theInterest: Issue #2
Sometimes it’s better to buy, sometimes it’s better to lease. To figure out which is the case for the type of car you’re after, you’ve got to understand some basics, and how to score a great deal.
When you buy a car, you buy the whole thing. When you lease a car, you’re buying the difference between the negotiated sale price (including fees) and the predicted amount that it will be worth at the end of the lease term. Or using lingo: capitalized cost - residual value (RV). Counterintuitively, when the terms state “you have the option to buy this car for $X at the end of the lease,” you want $X to be as high as possible.
A $25,000 car might have a 58% residual for a 36 month lease term. Leasing it means paying $10,500 (or $291.67/mo) to have it for 3 years, plus interest.
The interest is determined by the Money Factor (MF). It’s not expressed like a typical interest rate, rather a shortcut value that factors in several things. The formula to calculate the interest is a little weird but understanding it isn’t important: (sale price + RV) * MF.
Using an example MF of .00100, we can calculate the interest portion of the payment for the example lease above: ($25,000 + $10,500) * .001 = $35.5, bringing the total monthly payment to $327.17. Factor in the sales tax rate in your neck of the woods and you’ve got your final payment amount.
Scoring a great deal
Money Factor: it’s not negotiable, however, sometimes you can buy it down by paying some money upfront which you get back at the end of the lease. Ask about this. Additionally, you’ll evaluate the MF when shopping around just like you evaluate interest rate.
Residual: it’s also not negotiable, however, to get a great lease deal, this is a key number. If the manufacturer is setting a high residual, that’s a time when leasing that car could be better than buying it. And even better, the residual % is applied to the MSRP of the car, not the final negotiated price, which leads us to...
The price: this is super negotiable, and doing so can score you a great deal if the dealership really wants to move the car. Because the residual is pegged to the MSRP, negotiations for a lease have more impact than when buying. If the amount you’re buying is $10,500 (like above) and you negotiate $1,050 off, you’re paying 10% less. Whereas if you negotiated $1,050 off of purchasing this $25,000 car, you’re paying 4.2% less. To negotiate this, zero in on it: move the conversation away from the “payment amount” and to the sale price of the car, and use the tip below to find market value.
Incentives: If the manufacturer wants to move the car, they’ll offer and publicize incentives. You don’t negotiate for these, just shop around and find the “offers” section of a manufacturer’s website. Like price negotiations, the great thing about incentives is that they lower the price without lowering the residual (which is calculated based on the MSRP), compressing the difference between the two.
Fees. Within the sale price (aka capitalized cost), there will be some unavoidable fees such as tag fee, title fee, doc fee, acquisition fee, and possibly others. The dealer has to show you the full calculation to sign-off on; don’t do so with any non explained fees in the mix. The only fee that’s common with leasing that isn’t there with buying is the lease disposition fee, usually a few hundred bucks. See if they’ll waive it, but you’ll need luck on your side.
I think electric cars are especially interesting candidates for being leased. First, for the most part the federal tax incentive of $7,500 per car is still in place and usually gets factored into the lease as an incentive. When BMW first starting leasing their i3, they had huge incentives, including this $7,500, and didn't really adjust their residual % much to compensate (it was a comparable residual to a “normal” BMW). I leased one in 2014 for 2 years. When I returned the car, I had the option to buy it for $33k, when the value at the time was more like $16k! That was a great lease, having only paid a fraction of what the actual depreciation was over that time. When it came time to renew, they had adjusted the residual and it just wasn’t a great deal, so I passed.
Also, battery technology is likely to improve rapidly over the next several years. I’m more comfortable committing to leasing a giant battery that might be soon outdated, vs. buying one for tens of thousands of dollars.
How to collect the right information
The RV and MF aren’t usually made public via car manufacturer’s websites. A great place to ask (or find other people asking) about these details is the Leasehackr forum. Use this to shop around for high residual %’s and low MF’s, and also to double check that the dealers quote is using the manufacturer’s numbers. If they’re trying to sneak in any premium for themselves, this will be the easiest component to negotiate. They’ll know you’ve caught them doing something semi-shady and will instantly adjust it for you once asked.
Leasehackr is also a great place to see the current chatter around which cars are currently “leasing well.” If you’re asking yourself, “is it really worth it to be part of this obsessive community while I’m car shopping?” — YES! you’re talking about a huge purchase decision and a little research can easily save you 4 figures in one swoop!
For price negotiations, TrueCar and Edmunds are good places to identify what other people are paying. Don’t budge off of the low end of those fair market value ranges. If they start off higher, the sales person will eventually cave, after several trips back to see their manager.
Now go lease that car like a boss! Or better yet, ignore this entire post and just buy one a few years old for $10k.