Negotiating the best deal is no less than an art. However, securing the best deal depends upon your understanding of what is negotiable in a lease contract. It’s not just the selling price that matters the most, there are many other factors that contribute to the final lease price but very often customers do not realize that. Because of the way some lease terms are negotiated, even seasoned lessees might not be able to get the best bargain. On top of that, dealers make use of some confusing terms that do not make sense to most people. In fact, you have more negotiating power when leasing than you do when buying, as long as you do it right.
Here we will share with you the secrets of negotiating the best deal.
Capitalized Cost
Capitalized cost is an absolutely negotiable term! The gross cap cost is another name for the car price. This term represents the value of the car if you were buying it outright. It does not include anything that you agree to pay for over the span of your lease term i.e. fees, services, insurance, taxes, and any down payment. If you do not negotiate the cap cost of the car, you are losing money.
Our chapter no. 5, “Shopping for your vehicle,” thoroughly explains how to determine a fair cap cost of the vehicle. Cap cost is one of the topmost contributing factors in reducing your final lease payment. So it is important to negotiate the lowest possible cap cost for your vehicle.
The Rule: You should always negotiate the cap cost separately from the lease price. The lease price will automatically change when you negotiate the cap cost.
The selling price for the car is same for the lease deals as they are for buying. So do not let the dealer fool you by offering different prices for the leasing and buying.
Lease Term
Lease term has different variations. Typically, a lease begins at 36 months and can go as high as 72 months. The most common and popular leases are between 3-4 years. Most of the dealers will try to get you into a longer lease in order to lower your overall payments. If having a low monthly payment is your main concern, then this option is good to consider. But you must remember the longer your lease agreement is, the larger would be your collective liability at the end of the lease. If you can financially afford a normal lease payment, then it is advisable to choose a shorter lease for your vehicle. Ultimately, the lease term decided by you, so while it is not “negotiable”, it is always in your hands to pick the right term.
Money Factor
When you are dealing with a car lease, you will mostly come across a different version of an interest rate called money factor. The money factor is a simple calculation derived from the interest rate. Money factors are set by the lending institutions and are not easily negotiated.
However, it is important to know that if you are discussing a deal with a dealer, he may try to sell you a higher money factor than what you should be paying. The problem with this term is that although it is one of the most important factors, still it is one of the most misunderstood terms in leasing.
Financial institutions provide dealers with incentives to encourage use of their programs. They would offer a small percentage of the money factor back to the dealer. This is where you can save money. The difference between the money factors your bank charges and the money factor you pay could add up quite significantly. Remember, your money factor should be according to the current market interest rates. During the negotiation, be sure the calculations are always using the one lease term – 36 months, for example.
Determining your Money Factor
The Money Factor is expressed as a number such as .00225 or even more confusingly by moving the decimal point between the third and fourth digits as 2.25. You may take this figure as interest rate of 2.25 percent but it isn’t. The most convenient way to calculate your Money Factor is to take the money Factor number and multiply it by 2400. This exercise makes it equivalent to a similar interest rate like you see on a loan deal. While it is a good estimation of what you will be paying in interest, you must keep in mind that the Money Factor works slightly different because of the structure of the lease.
In the above example where the money factor is .00225, if you multiply this Money Factor by 2400 you will get the equivalent interest rate:
.00225 multiplied by 2400 = 5.4%
OR you can calculate it backward to determine your Money Factor:
5.4% (or just figure 5.4) divided by 2400 = .00225
If it seems difficult to you and you are unable to calculate it on the spot, it would be better to wait until you get back home to make your final purchase decision. The dealership environment is often a difficult place for the customers to make a rational business decision.
Negotiating on Money Factor
Like any other business, the dealer is looking to make money out of every deal. This is a revenue center for him. You must understand and keep this in your mind that if you are going to make a deal with a dealer, you have to pay more than you have to.
Remember the rule: If you are shopping through a dealer for your vehicle financing, you are probably going to pay a premium above the money factor your bank is actually charging.
Although the dealer offers more convenience, beyond that you can easily secure your own financing. To get the best financial deal on Money Factor, there are two ways; getting the best rate you can find among lenders or to find the best rate among lenders and require the dealer only receive a small markup after that. There are also some online platforms that give you an idea of actual money factors in real time. LeaseCompare.com is one such website that provides real-time quotes for lease including money factors, residual amount and associated costs of a lease.
Mileage Allowance
Typically, the standard auto leases come with annual mileage limits of 10,000 to 15,000 miles per year. Since an average American driver drives a car for 12,000 miles each year, a standard auto lease is suited to almost everyone. But drivers who put on more miles than their annual limit pay an additional per-mile fee of $0.10 to $0.25. This amount may seem less, but if you pass your annual mileage limit a lot, your lease costs can skyrocket.
If your vehicle use is more than the standard, then you will be offered a higher mileage limit, usually 18,000 to 20,000 miles. While this may avoid you expensive over-the-limit per mile fees, you will have to pay higher monthly lease payments.
Mileage is negotiable. You can negotiate those expensive excess mileage charges if you expect to drive more than your lease allows. You won’t get rid of them completely, but you can reduce them by dealing with it before the lease.
