Car Leasing Basics

As we covered in a recent article, leasing a new car can be a lot cheaper than buying a new car. However it comes with rules and principles that one should follow to get the best possible deal. This process can be very intimidating for someone new to leasing so here are a few things you should consider before going to a dealership.


1.  Select a car with High Residual Value


The lease payment is calculated according to many different parameters. The most important one is the residual value of the car at the end of your lease. (The residual value is another name for the salvage or resale value of a car)…

Start by choosing a car with a high residual value after 36 months. Anything over 55% gets us into more car for less money.

It is the remaining value of an asset after it has been fully depreciated.

In simple speak, it is the amount we can buy the car for at the end of the lease  and some cars have much higher residual values than other cars. This means when a car is durable, reliable (and desirable)… these cars sell for higher prices in the used-car market.

With leasing, we are rewarded when we drive these high-residual cars with lower monthly payments.

To give you an example, two cars that have a very similar retail price could have two very different lease rates. This is due to the residual values of the two cars that are very different.

The lender behind the lease actually determines the residual values on all the vehicles it agrees to “finance” through leasing. The dealer has no ability to adjust the residual value. If you read between the lines, this means that you cannot negotiate the most important parameter of the lease calculation. But don’t worry many other parameters can be negotiable.


2. The Capitalized Cost = the vehicle selling pricing


The Cap Cost is the vehicle’s selling price. This is maybe the second most important parameter of the lease calculation and the good news is that it is negotiable. You can check it by using tools like TrueCar or Edmunds. The main rule is that you should never pay the MSRP = the retail price of the car but the TMV (True Market Value). You should be at least aiming for the average price that other shoppers are paying for similarly-equipped cars in your area.
There are many ways to negotiate the selling price of your vehicle, the first one is to look for lease specials or special offers in your area. The second one is to shop around and ask many different dealerships for a quote. You should always ask them for the best price off the MSRP sticker price. This will give them the impression you are buying a car. But when you will go to their office to deal with the paperwork, you should ask to lease the car. The lease rate should reflect that selling price.
You should always make sure that the timing is right. Convertibles don’t sell well during Seattle’s gray, winter months, but four-wheel drive vehicles do. Also bear in mind that when gas prices go up, people demand more fuel-efficient cars and the values of trucks and SUVs go down.


3. Trade In Value


If you are trading in a car as a part of your lease deal, make sure you’re getting a fair value for it by calculating its value.

First you should look for an estimated value of your car. There are numerous Web sites where this information is available, including Edmunds.comAutoTrader, and the National Automobile Dealers Association, or check for similar cars being auctioned on eBay. If you have a CarMax store nearby, take your car there for a free appraisal.



4. Money Factor


The Money Factor is nothing else than the interest rate on a lease. The only difference is that it is expressed as a decimal number.

Your credit score will likely have a huge influence on the money factor. To find out what you are paying, take the money factor, and multiply it by 2400 — for example, .00250 X 2400 = 6 percent. Dealers sometimes mark up the money factor for additional profit. If you feel you are being overcharged, ask the dealer for a lease based on their “buy rate.”


5. Acquisition and disposition fees


Acquisition Fee: Sometimes called a bank fee or administrative fee, this is a fee that leasing companies charge to arrange the lease. This fee is typically between $395 – $895, depending on the vehicle and leasing company. Note that acquisition fees can be bundled into the monthly lease payment, or paid up-front.

The acquisition fee is not negotiable.

Disposition Fee. This fee is charged by the leasing company to cover the expense of cleaning up and selling the car after you return it at lease end. Most charge between $300 and $400. You normally won’t be able to avoid this charge unless you buy the car at the end of the lease — or, in some cases, lease another car of the same brand.


If you want to drive a new car every two or three years, leasing is for you but you might have to spend a lot more time negotiating. If you don’t like negotiating with dealers or if you don’t like the car buying process, we would recommend you to use a car broker service like Harvey Blake. If you think you can negotiate a good deal for yourself, then go for it but you will need to spend some time understanding the main basics of car leasing.
The best negotiation techniques is to shop with your brain not your heart. Spend some time online doing some research before going to the dealership. Look for lease specials, choose the right car with an high residual value and have an very good idea of the TMV (True Market Value) of the car you want.
Most importantly don’t hesitate to show the dealer that you have shopped around and that you are aware of the TMV. Also be prepared to walk away and look for a different dealer. You are not obligated to accept the dealer’s price, and because you would have done your homework, you’ll know immediately if they’ve given you a fair or unfair offer.

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