. Otherwise, you can request to see another vehicle of the same model without these extra features. Alternatively, you can negotiate a price which does not include the cost of such add-ons. Lastly, you can visit another dealer if necessary.
Dealers Can Sell Above or Below the Sticker Price
Dealers can base the car lease on an amount greater or less than the sticker price. The popularity of the car you are looking to lease can be a determining factor in this regard. But you should usually be able to get a few percentage points lower than the sticker price.
Also keep in mind that the invoice price often serves as a floor when negotiating the price of the car. The invoice price is the amount for which the dealer purchased the vehicle from the manufacturer. However, car models where the manufacturer offers rebates and incentives can potentially sell for less than invoice.
You may be able to find the invoice of a particular model car on a website such as Edmunds or J.D. Power. Some customers ask the dealer to see the invoice. However, the dealer is not required to show it to you.
Computing The Monthly Payment
For purposes of computing an estimated car lease cost, a quick online search can provide you with the MSRP of the model car in which you are interested. Add $1,000 to this figure for destination and delivery charges to get an estimate of the sticker price for the base model. This estimated sticker price is a good place to start with your calculations. You can then also discount this number a bit to account for a lower negotiated price.
There are many websites which provide the MSRP for different model cars. Popular such sites include Kelley Blue Book, Edmunds, and TrueCar. Some also provide average selling and invoice prices. This can help you determine what a good counter offer may be to the original sticker price of the car (which is usually the starting point of negotiations).
Step 1 : Compute the Gross Capitalized Cost
Start by computing the Gross Capitalized Cost as indicated below.
Gross Capitalized Cost = Agreed Upon Value of Vehicle + Other Items To Be Paid Over The Lease Term
The agreed upon value of the vehicle will be the estimated negotiated sticker price. You can also assume that any other items such as registration and other fees and costs will be paid at lease signing.
Step 2: Compute the Adjusted Capitalized Cost
Now use the Gross Capitalized Cost from above to compute the Adjusted Capitalized Cost.
Adjusted Capitalized Cost = Gross Capitalized Cost – Capitalized Cost Reduction
Capitalized cost reduction is typically your cash down payment. However, it can also include the value of a trade-in (negotiable) or a rebate.
Step 3: Compute Depreciation and Any Amortized Amounts
The next step requires an estimation of the residual value of the vehicle. This is generally an estimate of what the car will be worth at the end of the lease term due to depreciation.
Residual value is typically 45 to 65 percent of the original sticker price. The higher this value is, the less you will pay for the lease. The baseline percentage for each model car is based on industry standards. Most leasing companies use the Automotive Lease Guide (ALG) as a benchmark starting point in setting their residual value.
Each leasing or finance company may have a different value for a given car model. The term of the lease and the allowed mileage per year will also affect this amount. You may be able to find an approximate estimate of the residual value for a car with an online search.
Cars with higher than average residual values will often be touted on their company’s website. Or they may be featured in an article of the highest residual value vehicles, for example. Alternatively you can call a particular finance department and ask for the residual rate of a particular car.
Depreciation and Amortized Amounts = Adjusted Capitalized Cost – Residual Value
The amortized amounts include any fees or costs which are not paid up front but instead are included in the Gross Capitalized Cost. As such, they will be paid over the lease term as part of the monthly payment. This can include items such as the acquisition and documentation fees, and any optional service contracts, for example.
Step 4: Compute The Car Lease Monthly Payment
Finally, in order to compute the total of the base payments, you must add a rent charge to the depreciation. This is basically the interest you pay to the leasing company on the money they used to purchase the vehicle you are leasing.
The interest rate is converted to a “money factor” and applied to the sum of the adjusted capitalized cost plus the residual value. This gives you the amount of interest (or rent charge) per month. Multiply the result by the term of the lease in months to get the rent charge for the entire lease term.
Note that the money factor is computed as the percentage interest rate divided by 2400. So a 3% annual rent charge would be stated as a .00125 (monthly) money factor.
The money factor is dependent on market auto loan interest rates, as well as your FICO credit score. Promotional rates may also be available to those with good credit. The size of the down payment (capitalized cost reduction) may also affect this rate.
Keep in mind that the rate can vary by finance company and car model, and is somewhat negotiable. You can use the average going market rates as an estimate. Alternatively, you can contact the finance company and ask for their rates.
Rent Charge = Lease Term x Money Factor x (Adjusted Capitalized Cost + Residual Value)
Now add the Rent Charge to the Depreciation and Amortized Amounts to get the Total of Base Monthly Payments.
Total of Base Payments = Depreciation and Amortized Amounts + Rent Charge
Then divide the Total of Base Payments by the number of months in the lease term to get the base monthly payment.
Base Monthly Payment = Total of Base Payments / Number of Months in Lease Term
Finally, add a sales tax to the base monthly payment as applicable.
Monthly Payment = Base Monthly Payment x (1 + Sales Tax Rate)
The remaining step in figuring the cost of the lease is to compute the amount to be paid at lease signing.
Amount Due At Car Lease Signing
The amount due at lease signing typically consists of the following:
- Capitalized Cost Reduction (cash down payment)
- First monthly payment
- License, Title, & Registration Fees – You can lower the registration fee by transferring plates from your old car.
- Vehicle Acquisition Fee – Also called a bank fee, this is an administrative fee charged by the leasing company for setting up the lease. It typically varies from about $400 to $1,000 depending on the company and the car in question.
- Documentation Fee – This is a dealer fee for the preparation of the paperwork. Some states limit this fee by law, but others do not. It can be as low as $75, or as high as a few hundred dollars. If it’s more than about $100, you should probably negotiate it down. Or you can make up for a high documentation fee elsewhere in the negotiations.
- Sales/Use Tax – Sales tax varies from state to state. Most states only charge sales tax on the down payment and the monthly payments. But a few require it on the entire vehicle price. Also, most states allow the tax to be paid over the lease term with each monthly payment. Some states, however, require it be paid up front at lease signing.
Other Things To Consider
Note that besides the Capitalized Cost Reduction and the first monthly payment, other fees or costs may potentially be included in the calculation of the Gross Capitalized Cost instead of being paid up front. To the extent they are, they will be paid over the term of the lease as indicated above in Step 1.
Also, there is usually a Disposition Fee due at the end of the lease. This fee usually ranges from $200-$500. The fee is used to defray the cost of cleaning and otherwise preparing the vehicle for resale. However, you can avoid this fee if you purchase the vehicle at lease termination, or if you lease another vehicle from the same finance company.
Sample Car Lease Calculation
Negotiating a new car lease does not have to be stressful and intimidating. First it helps to know how the car lease cost is determined. Then you can “run” some numbers for the vehicle(s) which you are considering. This can serve as a guide in helping you to decide what is a good deal. Then you can walk into the dealership confident and ready to negotiate.