You Can't Negotiate a Car Lease Like It's Your Smartphone Plan

NEW YORK (MainStreet) – Auto leases and smartphone sales help consumers update for a low cost, but not doing your homework can make the former a far more expensive mistake than the latter.

According to auto pricing and analysis site Edmunds, 27% of all new car transactions last year were leases. That's up from a low of 16.6% at the bottom of the recession in 2009 and even well above the pre-recession high of 19.5% in 2007. Phillip Reed, senior consumer advice editor for Edmunds, wrote about leasing in his book Strategies For Smart Car Buyers. He notes that advancing technology and automakers eager to move new car stock and create a supply of new vehicles have made leasing less of a luxury option and more of a mainstream approach.

“One of the attractive things about leasing is that it puts you in a new car about every three years, and technology is evolving rapidly,” he says. “It used to be that cars were cars, but with safety technology, there have been significant changes in recent years.”

He notes, though, that there are a whole lot of moving parts that go into the cost of a vehicle lease. Sean Peoples, vice president of sales for vehicle pricing and review site CarGurus, points out that a lease is actually a loan on the depreciation of a vehicle during a predetermined period. A combination of the vehicle's total purchase price, residual value (what it's worth at the end of the lease), the “money factor” (a lease's version of an annual percentage rate) and “capitalized cost reduction” (basically, the down payment) all go into determining the overall cost of the lease and your monthly payment. While you don't have to focus on all of that to get a good deal, it helps to have a full picture before going into negotiations.

“If you're saying 'What will a $299-a-month lease on a BMW vs. a $299 lease on a Chevy get me?' you're kind of selling yourself short if you don't understand all aspects of that process,” Peoples says. “Not everybody is going to get that deep into this as I'm suggesting, but at least having a fair understanding of those numbers makes it more likely that you're getting the best deal you can possibly get.”

As Edmunds' Reed points out, loans are usually written by banks, not dealerships. Ford and Toyota, for example, have financing arms that exist solely to write car loans. Those banks, at times, provide the best hints for where you can negotiate a lease price. If you know that multiplying a leased vehicle's money factor by 2,400 will get you the equivalent of a car loan's APR, Peoples notes that you can figure out that the 6.6% being offered for leases is far higher than the 1% rate on a loan — giving you so wiggle room.

If you want to keep it simpler, though, Reed points out that the Edmunds recommended lease is for three years or less, roughly $1,000 to start the lease and 10,000 to 12,000 miles per year. He recommends establishing those parameters before you even step into the dealership just so you can see where a dealer stands and compare leases easily from one dealership to the next.

“I always try to make things as simple as possible,” he says. “There are people who say they're going to figure it out and make a spreadsheet of interest rates, residual values and all of that, but sometimes they get lost in the minutiae of it.”

Scot Hall, executive vice president of vehicle lease transfer site Swapalease, sees the value in that minutiae, and goes through all of it in his site's detailed lease calculation and comparison tables. But when it comes to points of negotiation, he recommends narrowing them to just two: the initial payment and monthly cost. By setting those boundaries, Hall says the consumer and dealer can work toward that specific goal by negotiating the vehicle's selling price and narrowing down lease selections to vehicles that retain their resale value.

“Generally speaking, from a financial sense, you want to wrap as little up in a depreciating asset as possible,” Hall says. “A car is a depreciating asset in any sense, so you want to keep payments as low as possible.”

When you realize there's absolutely no equity in a car and you're only paying to use it for a specific period, it gets a lot easier to embrace a lease and negotiate that down payment to something workable. CarGurus' Peoples suggests negotiating from no money down and argues that paying upfront only pulls payments ahead. Reed notes that your down payment couldn't be recovered in the event of an accident, as insurers would only cover the rest of what's owed on the car.

It's also not in a consumer's interest to take on a lease shorter than three years. Peoples notes that vehicles tend to depreciate most within the first year, so spreading out that pain a bit will only reduce the overall cost of the lease. Lease transfers, such as those offered by Swapalease, can reduce the term to as little as 18 months without subjecting a lessee to that steep depreciation cost, but there are drawbacks to that shorter term and lower overall price.

“You're taking over a lease on a vehicle that's a year to a year and a half old that, while still a fairly new vehicle, is a used car,” he says. “People have a hesitation on that and would rather not take something because someone's been out there driving it and they don't know the complete history. Also, if time is a factor, a lease transfer can take 10 days to two weeks to complete.”

If you do end up leasing a vehicle that you not only like, but has substantial resale value — such as the German luxury brands or big sellers from Toyota and Honda — you'll likely be in an even better position to negotiate the cost of your next car. Peoples notes that if you stick with the same vehicle type or even automaker, there's a bit of forgiveness for going over the mileage limit, and there may be a chance of wrapping a lease up a few payments early to get you into a newer model.

“The whole core of the business is moving inventory. And if you can help them move inventory and can give them a good used car to sell, that's great,” Peoples says. “Both the manufacturer and the dealer benefit when the new car gets leased and the used car is available to sell.”

— Written by Jason Notte in Portland, Ore., for MainStreet

To follow the writer on Twitter, go to http://twitter.com/notteham.

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.

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