Keep an eye on these critical factors
By: Joseph Goldy, AAMS
With the start of the new year, those who have auto leases coming due will be contemplating which new set of wheels to drive off the lot. While enjoying a new vehicle is the fun part, knowing whether you got a good deal on your lease is often less so.
However, just by arming yourself with some basic knowledge of how automobile leasing works, you can significantly improve your odds of not signing an unfavorable contract.
For this article, we will assume you have already decided to lease rather than finance the purchase of a new vehicle. While the case can often be made for financing from a financial standpoint, if you enjoy having a new car every few years, are ok with never owning, and don't drive an excessive number of miles per year, leasing may be a good option for you.
Whether leasing or financing, everyone likes a good deal. According to a study by iSeeCars, the month of January is second only to Martin Luther King Jr. Day when it comes to the probability of finding a good deal on a used car.
With new vehicles, the end of the year tends to be better since the dealerships are trying to clear out the previous models to make room for the next year's models.
Capitalization Cost
The first moving part to be aware of when leasing a vehicle is the capitalization cost. The capitalization cost (aka "cap cost") is the term used for the vehicle's negotiated selling price along with any additional fees, such as taxes or motor vehicle fees not paid as part of the down payment.
You will want to know your capitalization cost along with any reductions, and it is worth comparing that to other area dealerships to see if they can beat what you're seeing.
Putting your negotiating skills to work here will pay off in a lower monthly payment.
Interest Rate
When financing a vehicle, the interest rate is well known, and most consumers will work to find the lowest rate they can by shopping around at various banks. However, with a lease, the interest rate is sometimes less noticeable and will usually need to be discussed with the dealership to determine what you're paying.
The Money Factor
The rate is known as the money factor, and a quick calculation is needed to convert the money factor into an actual interest rate form that we're used to seeing.
Money factors are expressed in decimal format, such as .00089, and you will multiply that by 2400 to convert it to the interest rate of 2.136%. Whether or not this is a reasonable "rate" is dependent on several factors such as the lessee's credit score and the current interest rate environment at the time.
Not every dealer is open to negotiating this rate, but some are. Hence, it's worth exploring as it will directly impact your payments and could save you a considerable amount in paid interest over the term of the lease.
Residual Value of the Vehicle
Finally, it is essential to know the residual value of the vehicle you are considering leasing. The higher the residual value, the lower your payments since a lease is essentially paying for the vehicle's depreciation cost for three years. If the vehicle's residual value at the end of the lease is on the lower side, your payments will be higher since you're financing a more significant portion of that depreciation. Residual value is often not negotiable since the leasing company sets it instead of the dealer. The value is set by experts who estimate the ending value of the vehicle based on many factors.
While residual values are often not negotiable, doing some homework in this area before deciding on a particular brand is worth it. There is a significant discrepancy in how well specific makes and models hold their values. According to the same iSeeCars study referenced above, the average car depreciation over the first five years is 49.1%. Still, there is a big difference between models and between types of vehicles, as shown by the following table.
Author’s Bio
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.