Car Leasing Made Simple
Most people don’t understand the math behind calculating car payments. Car dealers prefer to keep it this way. But fear not, we’re here to explain leasing in a simple easy to understand way.
Over the past 5 years, I’ve spent countless hours extracting great deals on leases. My deals have included:
– Infiniti Q40 for $300/month including taxes for a 2 year/10k miles per year lease. No money down.
– Infiniti Q50 for $310/month including taxes for a 39 month/12k miles per year lease. $0 drive off; no money down
– Mercedes C300 for $360/month for a 36 month/12k miles per year lease; $0 drive off with no money down
Simple process to score a great lease price:
1. Collect data: Get the Money Factor (MF), Residual value(RV) and any discounts/incentive amounts from edmunds forums for your desired car’s make/model; you don’t really need to care what these numbers are if you want to keep this easy. These numbers do vary based on lease months, miles per year, your ZIP code/state, and typically change every month. You may need to post on the forum to get your numbers. e.g. 2019 Mercedes C-Class thread here (Google “Edmunds forums X year Y model leasing”)
2. Get quotes: from 2-3 dealers in your area for car leases. Simply go to their website, find a car you like, submit a form expressing interest. When they call/email you, ask for a lease quote including all details needed for step below.
3. Run the numbers: From the lowest quote, plug in all the numbers into the leasehackr calculator here. Make sure you have all inputs needed – just ask the dealer for anything missing. Check the box that says “Zero Drive Off” if you want a true sign-and-drive lease i.e. no payment due when you drive off.
4. Check your math and keep em honest: Make sure the monthly payment from the calculator matches what you get from the dealer. Also, make sure the Money Factor, Residual the dealer is using match what you got from the forums AND that the dealer is not adding any random/junk fee to the quote.
5. Negotiate a little: If the payment is too high compared to what others are saying on the forums or your desire, start negotiating the sales price. You can use any corporate discounts, student/military discounts or other discounts the car company or dealer has. You can also tell the dealer that you’ll sign if the payment is $X/month including taxes. What you’re negotiating is a discount on sales price – this varies by make/model heavily. e.g. Mercedes may only do 10-14% off MSRP but Infiniti may go as high as 20-22% off MSRP.
Lastly, you need to be flexible on the make and model to score a good deal. Why? Because not all car manufacturers offer a good deal every month.
We hope this helps you score a great lease deal! You still need to do some work to score a great lease but following this process above will make it less painful than simply negotiating random numbers with a dealer. Also, you know you’re not getting fleeced on interest rate or random fee by the dealer if you follow all these steps!
Advanced Terms and Math for those interested:
Here are the basic terms you need to understand:
MSRP – manufacturer’s suggested retail price. Comes from the car company. You can get this on any car makers website by building the car.
Capitalized Cost – final sales price of the car including any manufacturer incentives etc. minus any down payment. This number is the only thing you really have to negotiate with the dealer (not including the down payment). The lower you get this number, the lower your payments will be.
Residual value (RV) – value of the car after the lease ends. Usually a % of MSRP e.g. 55% of MSRP after 36 months
Money Factor (MF) – essentially an interest rate quote. Multiple this number for 2,400 to get your annual interest rate. e.g. MF of .0034 is APR of 8.40% (.0034*2,400)
MSD (multiple security deposit) – a deposit you can put down to lower your MF/interest rate. This is not super important to understand.
You’re looking for someone who offers:
1) High residual value (so your depreciation is low). A residual of 55-60% is great on a 3 year lease. This implies you’re paying 13-15% of the car’s MSRP per year.
2) Low Money Factor. Essentially you’re looking for a 0% interest rate so financing is free. Now, some manufacturers offer this out the gate with a super low MF; others require you to put down security deposits to lower the interest rate. The leasehackr calculator can help you see the impact of MSDs on your monthly payments based on car make.
3) Understand that popular cars such as SUVs are not on sale as much as say sedans right now. So, if you really want a low payment perhaps consider a sedan instead.
How the math works:
What you pay includes 1) Depreciation over lease timeframe PLUS 2) Interest charge and other fees
Depreciation is simply: (Cap. Cost – Residual Value)/number of months in lease
e.g. MSRP: 50k, Residual: 32K, lease months: 36
Depreciation = (50k-32k)/36 = 18K/36 = $500/month
Interest charge is: ( Cap. Cost + Residual)*MF. If you can get your interest rate close to 0%, this number basically ceases to matter. You may need to put down MSD/security deposits to get this number lower. Each MSD is typically your monthly payment rounded to the nearest $50 e.g. if you payment is $290/month, each MSD will be $300. Some manufacturers allow you to put down as many as 9 MSDs so that’s a deposit of $300*9=$2,700 in this case. Your MSDs are returned to you at the end of the lease; if the car gets totaled the deposits may or may not be returned depending on your contract so be aware of this risk.
Other fees: Acquisition fees (typically $500-1,000); DMV fees (typically $4-600); sales tax – varies by state as some states tax full sales price upfront.
We love comments and any other feedback you may have! Feel free to share your experience and deals as comments here to inspire others to follow your lead!