Thursday, September 23, 2010

Negotiating a Car Lease - Bracketing

After reading “How much should you pay for a new car?”, you should by now have identified the specific car you're interested, in its specific trim level, selected options and set a price target (TMV). 


In this article, we assume you have decided that you want to lease the car, for your own reasons, and have found a dealer.

Before we start,  if you found special lease offers while shopping, seriously give these consideration. Look at the ad, study the details, they are usually packaged with low financing rates and lease rates. Sometimes, they vehicles are also discounted. Check these out. If the price is right and the cars are not rinky dink versions of the showroom model, you may not have to do much negotiating to get a good deal.


HOT TIP: Do not lease or purchase a new car by rolling over an unfinished lease or car loan. You’re gonna get screwed. You’re going to get it on the old car, on the new car and on your brand spanking new inflated lease balance. A new car ain’t worth it. You might as well drop a bar of soap in a prison shower.


Back to the business at hand, determine how much down payment you’re going to put towards the car.  This will come from either your pocket or the value of the vehicle you’re trading in.


Determine your lease term. Do you want 1, 2 or 3 years? I do not recommend leasing a car for more than 36 months. If you want to have the car longer than that, BUY IT! It’s better to build some equity and get some of your money back in the end. 


Also, if you plan to have the car for longer than 3 years, you run into the risk of going over mileage. An extra 20 cents a mile for 15,000 miles over the life of the lease is $ 3,000. That’s in cash money due at the end of the lease!


HOT TIP: buys cars.  If you’re afraid of having to sell a car after financing or considering a trade-in, try and flip it over at Carmax. Before selling the car (or trading it in), exercise due diligence and check for its fair price. Carmax offers relatively little hassle. They won’t quote you on the phone though. You'll have to drive the car to one of their lots for inspection. As an alternative, makes selling cars to private parties relatively easy too. It will be a private sale, so realize that it will take more time and effort. Be wary, there may be some weirdos knocking on your door. Selling on Craigslist is another beast unto itself, a beast that has the potential to pay more for your car.


With the down payment and the term set, we will need the MSRP, the TMV price (national selling average price), the state sales tax rate, down payment amount, length of lease (term) and the CAR VALUE at END of LOAN (residual value). The Residual Value is available from your salesman. It will be disclosed to you on when they give you an offer. It is dependent on the term of the lease and the vehicles value. Normally, it is around 54% of the car’s value for a 36 month lease.


HOT TIP:  After determining the term and the down payment, DON'T CHANGE ANY OF THESE VARIABLES in negotiation. If you’re unable to do complex math in long hand, chances are you’ll get thrown off your game.


Plug all these numbers into the lease calculator.


As an example, let’s do an exercise using a base model 2010 Toyota Tacoma with an optioned air conditioner using an TMV table.



In filling in the numbers for the lease calculator, residual values can be had from the sales person. If its not available, for whatever reason, for the purpose of negotiations, we can go ahead and assume 54% of the TMV. 


TMV ($ 16,018) X 54% = $ 8649.72 (Car Value at End of Loan or Residual Value)


For interest rates, get a rate quote from your bank for a car loan and locate the dealer's advertised special rates from their website. If a special finance rate is unavailable for the car you want at the dealer website, find a finance rate that is and use that one. You deserve it! As of 2010, dealers are offering finance rates lower than banks. That will not always be the case.


Among the interest rates you gathered chose the lowest and use it for our computations. This may have you leasing with the bank. So be it. You may be wondering, what we have is not a lease rate/money factor. Don't worry, calculator has done well here and requires an interest rate . Their calculator converts the interest rate into a lease factor. This removes the rocket science from a lease. Money is money, and a lease and a loan should cost pretty much the same.


Note: the Final Negotiated Price entry for the calculator is negotiated price plus all dealer charges.


HOT TIP: I generally do not include dealer charges. This gives me a low base to start negotiations. I know, dealers have to pay such costs. That’s their problem. 


Back to the Tacoma example, here is the table with all the variables.


Your monthly payment on a 2010 Tacoma with $ 1000 down is $ 196.92 based on the TMV. 

Now lets start bracketing. Tweak the previously filled out lease calculator by adjusting the negotiated price. For the purpose of this exercise, lower the price by $ 500.00 to $ 15,518.00 and recalculate by clicking on the Calculate tab.

The amount add or deduct from the Negotiated Price column on the calculator it is dependent in what seems reasonable compared to the value of the vehicle. If we were negotiating for a BMW 550i with an MSRP of $ 75,000, I’d probably adjust in steps of $ 3000. Get my drift?

After adjustment, the monthly on that Tacoma is now $ 181.25. Repeat this process moving above and below the TMV. Bracket the negotiated price by intervals of $ 500, our assumption. The compute to an upper limit no higher than the MSRP. Set the lower limit somewhere below the INVOICE price. Print out each one of these pages, we will need them later. Make as many computations as needed to cover the range in which you think the price can be negotiated. Assumptions over the TMV are made to factor in unanticipated options already included in the car that’s in the lot.

After the exercise, we get a table of various negotiated prices and their corresponding monthly payment.  

$ 17130 - $ 231.79 monthly
$ 16518 – $ 212.60 monthly
$ 16018 – $ 196.92 monthly
$ 15518 – $ 181.25 monthly
$ 15018 – $ 165.57 monthly

Do you see what we are doing?  With all variables (term, rates) constant, except the negotiated price, we now have built ourselves a map to negotiate your monthly lease payment. Let’s go to the dealer!

Sitting down in front of the salesman, before you start negotiating, get everything straight. Which car are we dealing with here? Tell the salesman the term you have in mind and the amount of your down payment. With that done, WAIT! Do not blurt out your offer. Ask the dealer for his price, and the monthly payment. They’ll give it to you. They do not expect you to know what you’re doing on a lease.

Study the offer. How much is the dealer selling you the car? Let's say the offer is $ 250.00 a month with $ 1000 down. That’s not right. We know this from our table.

From my own experience, I was negotiating for a $ 27,400 car, for 36 months, with $ 2000 down and a 1.9% special financing rate (converted to lease factor). The first offer on the table was $ 435 a month. That prices the car over $ 28,000! No, no, no, I told the sales guy NO WAY. You’ll get the standard reply, “what do you want?”. They are prepared to deal. These are professionals. I took that car home for $ 345 including sales tax. That’s $ 314 a month ex-tax. Total savings of $ 1080 a year or $ 3240 over the life of the lease.

HOT TIP: Always negotiate including tax! That’s how are our negotiating table is computed and that’s how we'll roll.

Let us  proceed. Back to the Tacoma, we know the national average selling price and that is what we are shooting for. But for starters, shoot LOW. The base model Tacoma is not a high margin vehicle. It’s a business model. Invoice, according to is about $ 16,000 just around TMV. Offer the salesman the monthly payment for $ 15,000 ($ 165/month) and let him chew on it. See how he reacts. Work your way from there. Work at getting the car under or just at TMV. If he objects and you hit a wall in negotiations, pull out your printed page with the monthly payment that is closest to your current stand-off price. This will show him you know where you are and that you know what you should be paying. Don’t worry, you’ll get it. If not at this particular dealer, at another one. The TMV is a true price. The Tacoma is being sold somewhere at this price. Its a THE NATIONAL AVERAGE, that means the car is selling somewhere LOWER.  We know the fair price and its now a matter of how much below it can you negotiate.

Don’t let the sales guy confuse you with lease rates and money factors. He'll throw every trick in the book at you. Pay no heed. We have included all the factors in our computations using available interest rates. We're good. All assumptions are set. All you need to negotiate is the monthly payment.

WARNING! Do not change length of the lease (term) or the down payment during negotiations. These will change your cost and throw you off your game. You can’t get what you want when you don’t know what you want. These numbers should be set in stone before you walk into the showroom.

Continue negotiations until you hit common ground. Things should go fast once you’ve pulled out you spread sheet and showed it.  If the vehicle comes with unanticipated options, ask how much the options are (if you want them) and just note the TMV from your roll of printed spreadsheets to factor them into your monthly payment.

Don’t be afraid to walk away. Most times, that is the only way to get the best possible deal. Their best offer has no expiration. It will be available to you tomorrow. If you have to, hold your ground and go home. You have nothing to lose. It’s only a question of how much is your time worth. With your TMV tables, you know how much playing the game is costing you. Be bold and make a decision.

In ending, you may have noted that we did not discuss ANNUAL MILES. Although this plays into the dealer computation, this in unimportant to us except for the fact that we should be negotiating a lease that has ANNUAL MILES within your historical average. Once that is clear to the dealer, don’t worry about. Just use the TMV Values as a guide and adjust a little bit if the dealer wants more money for 15,000 miles a year over 12,000.


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