conversation: User (tomatuvm): "I have seen a lot of posts recently about best practices with car buying, but I haven't seen anything on _how to_ lease a car. So I figured I'd write this up! \n\nOk, let's get this out of the way right away: Leasing isn't for everyone. In fact, it's probably a bad idea for most people. But if you are going to lease, you need to know how leases work and where they get the numbers in order to get the best deal. And knowing the numbers may actually make you realize it's a terrible deal and to stay away. \n\nBut for this post, I'm not debating the merits of leasing, just explaining HOW the math works, what your costs actually are and how to realistically minimize those costs. \n\nThis post will include the following info:\n\n- The math behind the calculation\n- What kind of car to look for\n- Where to find the info you need\n- How to negotiate the best lease\n\n***The Math***    \n\nLet's start with how the lease monthly payment is calculated. \n\nThe formula is: Payment = Depreciation + Finance charge.    \nYour depreciation is: ((Capitalized Cost - Residual Value) / Number of Months)   \nYour Finance charge is: ((Capitalized Cost + Residual Value) * Money Factor   \nSo your total formula is: Payment = ((Capitalized Cost - Residual Value) / Number of Months) + ((Capitalized Cost + Residual Value) * Money Factor)\n\nPretty simple right? So what do those things mean?\n\nCapitalized cost: This is the amount financed. Did you know in a lease, you are actually financing the depreciation? This can be higher or lower than the price of the car, depending on whether or not you are putting money down, rolling over negative equity, or tacking on fees into your payment. The lower the better!\n\nResidual value: This is what the manufacturer (or the bank, if using a separate lease provider) thinks the car will be worth at the end. It's expressed as a percentage. 50% or 0.50 means they think it will be worth half as much in the end. The more miles you want, the lower the residual will be. Residual can also vary by trim package (i.e., the "Limited" has a higher residual than the "Sport"). The higher the better!\n\nMoney factor: This is the interest rate. For some reason, it's always actual interest rate / 2400. So 4% = 0.0016 and 0.9% = 0.000375. The lower (more zeroes) the better!\n\nNumber of months: How long you want to lease for. Sometimes manufacturers juice the leases depending on months. For example, VW wanted to move Jetta GLIs off their lots a few years ago, and had insanely inflated residuals and ridiculously low money factors on 2 year leases, making them about $100/mo less than a 3 year lease.\n\nRefundable security deposits: This is expert level leasing. Almost no one knows about it, even dealerships. But some banks allow you to put down a refundable security deposit in order to lower your money factor. This is usually for people with low credit to secure the rates of someone with higher credit, but some let people with top tier credit put down money to get an even lower rate. I was told by the finance manager and the sales manager at one Toyota dealership that I was wrong. I asked them to call Toyota, and they came back and said "well, you learn something new everyday". If you are doing a refundable security deposit, simply calculate if the reduced payment on your lease will be higher than the guaranteed return on your money. In other words, if you put down $3000 and get $20/mo off, at the end of 3 years you'll have $3000+20x36 = $3,720. That's a 7.44% guaranteed return!\n\n***Type of car to look for***   \n\nTo get the cheapest lease possible, you want to find a car that the manufacturer is discounting (this will reduce your 'cap cost'), which has a naturally high resale value (think Honda or Toyota), and a low money factor (triple zero!). \n\nYou can monitor for specials, search online for deals, or call around when you are looking for a car. If manufacturers are advertising cheap lease deals, it probably means they are either discounting the car or offering a really cheap money factor. Just realize that if it's being advertised, you can do better by negotiating. \n\nAs with anything, google is your friend as well: I got my parents a great lease deal by googling "current lease deals" and finding out that Mazda was basically doing interest free leases - they're driving a $30k car for $315 a month, with zero money out of pocket.\n\n***Where to get the info***   \n\nSo now you know you want to lease a car. You need to start filling in the blanks. What are the sources of this information:\n\n- Dealerships. They won't tell you easily, but if you make it clear you are a serious buyer, they'll share the real info with you. I've found that sales managers and internet departments are the most likely ones to share the info.\n- Edmunds TMV. This a great source to find out how much cars are actually selling for in your area. You can option the car and price it out and see if it's realistic to get a car below invoice or at msrp or somewhere in between.\n- CarGurus. I've found this site/app super helpful for knowing what specific cars are available in an area, what the average price is, and how long the car has sat for.\n- Edmunds vehicle specific forums. This is the best source I've found for up to date residuals and money factors. The mods of the forums answer specific questions on current vehicle offers.\n- Google. If you google "money factor + residual + [make/model]" you might find another source that will break it down for you. \n\nI like to find all of the numbers, plug them in, figure out what the monthly payment would be, and then start calling dealerships to confirm my numbers are right. This makes negotiation easy - figure out what you want to pay, figure out a reasonable price, and then find someone who will sell it to you for that. Speaking of...\n\n***The negotiation***   \n\nHere's where it can get tricky. Even if you know the numbers and know what you're trying to do, they'll still try and add stuff on. There are curveballs everywhere. \n\nAlso, it's going to be rare that you'll find a sales person who will dive into calculating at this level. They will ask you about monthly payment, your trade-in, what you want to pay. You need to be firm and stick to your plan. The last time I leased this led to me walking out of one dealership after they wouldn't play ball. Their loss, I walked into one the next weekend and leased the same car for LESS than I was willing to pay at the first one. \n\nThe key strategy is this: _focus on the sale price of the car_. You already know the money factor and residual. Those are driven by the bank and the dealer can't budge (unless they find you another bank). You want to negotiate the lowest sale price possible. This is where the Edmunds TMV and Cargurus info is so helpful.\n\nDo not talk about down payments. Do not talk about monthly payments. Do not talk about trade-ins. Do not talk about _anything_ except the sale price of the car.\n\nWhy is this so important? Because the residual is always calculated based on the MSRP of the car. But the closer the residual is to the sales price, the less depreciation you are financing. So the lower "sale price" you can base the lease on, the cheaper your payment!\n\nSome other tips to think about when negotiating: \n\n- Never put money down. All a downpayment does is reduce your cap cost. But if you drive off the lot that day and get slammed by an 18 wheeler and have the car totaled, you'll never see that money again. NEVER PUT MONEY DOWN.\n- If you can, sell your car privately. Don't trade it in on a lease. Why? See above. It's money, and it may disappear. There are obviously exceptions to everything, but in general, don't trade a car in.\n- Watch for additional fees. Dealers charge for document fees ($100-$500, may or may not be negotiable) and a host of other factors. Ask for these to be separated out, then decide if you want to lease them. When your money factor is near 0, you may be ok with "financing" these costs. But you may just also want to pay them up front (note: this isn't a down payment).\n- Taxes: these vary by state, but in my state they're based on a prorated lease rate. So it's a monthly payment of (6.5% x calculated monthly payment) is added on to your total payment.\n\nSo what are some real world examples:\n\nI currently lease a 2017 Toyota 4Runner Off Road Premium. The MSRP of my car is $40,500. Toyota was running a lease special of $399/mo with $2,999 down, plus taxes and fees for a base SR5 that goes for about $37k. Seems like a great deal, right? And I should be paying more for a more expensive vehicle than their current special, right?\n\nWell, I looked up on edmunds and found out that the car was actually selling for closer to $38k. Cargurus confirmed this, and also showed that several were available near me and had been sitting on lots for a couple weeks. I did some research and found out the residual was high for a 3 year, 36k mile lease (I think 65%) but the money factor was kind of meh (0.00225). Let's see the differences, using the MSRP:\n\nPayment = ((Capitalized Cost - Residual Value) / Number of Months) + ((Capitalized Cost + Residual Value) * Money Factor)\n\n((40,500 - (40,500 x .65))/36 = ($40,500-$26,325)/36 = $393.75 +     \n((40,500+ (40,500 x .65)) x .00225) = $150 = $544/mo .   \n\nOk, now let's play around with this a little bit. Let's remove $3000 from the "capitalized cost" after we learn that the average Edmunds selling price is $2500 below MSRP (and we're going to negotiate a little better than average).   \n\n((37,500 - (40,500 x .65))/36 = $310 + ((37,500+(40,500 x .65)) x .00225) = $143 = $454/mo\n\nWe just dropped almost $90 off the price by knowing what we can actually get the car priced out. How do we lower the price a little more? Turns out, Toyota will drop the MF from 0.00225 to 0.00153 if you put down $3600 in fully refundable security deposits, returned in full at the end of lease completion. Let's run the math again.\n\n((37,500 - (40,500 x .65))/36 = $310 + ((37,500+(40,500*.65)) x .00153) = $98 = $408/mo\n\nAnother $50 off. We dropped our interest rate from 5.4 to 3.67 and the price came down accordingly. \n\nNow, let's plug the same numbers in and push for a dream price: $36,500. That gets my payment down to $379. With a tax of 6.25%, my final payment will be ($379*.0625)+$379 = $402. Since my goal is $400, it's now to time to call some dealerships and see if they'll play ball.\n\nI took out my CarGurus app, found what was on their lots, did the exact math based on exactly how they were optioned (typed the same exact cars into Edmunds), and then made specific offers and was transparent about the info I knew:\n\n"Hello dealer, I see you have a 2017 4runner on your lot with XYZ options. I believe the residual is 65%. My research tells me the money factor is 0.00153 with a $3600 refundable security deposit. If you'd be willing to base a lease off of a cap cost of $36,500 with no money down, then I will come in today to sign paperwork".\n\nNotice a few things: I share numbers that show I'm serious and have done research. I make an offer and tell them I'm ready to close the deal. I don't mention monthly payment. I confirm the numbers. \n\nThe results of this effort: Two dealers were interested. One dealership told me to come in, then wouldn't move off MSRP. When I complained to head of biz dev at the dealer, he told me I obviously worked for Toyota - "why don't you just use your own discount to order it from the factory?". He was serious too, and said that no one who wasn't in the car industry would have the knowledge or info I had. I sent him links to CarGurus and Edmunds and never went back. The other dealer told me to come in.\n\nNow here's where it got interesting. The Sales Manager asked if I'd be open to working with another bank besides Toyota. He brought out a sheet from a local credit union and shared their numbers (this is something I've seen that happens when you make it clear you know what you're talking about and are serious about buying: they stop BS'ing you). \n\nThe money factor on this bank's lease was .00165 (3.96%). Higher than Toyota's lowest, but no security deposit. And the residual was 0.68, also higher than Toyota's.\n\n((37,500 - (40,500 x .68))/36 = $276 + ((37,500+(40,500 x .68)) x .00153) = $107 = $384/mo\n\nAnother $25! Now this is getting good. Now's when we started the real negotiation. I pushed for $36,500 and said I'd sign on the spot. We ended up settling on $36,900 after some back and forth. \n\nFinal price: $366 for the car, $23 for the tax, $389/mo total, $1500 out of pocket, $40,500 car.\nWhat was Toyota's advertised deal at the time? $399/mo, $3000 down (includes fees), for a ~$37,000 car.\n\nSo by knowing how the lease works, I got significantly more car for less money per month, no money down, and the same out of pocket costs!\n\nNow, we still had to finalize a couple other things:\n\n- Gap insurance: You need this on a lease. The bank I was leasing included it, but apparently Toyota does not. So Another $10/mo or so in savings.\n- Acquisition fee: Unfortunately, the bank makes you pay an initial fee to take possession of the car. In my instance, it was about $800, which was about $150 more than the Toyota lease. I could have added this to the cap cost and paid about $20/mo more, but I decided to pay this up front.\n- First month's payment: Varies by manufacturer, but I chose to pay this up front as well.\n- Plates, title, registration, etc: Varies by state. I paid them up front as well\n- Document fees: Dealerships often inflate these to make money, since they often don't make money on the car itself. You can push and negotiate on these, but sometimes they'll waive them and sometimes not. And if they do waive them, you'll probably pay for it in the sale price of the car. I'm ok with a business making some money, as long as I know exactly what it is. I paid this up front as well.\n\nIf I had rolled all of those fees into the lease, I would have basically been financing $1500 at 4%. Now there's the argument that if I rolled it in and got into an accident, the gap insurance would basically pay for it. Overall, it would have added about $50/mo to the cost of the lease, so I paid it all up front.\n\nSo in the end, I took possession of the car for $1500, didn't have a payment for 30 more days, and now owe $389/mo for the next 3 years on a $40k+ truck. If I want to buy it in the end, it's simply the residual cost ($27,540). If I choose to buy it out before then, it's simply a matter of getting a loan or writing a check for the current buyout price that month.\n\nSo to summarize, if you are going to lease:\n\n- Know how a lease works\n- Use your internet resources to find out the current manufacturer rates for your car, but be open to different banks\n- Learn the points to negotiate the lease on\n- Don't negotiate monthly payment\n- reach out to multiple dealerships, but be straightforward, respectful, and up front.\n- Don't put "money down", but realize it may make more sense to pay some things up front.\n\n\n\n***Bunch of Edits/follow-ups:*** \n\n- well, I didn't expect the front page and 2 golds (thank you!). I was just trying to do a knowledge dump that I could share if people had questions on their lease. I always assumed my pitbulls or cat would be the thing that got me to the front page.\n- the audience was /pf, which is generally against leasing. I wasn't interested in that debate, and there are plenty of sources out there to decide if a lease is for you or not, or when it makes sense and when it doesn't. Leasing isn't necessarily the cheapest way to drive (although it can be), but sometimes there's more to life than spending the least amount of money as possible to make it through your day. But there's no reason to overpay for something that you are getting, especially if understanding how it works can save you money. \n- if you are going to lease, please do more research than this post! I was just sharing what I've learned. I wanted to share the numbers from mine to show how the payment can go up and down, and then shared where I found the numbers and how I approached the process. Not trying to claim it is the *best* way, just that if you are going to lease you should understand the mechanics of it.\n- I got a few PMs and messages that I said not to put money down and then I did. This is a valid criticism. The first payment is due at some point and I'd rather use my rewards card than ACH for that, so the only out of pocket money I paid was the acquisition cost, doc fees, and title/reg, which was about $1100 total. In hindsight, I should have just rolled that all in and had a higher monthly payment. At the time my reasoning was that it's not cap cost reduction and I didn't want to "finance" the acquisition cost. In hindsight, the same logic applies - if the car got totaled, I'd be out that money. So do as I say, not as I do!\n- thank you to everyone who provided feedback on typos and errors. I believe I fixed all of the math format edits and mixups on switching cap cost and msrp. If you see any other errors, feel free to PM me and i'll fix them.\n- several people mentioned leasehackr.com. it's an awesome site and has a great calculator. If you aren't comfortable with building your own spreadsheet, just use theirs! They also have great breakdowns on things like the deal of the month if you are just looking at getting cheap leases.\n- as someone said in the comments, please be respectful to folks if you're buying a car. I personally think having #s and doing research makes it easy for everyone because it removes the "is this guy BS'ing me?" part. Even the dealership that I walked out of in frustration, I thanked the sales guy for his time and told him to call me if his sales manager was willing to budge on price. But the dealer i did buy from, the sales manager said "you'd be surprised how many people think I'm trying to screw them when I offer leasing through our 3rd party bank".\n\nAnd finally, I'll say it again: if you are going to lease, please research beyond this post. Don't make 3 year commitments for thousands of dollars based on one guy's post! Hopefully my post helps you understand a little more how it works and provides a starting  point for research, but it wasn't meant as a be all and end all comprehensive guide!"
  Self: "Saved. My current lease is up in a few months and this is exactly the sort of info I'll be looking for then. "
  