Get The biggest mistake many customers make when leasing a car is to focus on that seeming low monthly finance charge to the exclusion of all else. The monthly payment is, of course, crucial. But think of it this way: Would you buy a car without first knowing what price and interest rate you are paying? The monthly payment is built on these crucial details. Why enter into a lease blind to them?
Thanks to a new regulation from the Federal Reserve Board, a dealer is now required to disclose all of key variables of a lease: the interest rate, the residual value, the length of the lease and the size of your down payment, if any. (For a sample contract, download this Adobe Acrobat file). That's good news, but having the numbers is really just the beginning. To figure out whether you're getting a good deal, you need to know how each of these figures compares in the open market.
We've broken this section into a step-by-step strategy for evaluating your dealer's lease offer and bargaining him down. We suggest that you make full use of our Leasing Calculators in conjunction with this section. And if your understanding of leasing is sketchy, you may want to check out Leasing Demystified to prime yourself for this discussion.
The 2% Rule
Leasing is complicated enough that it easily defies most rules of thumb. But there is one quick way to spot whether an advertised deal is even worth looking into -- that is, whether the advertised "low, low monthly payment" is really so low. It's called The 2% Rule and it goes this way:
A two-year, no-money-down lease makes sense if the monthly payment is 2% or less of the MSRP.
The MSRP is the "manufacturer's suggested retail price." It is the number found at the bottom of the sticker plastered to a new car's window. What the rule tells you is that the "capitalized cost" the lease is based upon is comfortably below this sticker price. The rule works this way: Say Jaguar is advertising a two-year deal at $599 a month on a car that lists for $52,330.
Two percent of $52,330 is $1,047, so clearly the Jag is worth looking into. The best deals, which are heavily subsidized by the manufacturer are closer to 1%, but anything over two is to be avoided. The rule also applies to a three-year deal. Just ratchet the 2% figure down to 1.8% to allow for the longer term.
But remember, this rule is just a start. Make sure before you sign anything, you examine all the other factors in the deal. Here's an example why: BMW advertised a three-year lease on a 328i for $369 a month. Multiply the MSRP of $34,750 by .018 (1.8%) and you get $625. Looks like a great deal. Read the fine print, however, and the terms seem less rosy. First of all, you have to put $3,500 down, something you may or may not be willing to do to keep your payments low. Second, at the end of the lease, you'd owe 15 cents for every mile you drove over 25,000 -- or 8,333 miles a year. Most people average 15,000 and most leases allow as much. Assuming you drove 15,000 a year over three years, you'd owe an extra $3,000 at the end of the lease. Suddenly, the BMW looks a little more expensive.
Before you start shopping for a lease, you've got to arm yourself with some key information.
Which Cars Are Moving?
One way to find a deal is to target those cars that dealers are looking to get rid of because sales (or the economy) are slow. Those are often the same cars the manufacturers are subsidizing. Your dream car may not be in this group, but you may find one among them that would suffice. To get information on these trends try Fighting Chance (800-288-1134) in Long Beach, Calif. It sells informative tip sheets on three cars of your choosing for $19.95 -- $8.95 for each additional car. The sheets show when a manufacturer is offering dealer incentives and analyzes how your selections are selling.
In any negotiation, it is crucial to have a rough understanding of your opponent's bottom line. If you don't know how low a car dealer can go, how else are you going to know when to push for a better price?
Your first stop should be to find the car's invoice price. Also known as the factory invoice, this number is essentially what the dealer paid for the car. Your lease will be based on "the capitalized cost," a price you negotiate somewhere between the invoice price and the MSRP. In many cases you can get a dealer to accept only a few hundred dollars above the invoice. Sometimes cash incentives from the manufacturer even make it possible for dealers to sell cars for less than the invoice price, although that's hard for you to know beforehand. Figure out what car you like and what extras you want and you can find detailed invoice-price information from Edmunds Automobile Buyer's Guides or another site called LeaseSource.
You'll also need a reasonable estimate of the car's residual value at the end of the lease. The industry's definitive source of this information is The Automotive Lease Guide (805-563-0777). But the best place on the Web to find residual value numbers is CarWizard, a service of LeaseSource. This data site has ALG info for just about any car you can think of. When a manufacturer subsidizes a lease, it often inflates the residual value artificially. The higher it is, the lower the monthly payment. But if you want to buy the car at the end of the lease, watch out for this inflation.
Interest Rates, Sales Tax and Trade-Ins
Once you have an estimate of the invoice price and the residual value, check to see what auto loan interest rates are doing in your area. Chances are, your lease deal will be handled through the manufacturer's leasing arm (which will probably have a decent rate), but this page will give you a reasonable figure with which to estimate. Your other option is to call a dealer or a bank in your area and get a rate that way.
Finally, if you don't know the rate already, call an auto dealer, an accountant or your state's taxing authority to find out what your sales tax rate is. Also, if you plan to trade in a car, ask the dealer for an estimated trade-in value. Usually, that is derived from the blue-book value (which is also available from Edmunds).
Armed with these pieces of information, you are ready to move to the next step.
Before You Enter the Showroom
Once you have estimates for all these lease variables, you're ready to run some numbers. Launch our Monthly Payment Calculator, and plug the fruits of your research into the "Your numbers" section to get a good sense of what a monthly payment should be for your car of choice. We encourage you to play with different assumptions here. Raise the price, for instance, and see what happens to the monthly payment. Take away the down payment or shorten the lease term and see if you can still afford the deal. This exercise will make you more confident when the dealer starts throwing numbers at you.
The calculator can also give you another invaluable negotiating tidbit: the dealer's bottom line, expressed as a monthly payment. If you plug the invoice price into the calculator's "Car price" box and enter zero in both the down payment and trade-in boxes, the monthly payment will represent what the dealer needs from you to break even. Now, it is unlikely that you would get that kind of price (the dealer does have to make a buck, after all, and this estimate doesn't include the shop's overhead). But the number is still highly useful. Consider it a baseline to compare against other estimates. It will give you a sense of when to push for a better deal and when to trust that your dealer has hit bottom.
Another thing you might do before hitting the showroom floor: Call around to a few dealers to get some idea of what sort of price you might get for your car of choice. Knowing what the broader market has to offer helps give you a sense of how hard you can push for a certain price. Dealers aren't wild about this; there was a time when they wouldn't even give you a number over the phone. But most markets are competitive enough these days that the dealer will come through with a number, provided you make it clear that's the only way you'll do business. You can continue negotiations in the showroom once you've narrowed down the playing field.
What to Demand of the Dealer
We can't say it enough. Dealers are masterful at steering lease customers away from a car's somewhat daunting purchase price in order to gain an advantage in their negotiations. The focus is always on the monthly payment, which is repeated like a mantra. Part of the reason this works is that the monthly payment is all many customers care about. "Can I really have a BMW for $498 a month?" you might ask yourself. "I can afford that." Maybe so. But if the dealer has gotten to that number by inflating the car's capitalized cost to somewhere near or above the MSRP while extending the term of the lease to four years, you're getting ripped off. The question should be, "Could I have this same car for $400 a month?"
As of January 1998, dealers have to disclose the terms of any lease deal. They'll hand you a sheet of paper with the numbers on it and you can promptly plug them into our Monthly Payment Calculator. The calculator allows you to run your dealer's numbers yourself. It also lets you compare them side-by-side to your own estimates of what fair market value should be. Use this comparison to haggle for a better deal.
If you plan to visit a few dealerships, another approach is to use our Net Interest Rate Calculator to compare different deals. As opposed to deriving a monthly payment, this calculator assigns a value to a lease contract -- plus any fees you pay -- and expresses it as a single "net" interest rate. This number can be compared to the interest rates your bank offers on auto loans (or see our auto rates page for comparisons). You can also derive net interest rate figures for several competitive leases to see which is best. In any event, the lower the number the better.
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