Depreciation

Don’t Negotiate Monthly Lease Payments

Published by G

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.

The Lease Down Payment Dilemma

Published by G

4/24/2008

So I received an email from a reader explaining the whole down payment dilemma in a very detailed and extremely convincing manner. It has, changed my view of down payments. I’m not saying I’d put down a large down payment, but if you got it, why not, specially if the interest is high on the vehicle you plan on leasing. Also, I do recommend everyone to call their insurance agents and find out how their policies treat leases.

So here are excerpts of the email sent by Damien from D.C.

“So I called my insurance company, Geico, and asked them about it. They report that their payout for a claim doesn’t rely on how the car was financed. That is, if they determine it is a $27k payout and residual value is $20k and you owe nothing, then you would get your $7k in cold hard cash.

I think what you are giving up is the GAP protection. In our example, you lost $3k. That would be the maximum you could lose, because there are no remaining lease payments and therefore there is no gap to protect.

Look at the other direction, where you pay $1000 to drive off the lot. In this case, your remaining lease payments are around $11k. The residual + the remaining lease payments is $29k, and the insurance company pays off $27k. This leaves a $2k gap, which the lease (if it includes GAP protection) would cover. In this case you only lost $1k, not $3k.

So it is a gamble, but not for the down payment amount. The gamble is for the gap, or depreciation. The depreciation is the highest when you drive off the lot, and should be $0 after your last lease payment.”

There you have it folks, I couldn’t have said it better myself. Props to Damien for this insightful email.
Now I gotta call my insurance agent tomorrow 😛

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Lately, I have been putting a lot of thought into the down payment. Generally, I don’t advise people to put down a lot for their initial drive off costs since in the event the car is stolen/totalled, you will lose all that is put towards the car. That typically happens because GAP coverage from either your insurance or the leasing bank only covers your remaining payments. However, I have been analyzing the financial effect of paying a down payment and it makes a lot of sense (assuming you never get your car stolen or totalled). Take this for instance, lets say I want to lease a vehicle that at a cap cost of $30,000. The residual value is $18,000 (60%) after 36 months This would mean your depreciation fee you are paying is 12,000, which you will finance at a rate of say .00101 or 2.42%, then of course, you pay your sales tax every month. Now lets say you put down 10,000 dollars, lowering your cap cost to $20,000, which makes your effective depreciation fee $2,000. This pretty means that you are being charged interest and sales tax on $2,000 versus $12,000, saving you a bunch over time.

Of course all of this comes at a risk. Get the car stolen or totalled in an accident, you lose the $10,000 in a flash. So, are you the gambling type?