Some people prefer to lease rather than own a car for a number of reasons including smaller up-front costs, smaller monthly payments and avoiding the hassles associated with selling a used car. In a lease deal, the dealer sells your car to a leasing company who, in turn, leases it back to you. Your payments will be based on the beginning value assigned to the car (called capitalized costs), the ending value assigned to your car (called residual value), your down payment and the interest rate (called money factor) inherent in your financing arrangements. In effect, you are paying for the depreciating value of the car for the time period of the lease. Here are the steps you should take to cut the best deal on a leased car.
Step 1. Check your credit history. As with buying a car, you need to check your credit history to make certain there are no errors. Get a free report from the three major credit reporting agencies at www.freecreditreport.com. If you find errors, correct them before you lease your car. This can take 30 to 60 days or longer.
Step 2. Know exactly what type of car you want to lease including all the optional equipment. You can determine this ahead of time by going to www.cars.com. Print out a list that includes both the retail (sticker) price of the car and options as well as the invoice prices. Cars with high residual values reduce your payments so they typically are your best choice for a lease. Historically, foreign cars such as Hondas, Toyotas, Lexus and Volvos decline in value the slowest. Cars.com lists the most popular leased cars and those with the highest residual values.
Step 3. Treat the leasing process as two separate transactions. The most important component of getting a great deal on a lease is the price you pay for your car including trade-in if applicable. You should negotiate this just as you would when buying a car (see last week’s article at www.welchgroup.com; Stewart’s Weekly Article). Make sure you are getting a good deal on your leased car price and trade-in. Once you have established a great price (your ‘cap’ rate), you are ready to focus on the remaining terms of the lease agreement: down payment, residual factor, and money factor. A down payment reduces your cap cost and thus your payments. Since one of the advantages of leasing is minimal up-front cost, your goal is no down payment. You will still incur some up-front costs– called acquisition fees– in the form of destination charges, tag and license fees, but you should avoid making a down payment. You won’t have much control over the residual value of your car other than to choose a make and model that has historically held a high residual value. Finally, your money factor (interest rate) may or may not be negotiable depending on dealer access to leasing companies. Your goal is a low competitive rate. Your money factor will be expressed as a fraction, which if you multiply by 2400 will give you the interest rate. You can shop your lease for better terms through your bank or go to www.leasecompare.com.
Getting a great deal on a car lease will require that you do your homework and work with several dealers or online services. An excellent source for more detailed information can be found at www.leaseguide.com. Next week, I’ll answer the question, “Are you better off purchasing or leasing your next car?”