Back in 2019, I was leasing my first car. I'm the kind of person that hates getting ripped off and loves getting a deal. So I did the natural thing and made a spreadsheet. The first time I walked into a dealership and could calculate my monthly payment faster then they could, they kicked me out and accused me of working for a rival dealership. (Here's the spreadsheet)
Here's how to think like a car salesperson and negotiate a great car lease for cheap.
First, some terms:
Money factor: This is the annual percentage rate (APR) divided by 2400. Why 2400? Probably just to confuse you and obscure the real rate. Usually this is determined by your credit score.
Residual: How much your car is worth after the lease, expressed as a percentage of the manufacturer's suggested retail price (MSRP). This is determined by the make and model of your car. For instance, the residual on my Honda Civic Hatchback in 2019 was 58%.
Adjusted Capitalized Cost: The negotiated price of the car plus fees minus any rebates.
Your lease finances the difference between what you negotiate the price of the car is today (adjusted capitalized cost) and what it will be worth at the end of your lease (residual value = residual * MSRP). Your monthly payment is simply that difference spread out over the lease term plus interest.
Some equations:
Gross Capitalized Cost = Negiotiated price + fees
Cap. Cost Reduction = Rebates + Down payments
Adjusted Cap. Cost = Gross Cap. - Cap. Cost Reduction
Residual value = MSRP * residual
Monthly depreciation = (Adj. Cap. Cost - Residual)/Lease Term
Monthly finance charge = (Adj. Cap + Residual)*(money factor)
Monthly payment = (Monthly depreciation + Monthly finance) * tax rate
Some tips:
- Never pay down payment. The down payment is simply the interest paid upfront, it does not lower the capitalized cost. If you wreck or total your car in the first few months, you might not be able to get that down payment back either. Salespeople don't make any money if you put a down payment or not.
- Negotiate only the sale price of the car. It's tempting to negotiate the monthly payment, but it can obscure real costs. Research the money factor and residual before you go into the dealership. In many states, the dealerships are required to give you these numbers as well.
- Make sure upfront fees aren't included in the capitalized cost. Fees like registration need to be paid upfront. Dealers will hide this in the monthly payment – maybe you get to walk out with a lower payment, but now you are paying 3 years of interest on those fees.