I’ve been noticing a very disturbing trend on automotive forums. Many folks keep asking the “experts” about whether their “quote” is a good deal or not. The truth is, there is no way to find out whether a lease is a good lease if the sale price, money factor and residual value aren’t provided. Folks, let me remind you that a “good deal” is rather subjective. Depending on where you live, a good deal could be $100 more than some or $100 less than others since the sale prices/taxes vary from state to state. Cities with a lot of dealership competition will usually get you the “lower” prices, while cities with little or no competition will usually make you pay more. Basic economics.

Another thing I’ve been noticing is that people seem to only understand leasing in terms of “monthly payments” and “money down”. There IS a reason why leases have a sale price, residual value and a money factor and that is because they are used to calculate your monthly payments. So don’t waste time negotiating a monthly payment when you should be negotiating the sale price. The Math doesn’t lie, as long as you know what the numbers are used to calculate your monthly payment, you will secure the lowest possible monthly payment. Here’s a simple explanation of what makes up your monthly payments.

Your monthly ease payment generally consists of 3 parts:

1) Depreciation Fee
2) Finance Charge
3) Taxes (This one may vary depending on which state you live)

CLICK HERE to see the Lease Formula and a sample calculation of a lease payment.

DEPRECIATION FEE – This fee is the difference between the sale price and the residual value of the vehicle. In order to minimize this fee, you need to hammer out the lowest SALE PRICE possible. Ideally you want to shoot for invoice price (what the dealer pays) or lower because it will lower your monthly payments. The ability to get invoice will depend on the model you plan to get. Chances are, you won’t be getting a Hybrid at invoice.

FINANCE FEE – The finance charge is what the bank charges you for borrowing money to lease the car you want. This is calculated by adding the SALE PRICE and the RESIDUAL price and multiplying it by the MONEY FACTOR. As you can see, everything is based on the SALE PRICE, RESIDUAL VALUE and the MONEY FACTOR. This is why I stress the fact that if you plan to lease a car, you need to know these three numbers.

TAXES – In most states you will be assessed a tax for the depreciation and finance portion of your monthly payments (which I consider to be the better states to lease from). In other states (IL, TX for example) you will be charged taxes on the entire amount of the vehicle, not just depreciation, thus making lease a really bad deal in those states. Since sales taxes are manage by state governments, a “good lease deal” really varies from state to state.

To know what a good deal is, you need three things: SALE PRICE, RESIDUAL, MONEY FACTOR, with SALE PRICE being the only thing you can negotiate since RESIDUAL and MONEY FACTOR are set forth by the lending bank and it depends heavily on the lease term you choose and the credit score you have.

I don’t recommend folks with low credit scores to lease because a good deal can turn UGLY if dealers find out your score is less than ideal. What is a good credit score that will qualify you for the best rates? It is generally a credit score of 700 or more (some lenders may require higher scores). Don’t go into a dealership not knowing your credit score, specially if you don’t like surprises.

Again, I don’t want to sound like a broken record, but make sure you negotiate the sale price of the vehicle first and foremost. You don’t even have to tell the dealer you plan to lease, just ask for the rock bottom price and cross check that number on websites such as Edmunds.com to see how close to invoice price it is. Once the sale price is ironed out, your payment should be surprisingly lower than initially quoted.