Complexities Of Car Leasing
When it comes to leasing a vehicle, one common question is "can I negotiate?" Those who didn't know any part of leasing was negotiable just got a little happier, yes there is a portion of your lease that will or should be negotiable, the vehicle price. The dealer has direct control over this one component. All other areas are typically out of their hands and up to the leasing company, whom they do not control.
On an extremely rare occasion, a leasing company will give a dealer authorization to negotiate some other areas that they typically have total control over themselves like money factor, residual value, security deposit, down payment, and acquisition fees. However don't expect to haggle when it comes to these things, as I stated, that is a rare (practically never) occurrence.
Money Factor
If you're wondering what the term money factor means, a simplistic description is it establishes the amount you will pay in finance charges over the life of your lease. Ultimately, it is the configuration of the cost-of-money finance rate. Sometimes money factor is referred to as the lease factor. A high money factor equals a large monthly payment and you can anticipate a sizeable payment in finance charges. It is imperative to be patient and seek out the lowest money factor obtainable. This task is only difficult because it is not mentioned by the dealer and often not exposed in most contracts! You have to ask the dealer directly what the money factor is and if they refuse to discuss it, find another dealer.
If and when you find the dealer who will talk about a car lease money factor, the other issue is appearances. While you may get a number like .00275 and think it's almost non-existent, in reality that figure has to be converted to an interest rate also known as the Annual Percentage Rate (APR). This is configured by multiplying 2400 yields with .00275 equaling 6.6% APR. If you're fortunate enough to get a number that makes more sense to you like 2.75, don't get too excited; that's just their way of displaying .00275! So spare yourself a headache and when you're given that low sounding figure ask them what that number will be as a percentage (i.e., 6.6% APR).
Residual Value
A dealer may use this term frequently while you stand wondering what it means. Residual value defines the value of something that has been used for a length of time. In car leasing it will directly affect your monthly payments. It is also part of the configuration used by the leasing company for the amount you'll pay if you decide to purchase the vehicle at the end of the lease, and it is incorporated to establish the penalty you incur if you break your lease prematurely.
Known as the "depreciation" your vehicle experiences over the life of your lease, the leasing company is responsible to guesstimate how much of the car's value you will be using over the course of the lease, the "residual value." This figure directly contributes to your monthly payments because they are calculated based on the residual amount divided by the number of months you lease, and then broken down into a monthly payment excluding fees, interest and taxes (FIT). So if you had a 24-month lease and the estimation of your end lease residual amount is $26,000, your monthly payments will reflect the $11,000 used over the 24 month period (in other words, divided by 24 months) and broken down to average the monthly payment which in this case is approximately $458.3 (FIT excluded).
Security Deposit
Your security deposit can be figured out in relation to your monthly payment amount. If your monthly payment were $525, your security amount would be $550 (the amount is rounded up and based on increments of $50).
Down Payment
In order to reduce the amount owed on a lease, a down payment is typically offered or suggested. Often referenced as Capitalized Cost Reduction (Cap Cost Reduction). This can substantially reduce the monthly payment, however most of it will be put toward the tax, fees for the title and other fees incurred during the first month, in addition to the monthly payment itself.
The terms due upon lease inception or drive out cash has nothing to do with your down payment and may not be included. Ultimately, the amount you put down as a down payment might see a 50% reduction after fees have been withdrawn. A cash payment of $5,000 upfront will have the security deposit and other fees deducted from it in addition to the first month's payment. So the cap cost reduction could be as low as $2,500, not the initial $5,000 you paid upfront.
Since a down payment is not typically required in leasing a vehicle, it might be in your best interest to not offer one. The disadvantages of including it are numerous and may potentially outweigh the advantages. If the vehicle is wrecked, or stolen before the end of the lease, your down payment may not be recouped in your insurance settlement.
Acquisition Fees
An administrative fee is included in every car lease, aka acquisition fees, assignment fees, or bank fees. You'll see this explained in your lease contract though right? Not necessarily, most contracts have no mention of this fee since it is a direct charge from the lease company and not your dealer. If it makes you feel any better, your dealer doesn't see any of the proceeds from this charge (unless the leasing company is extending part of it as a bonus for the business, but this is not typical).
This amount is based on numerous factors including where you live. Someone leasing in New York City will have a higher fee than someone leasing in a more remote city or town; in addition the more luxurious your car (expensive) the higher the amount. While the fee is often included in "capitalized cost" it is otherwise not often disclosed and considered a "hidden fee." If you're required to pay the acquisition fee upfront, a positive will be the itemized list of capitalized cost provided to you within your contract.
Do your homework, research, don't feel pressured, shop around and get your questions answered.
