Negotiate Your Car Lease Like a Pro

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Here’s what you need to know to negotiate your car lease without any experience whatsoever.

Negotiating lease deals is a lot like hammering out any other contract. The more you know, the better your chances of getting a good deal. In the auto leasing world, that translates to a lower monthly payment and the freedom to drive without worry about certain lease limitations.

However, the process can still feel a little intimidating. There’s unique terminology and subtleties that the average person might not spot. But don’t worry — it’s not as complicated as it sounds.

To properly negotiate a lease, you have to understand what you’re negotiating in the first place. So, let’s start by walking through the leasing process.

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How Does Leasing a Car Work?

An auto lease is an agreement to borrow a vehicle from someone else, such as a dealership or company leasing program. It’s a lot like renting an apartment, just with a car instead.

For starters, you have to qualify. While there’s no universal minimum credit score to guarantee a lease approval, you’ll have a harder time qualifying with bad credit. On the flip side, if your credit score is high, you might be able to qualify for a lease without a down payment.

There are two parties involved in car leases: the lessee and the lessor. The lessee borrows a vehicle from the lessor, the legal owner of the asset, for a certain amount of time. This is known as the lease term, which is usually between two and fourth years. Once the term concludes, you have several options. You can re-lease the vehicle, lease a new vehicle, or buy out your lease — assuming you qualify and your current lease allows you to do so.

Of course, you can also walk away from leasing and take the traditional car buying route.

Just like with an apartment lease, your lease agreement determines what you can and can’t do while borrowing the car. It’s a comprehensive document that covers things like your payment frequency, mileage limits, maintenance requirements, fees, and penalties.

Some of these terms are negotiable, others are not. Just like when you buy a car, the biggest factor to negotiate is the vehicle’s purchase price. However, it’s a little different with leases, which is why it’s important to know the meaning of common lease terms.

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The Car Lease Terms You Need To Know

Car leases can feel like dense paperwork. That’s because they are. Still, to nail your car lease negotiation, you should be able to read between the lines and understand what you’re discussing. Here’s a list of key terms to be aware of.

  • MSRP: Auto manufacturers, like Ford and GM, recommend a sale price to dealerships for each of their vehicles. That recommendation is an MSRP — or Manufacturer’s Suggested Retail Price.
  • Sale price: The actual sticker price offered by the dealership, which can vary from the MSRP. Manufacturer incentives and dealership discounts reduce the sale price.
  • Capitalized cost: The dollar amount financed under your lease. Without a down payment or trade-in, your cap cost would be the same as the sale price.
  • Residual value: The estimated value of the vehicle at the end of the lease, usually expressed as a percentage of MSRP. This value is determined based on industry data.
  • Depreciation: The change of vehicle value from the start to the end of the lease. In other words, the capitalized cost minus the residual value.
  • Money factor: Lenders use the money factor (also known as rent charge) to determine your monthly financing costs. However, lessors are not required to include this rate in lease agreements — you have to ask for it. Note that you can convert a money factor to an annual percentage rate (APR) by multiplying it by 2,400.
  • Lease term: The length of your lease, usually listed in months (e.g., 36 months). Most leases are between 24 and 48 months.
  • Acquisition fee: The upfront fee that dealerships and leasing companies often change for arranging the lease.
  • Documentation fee: You might have to pay this fee to cover the lessor’s documentation processing expenses.
  • Disposition fee: You might be responsible for a disposition fee at the end of your lease, which essentially covers the costs of cleaning and prepping your vehicle for the next borrower.

Now that you understand these terms, you can calculate your monthly lease payments and figure out the right rate for your personal finance budget.

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How Are Lease Payments Calculated?

Excluding taxes and potential fees, your lease payment is based on two factors:

  1. The vehicle’s depreciation during the lease
  2. The cost to finance the lease (i.e., interest)

Most cars lose value over time and with use. The same idea still applies when you lease someone else’s car. For that reason, depreciation accounts for a significant chunk of your lease payment. Additionally, the lessee earns a premium on top of this payment to compensate them for lending the car away in the first place. It’s similar to the interest rate tied to a car loan.

An example of calculating a car lease payment
You qualify to lease a 2020 Honda Civic for 36 months. Although the Civic’s MSRP is $20,000, the manufacturer offers a $1,500 incentive. On top of that, you manage to haggle another $1,500 off the new vehicle’s sticker price, bringing the price of the vehicle to $17,000.

To lessen your monthly payment, you put $2,000 down, reducing your capitalized cost to $15,000. The dealership’s financing program determines that the residual value of the Civic is 70% after three years — or $10,500. The lease offer also has a money factor of 0.001 (2.40% as APR).

So, here’s an overview thus far:

  • Sale price: $17,000 (MSRP minus incentives and discounts)
  • Capitalized cost: $15,000 (sale price minus your down payment)
  • Residual value: $10,500 (the estimated value after three years)
  • Money factor: 0.001

With this information, we can calculate your monthly payment.

The depreciation component would be the capitalized cost minus the Civic’s residual value, or $4,500.

Capitalized cost  –  Residual value  =  Depreciation component

$15,000 – $10,500 = $4,500

By dividing this total by your lease term, we arrive at a monthly depreciation cost of $125.

Depreciation component  /  Months of lease term  =  Monthly depreciation cost

$4,500 / 36 months  = $125

To calculate your finance costs, you’d add your capitalized cost and residual value together and then multiply that sum ($25,500) by your money factor (0.001). This would be $25.50 per month.

(Capitalized cost  +  Residual value)  x  Money factor  =  Finance costs

($15,000 + $10,500) x 0.001 = $25.50

Coupled together, your pre-tax monthly lease payment would be $150.50.

Monthly depreciation cost  +  Finance cost  =  Pre-tax monthly lease payment

$125 + $25.50 = $150.50

What Parts of a Car Lease Are Negotiable?

Some people like to live by the adage of “everything is negotiable.” Unfortunately, that’s not the case with car leases. Some aspects of your lease agreement are not open for discussion. Here are three non-negotiable car lease terms:

  • MSRP: Regardless of the vehicle you choose, its MSRP is non-negotiable. This dollar amount is set by the manufacturer — not the dealership you lease the car from.
  • Acquisition fee: The upfront charge for arranging the lease is typically standardized by the lessor and non-negotiable.
  • Residual value: Since this is determined by independent data, your vehicle’s residual value is non-negotiable.

However, there are plenty of lease terms for which you do have a say. Here are three negotiable areas of your car lease:

  • Sale price: Although a vehicle’s MSRP is set in stone, that doesn’t mean you can’t push for a discount on the dealership’s selling price. Quite the opposite — you should negotiate the price of the car down to save money and lower your monthly payment.
  • Mileage allowance: Leases typically restrict the number of miles you can drive during a given year (e.g., 15,000 miles per year). Depending on how often you drive, your needs may exceed your mileage allowance. If that’s the case, there’s nothing wrong with requesting a higher limit.
  • Money factor: Although the money factor is often viewed as non-negotiable, that doesn’t mean you can’t take your business elsewhere if a dealership refuses to disclose it upon request. Some dealers boost the money factor to increase their profits. Since it ultimately impacts your monthly payment, it’s worth scrutinizing this aspect of your lease.
What rate can I get? What rate can I get?

With these areas in mind, let’s discuss a few steps for negotiating your car lease.

How To Negotiate a New Car Lease Like a Pro

You don’t need years of negotiation experience to outmaneuver a salesperson, get the best lease possible, and reduce your total costs. By taking the following steps, you can set yourself up for negotiation success.

Step 1: Check your credit report

Much like applying for an auto loan, your credit factors into your likelihood of getting a lease with favorable terms. For that reason, it’s worth checking your credit report ahead of time. You may come across errors or realize your credit score could use some work.

You’re legally entitled to a free credit report from the major credit bureaus, including Experian, Equifax, and TransUnion.

Step 2: Know market rates before you negotiate

You don’t have to be an auto industry genius to negotiate a fair sale price for your lease. Visit sites like Edmunds and Kelley Blue Book before you step foot on a car lot. Browse vehicles (new cars and used cars), making note of average values. Then use these amounts as starting points in your lease negotiation.

This will help you avoid spending more than a vehicle’s worth.

Step 3: Browse multiple dealerships

Want an easy way to increase your leverage at the negotiation table? Have multiple tables. Rather than corner yourself by shopping exclusively at one dealership, extend your search to various lots in the area. Test drive until you find the best car. Give yourself options.

Whether you’re buying or leasing, this approach can help you secure the best price, terms, and vehicle.

Your Car Lease Contract Negotiation Starts with Research

Negotiating can feel like a stressful process, regardless of the situation. But the easiest way to calm those nerves and increase your odds of saving money is to thoroughly research beforehand. By entering a discussion armed with market values and specific numbers, you can guide the conversation to the right conclusion.

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About The Author


Carter Kilmann

Carter Kilmann is a personal finance writer and editor for hire, covering topics like credit cards, mortgages, budgeting, banking, and investing. He's written for The Points Guy, Investing.com, Thrive Global, Day to Day Finance, Money Mini Blog, and more.


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