The first thing you should do when you’re thinking about leasing a vehicle is to do some background research. Go online or get on the phone and research different makes and models. Be sure to pay attention to not only their MSRP but also the expected residual value of the vehicle. A higher expected residual value means less depreciation and lower monthly payments for you. Once you’ve decided on a make and model, find out what the MSRP is, with and without various accessories. Different accessories may impact the MSRP more than you’d expect, and you want to make sure you know what range you’re dealing with when you approach the dealer. When you finally go into the dealership and begin discussing a lease you will be presented with a few important figures:

 

• MSRP – This is the Manufacturer’s Suggested Retail Price. Keep in mind that this is almost always higher than what the dealer is willing to sell the car to you for. This includes a profit (often substantial) for the dealer and therefore is very negotiable.

• Capitalized Cost (Selling Price) – This is the price that the car is actually sold to you for. You should subtract down payments, trade-in money and rebates from the MSRP to get this. This is also highly negotiable

• Residual Value – This is the expected value of the car at the end of the lease term. It is used to calculate the expected depreciation of the vehicle.

• Lease Term Length – The length of the lease term, usually given in months.

• Total Monthly Payment – This is your total monthly payment on the car. Make sure you know whether or not this includes your state’s sales tax. Also, some states may have additional fees associated with leasing the car (such as an acquisition fee) that can be as much as $2000. Make sure you are informed about your state’s laws regarding leasing.

 

The capitalized cost and residual value are used to calculate the total depreciation on the vehicle (capitalized cost – residual value), which is then divided by the lease term and added to the monthly lease payment each month. In addition to this monthly depreciation, the total monthly payment is composed of a monthly lease fee, which is a financial fee based on an interest rate. (Note: This is not the same interest rate as they charge you to borrow money from them) The leasing company is essentially charging you for the use of their capital. By driving their car you are tying up its value for the length of the lease term – a value that could potentially be used to make more money. Therefore they will charge you a lease fee based on the rate they think they could increase the value of that money. By using the numbers given to you above, you can calculate this interest rate and potentially use it to negotiate (see our calculator).

After you’ve found this “money factor” [=interest rate/(2400)] you can potentially use it to negotiate a lower monthly payment. So, when you go to the dealer to make your final negotiations, you should come well informed about the money factor, the MSRP (and the negotiable selling price), and the expected residual value of the car. Remember, the car industry is very competitive and thus dealers are very open to negotiation. Don’t be intimidated! If you come informed, you should be able to significantly reduce the dealer’s initial monthly payment offer. 

Leasing Calculator (enter numbers only, no $  signs):

MSRP
Capitalized Cost (Selling Price)
Residual Value			Percentage of MSRP
Lease Term
Total Depreciation
Monthly Depreciation
Monthly Lease Fee
Money Factor			Interest Rate
Total Monthly Rent
Tax Percentage
Total Monthly Payment
Total Lease Cost

Example:

Let's say you see this leasing offer online (from http://www.mazdausa.com/):



The important pieces of information you should take out of this are the MSRP ($17,695), the given capitalized cost ($16,235), the lease term (36 months), the residual value ($10,724) and the monthly payment ($195/month). Note, however that this monthly payment does not include tax, so enter this value into the total monthly rent column. Try entering these values above -  the calculator will show you the money factor and interest rate. You can use the figures from the calculator to potentially negotiate lower monthly payments.