How To Get The Best Price On A Car Lease
When you walk into a dealership to lease a car, it’s real easy to be ripped off if you’re not prepared. However, with just a little bit of research beforehand, you can know almost exactly what your car lease should cost.
How does car leasing work?
When you buy a car, you are paying for the full value of the vehicle. When you lease a car, you are paying for the original value of the vehicle minus the value of the vehicle at the end (known as the “residual” value) of the lease term (most often 24, 36, or 39 months) plus some interest (known as the “money factor”).
Doing your research
It is important to go into a dealership knowing a few pieces of extremely important information.
- Invoice Price
- Residual Value
- Money Factor
- Approximate Monthly Payment (that you calculate)
M.S.R.P (Manufacturers Suggested Retail Price) & Invoice Price – Also known as the “sticker price”, the M.S.R.P. is the non-discounted purchase price for a vehicle. The Invoice Price is the actual cost of the vehicle for the dealer.
The difference between the M.S.R.P. and the invoice price represents the profit margin for the dealership. You can use a site like Kelly Blue Book to pick the specific vehicle and options you want, and then see the exact retail and invoice price for that vehicle.
When you lease a car, you negotiate a purchase price for the car, that is then the basis for the calculation of the monthly lease payment. It can vary depending on the dealership, but it is very possible to get a car at invoice price or just slightly above. This will significantly lower your monthly payment as compared to a payment based on full M.S.R.P.
Residual Value – Residual value is extremely important when leasing a car, because it represents the % of the car you will be paying for. If the residual value of a particular vehicle is 70%, it means over the course of your lease you will be paying for 30% of the car plus interest. If the residual value of a different, but similarly priced, vehicle was 60%, you would be paying for 40% of the car. My point is, just because the original price of two cars might be similar, their lease prices can still vary greatly.
The residual value is set by the car maker and it not negotiable.
Money Factor – The other important component is the money factor. The money factor is the interest you will pay over the course of a lease, so the lower the rate, the better your payment will be.
Like the residual value, the money factor is set by the car maker, and is not typically negotiable. However, some dealers will mark up the money factor by a slight margin to make some pure profit off your lease agreement. So, it is important to know what the “base” money factor is.
For example, BMW dealers have a tendency to mark up the standard BMW Financial Services money factors and just hope you don’t notice. The last time I leased a BMW, I walked in knowing this so I insisted they use the correct base money factor.
You can use a site like leasecompare.com to find out the current lease rates for various car makers. Below is an example listing for a 2011 BMW 335i. You can see the residual values and money factor rates for 24, 36, 48, and 60 month lease terms.
As you see, the numbers vary based on the length of the lease term. The residual also varies based on the number of miles per year included in your lease. The fewer miles you plan to drive, the better your residual value will be.
Estimated Payment – I know you might be a little overwhelmed at this point, and that is OK. You can use a lease calculator like the one on Lease Guide to get an idea of what your monthly payment will be, based on the criteria we’ve already discussed.
When calculating your lease payment, it is best to use a down-payment of $0, unless you are positive you want to put down a certain amount of money. Once you know a lease payment based on $0 down payment, you can roughly adjust it -$30/month for each $1000 you put as a down payment on a 36 month lease ($42 on a 24 month lease and $25 on a 39 month lease).
What about those lease ads on TV?
You’ll regularly see commercials on television for various lease specials. They are rarely worthwhile.
Problems with lease specials:
- The vehicle being offered is likely a very specific configuration that nobody wants.
- The dealer may only offer one or two vehicles at the advertised price.
- Often a low lease price is advertised, but when you read the fine print you’ll see a large down-payment is required.
Benefits of lease specials:
- If the brand is offering a rebate or lease incentive, you can use that to your advantage on top of what we’ve discussed above. If BMW offers a $2,000 rebate on a 3-series, that lowers your negotiating starting point by $2,000 and that is a good thing. The dealer will likely try to pretend that’s a discount they are giving you, when really it has nothing to do with the dealer.
Doing the deal
When you walk into the dealer, a few things are very important.
- Be very friendly and polite. You want to get off on a good foot with this person… you want them to like you before they realize you’re going to screw them out of part of their commission. Don’t worry, even if you get the car at invoice price, they still receive a base commission, so don’t feel bad.
- Don’t waste their time. As noted above, the salesperson will likely be making less of a commission than normal on this deal, so making it quick for them is in your favor.
- Know what you’re talking about, but don’t be a dick. There is a difference between knowing your shit and being an asshole. Rarely will you get what you want by trying to strong-arm the salesman.
- Don’t be afraid to walk away. The deal won’t always get done the first time you walk in. If they are reluctant to give you the price you want, say thank you and leave. Chances are the manager will stop you before you leave, or the salesperson will call/email every five minutes until you come back.
A few extra tips
- Dealers work on volume not just price. So, it is in their best interest to put you in a car even if they are not making much (or any) profit on it.
- The last week of the month is a great to car shop. By the last week of the month the dealer knows what quotas they need to hit… and by leasing a car during that time, you are helping them. So, they will be much more likely to bend on price.
- The first number is never the best number. Some car salesmen will be quick to give you some degree of discount and say it’s their “best price.” This is a lie. Their first price is never their best price.
- Dealers want to move cars they have in-stock. So, they will be more motivated to make deals as compared to a car they need to order. This can work in your favor, if you pretend to not be interested in what they have in stock, and then act willing to settle for it for the right price.
Post questions below and I’ll do my best to answer them.