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How car leasing works

A step by step guide to how car leasing works

Choose the right car or truck to lease

You can lease just about any car or truck, but if you don’t know how car leasing works or choose a vehicle with a low resale value, you’ll pay a higher lease payment. Every new vehicle depreciates the minute you drive it off the lot. You pay for that depreciation. So you’ll save money if you choose a car make and model that has a high resale value. European cars like Audi, Mercedes, BMW hold their value very well for several years, but plummet in vale as they near 100K miles. If you want to drive one of those luxury cars, find the “sweet spot” of ownership time and miles and fashion the lease so it ends before resale begins to drop rapidly. Find that information at Edmunds.com and truecar.com. Japanese cars like Honda, Toyota, Mazda, Subaru tend to hold their value for longer time periods and higher mileage.

Next, choose a car or truck with a manufacturer’s warranty that stays in effect during the entire lease. You’re responsible for all maintenance and repair costs during the lease period. If the vehicle is covered by a 3-yr warranty but you’re leasing for four years, you’re at risk for repairs during that fourth year. The same applies to maintenance. Many car makers offer free oil changes and maintenance during the warranty period. That will reduce your out-of-pocket costs.

Negotiate the best price on the vehicle

In many ways negotiating the price on a lease is no different than negotiating the purchase price of a new car. If you don’t like haggling on a purchase, you won’t like haggling when you lease. But there’s an easier way. Just go to Edmunds.com and select the car you want to lease. Edmunds will show you the sticker price and tell you what most people are paying in your area for that vehicle. Print out that information. Then contact the Internet sales person by email (don’t walk in the front door and talk to a floor sales person) at a nearby dealer. The dealer’s Internet salesperson can sell at lower prices than the retail sales people. Have the salesperson search their inventory for the color and options you want and get their lowest selling price (yes, selling price). Factor in any car maker rebates to arrive at the final selling price. That becomes the vehicle’s capitalized cost or “cap cost”. Once you’ve nailed down the selling price, THEN ask about their leasing rates.

Negotiate the acquisition fee

leasing acquisition feeCar dealers act as agents for the leasing company. The leasing company can be the financial division of the car maker or an independent leasing company. Each leasing company charges a different acquisition fee and sometimes the selling dealer marks up the price. If so, the price is usually negotiable. Acquisition fees start as low as $400 and go up to $1,000. The lower acquisition fees are usually offered by the car maker’s finance division. If the car makers wants to clear out end of year models, they’ll offer a lower acquisition fee for their leases, but charge a higher acquisition fee for a new model year vehicle.

If the dealer quotes you a high acquisition fee, ask which company is offering the lease. If it’s an independent leasing company, try to negotiate the acquisition fee. If the dealer won’t budge, check with other dealers to see what they’re charging for the same fee.

Determine the lease term and mileage

The longer the lease period, the lower your monthly lease payments will be. But be realistic about the limits on mileage, because going over the mileage limit can cost you dearly. Then determine whether you want an open or closed end lease. To learn more about the pros and cons of each, read this post.

Negotiate the money factor

leasing money factorCar leasing companies aren’t doing this to be nice guys, they’re in it to make money. They make money on the acquisition fee. They make money by charging you a higher interest rate than you would pay if you just purchased the vehicle. Before leasing, ask your to run a credit check and give you their best loan rates on a new car. Then ask the dealer to beat that rate as if you’re buying the car outright. Then, when it comes time calculate the money factor on your lease, you’ll know how much extra the leasing company is charging you. If you feel their rate is too high, talk to other dealers to get their rate.

Determine the residual value

Leasing companies refer to industry guides to determine what the vehicle might be worth at the end of the lease. Most leasing companies use the Automotive Lease Guide (ALG). You can access the ALG at your local library. Keep in mind that the residual value is based on the vehicle being returned if good condition and then being sold at wholesale auction. It’s not based on trade-in value or retail value. If the leasing company is using a lower residual value than shown in the ALG, ask them why, because low balling the residual value is another way a leasing company can make extra money at your expense.

Negotiate the disposal fee

The leasing company wants to get the best price when it sells the car at auction so they usually have the car professionally detailed (carpets and upholstery shampooed and washed and waxed). The going rate for a car detail in 2016 is around $200. If the leasing company charges a higher disposal fee, start negotiating.

Calculate the down payment to get the lowest monthly payment

Now that you’ve nailed down the cost of the vehicle, acquisition fee, money factor, residual value, you can start working on your monthly lease payment. If the payment is too high, the only way to reduce it is to extend the lease term or make a down payment.

©, 2016 Rick Muscoplat

Posted on by Rick Muscoplat

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