# How To Lease a Car and Not Get Ripped Off? Breakdown of A Real Example!

In my posts you will find a lot about car leases. Why, because it is one of the easiest places for consumers to get ripped off. I hope you will take the advice below and do the research necessary when leasing a car.

This example comes from a post I fund at edmunds.com

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“If I can get out to try to negotiate a 36 month lease tomorrow (Sept 4), can someone tell me if the following is a fair deal, or is it unrealistic?

They have a 2007 Q7 (3.6 Premium) with the following options:

Sunroof, Infotainment Nav, 4 zone climate, 3rd row seating, 19″ wheels, rear side airbags, convenience package. It says the MSRP is about $56000, invoice would be around 51700.

I read on here that there is an offer available for $4000 below invoice, bringing the cap cost to $47700.

I read on here the residual with Audi Care is 0.52, which would be $29154.

I read on here that if you take the $4000 below invoice, you can’t get the low MF, so would a MF of 0.00165 (~3.96%) be a reasonable expectation?

Using an online lease calculator, I calculate the following:

Capitalized Cost: 47719 (56010 MSRP minus discount)

Residual Value: $ 29154.00 (after 36 months)

Depreciation Fee:$ 515.69 – part of lease payment

Lease Fee: $ 124.92 – part of lease payment

Monthly Payment :$ 640.61 without tax

Usage Tax: $ 19.22 over full loan (3.00 % of 18565.00)

Total Monthly Payment: $ 659.83 including tax

So is a $640/mo payment (without tax) a reasonable expectation for this vehicle? Were any of my assumptions wrong? Is it unlikely that I can reach this deal in

Charlotte, NC where there are no other local dealers for competition?

If I take the 0.00014 MF and negotiate $500 over invoice, the payment would seem to be about $10/mo higher so I guess I could go that way too. I qualify for tier 1, but is $500 over invoice reasonable for the 2007s?”

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So, lets breakdown his offer step by step.

**1. The price of the car**. He has spent time researching the current incentives as well as the current invoice with listed equipment. The invoice for this car is around $51,700 as he found plus an additional incentive to sell this particular model $4,000 below invoice. So, his assumption of a reasonable cost of $47,700 is accurate.

*Note: Higher demand cars or limited production cars often do not sell at invoice. You can check particular data on what a fair price should be on many sites. I highly suggest kelly blue book or edmunds as two reliable resources. Also, you can check the Saturday ads in you newspaper to gauge what dealers are letting cars go for. It is good to compare the two sources.

**Additional Resources:**

**2. Expected Residual:** This one is tough. To find the exact residual of your car you have to do digging. This buyer was able to find it reading through posts. Another source is looking at what the average value of the car you are planning to buy is worth after 3,4, and 5 years. This can be done using KBB.com, but be cautious of any model changes that may alter the results.

What you are trying to determine is what the bank considers the value of the car after the loan term. For the Audi above, the bank considers the car to retain 52% of its value after 36-months. Some cars are higher and others are lower. Typically American cars such as Ford, depreciate faster then foreign automakers. The better your car holds its value the less you are going to pay for the lease.

Cars that hold value well are typically strong reliable cars with good resale values like the Honda Accord. You can also try doing a search for residual value “insert car”. Things should pop up.

*Note: Why is residual value important? In a lease you are paying monthly the depreciation of the car plus a money factor fee on that amount. The faster your car loses value the more your payment will be. You could have two cars that have large price differences but cost the same per month to lease. That is why you should only lease cars that have good residual values (hold their value better). Cars that don’t, buy them, it will be cheaper in the long run.

Also, for this same reason the typical optimal lease is 36-months. After that, cars really start to lose value and this affects your entire payment structure. Never buy a car on a 60-month lease.

**Additional Resources:**

**3. Money Factor:** This is the cost you pay to lease the car otherwise known as interest. The Money Factor is expressed in a four or five digit decimal number such as .00210. To convert this to an equivalent interest rate simply multiply the Money Factor by 2,400.

The Money Factor of .00210 is equal to a 5% interest rate. The length of the loan does not matter when doing the conversion. To go the other way simply divide by 2,400 and you can determine what Money Factor equals what interest rate.

The buyer again has shown great knowledge and done homework. The money factor should be in line with current financing rates. Typically, if a special is running on interest rates, some special is running on Money Factors. The buyer has determined that a fair rate given his credit and the market conditions is .00165 or just under 4%. This is probably a fair rate for the term when taking the rebate. If the rebate was not taken, then expect a much better lease factor. If you don’t know which to take please see this post

**Additional Resources:**

Leaseguide.com

Swapalease.com

BankRate.Com

(Note: Leaseguide.com offers a pay product to help with a lease purchase. I firmly believe you do not need this product. While I am sure it is very well done, there is enough free information to help you if you are willing to take the time to learn. If the fee is worth it to you and you want to save time, then by all means purchase the product, but I truly think you can save your self some cash. I do not make any referral fees if you purchase the program, just my two cents.)

**Now you are ready to calculate your lease:**

The three components of a lease are your Money Factor, Price of the Car (cap cost), and residual (or depreciation).

For the deal above we know:

Money Factor is .00165

Price of Car is 47,719 (cap cost)

Depreciation is about .52 or 52%.

Residual is equal to (MSRP X Depreciation) = 29,125.20.

We know that the expectations above are fair from researching the cost of the car along with rebates available, market conditions for interest rate, and the expected depreciation of the car.

**Here is how you compute your lease payment:**

There are two parts, the depreciation fee and the finance fee:

**Depreciation Fee:
**Depreciation Fee = (Cap Cost – (MSRP X Depreciation) )/ term Or ( Cap Cost – Residual ) / term.

For the car above: (47,719 – (56,010 X .52)) / 36 = $516.49

**Lease Fee or Finance Charge:
**Finance Charge is equal to: Cap Cost + Residual X Money Factor(This is an approximate way to calculate the fee with out using accounting formulas)

Finance Charge = 47,719 + 29,125.20 X .00165 = 126.79

**Your Lease Payment before taxes:**

Lease payment = Finance Charge + Depreciation Fee = 126.79 + 516.49 = $643.28

Due to rounding and slightly different calculations the numbers vary slightly than calculations from the buyer, but the buyers calculations seems to be in line. Tax is every state is different, so make sure you know what you are suppose to pay for tax and exactly what is taxed. I would say the buyer in this case has come up with a great offer. In a follow up post, the buyer took the offer to the dealer and they accepted.

If you spend the time and do your homework, a lease can be very good option. If you don’t understand the calculations above and can’t do them on your own, don’t lease the car. If you must, find someone that can help you with this. There are to many places to add in profit and still make the deal look good to the buyer.

**To close, here are just a few places they can add un-reasonable terms that you should be aware of:**

**Residual:** Be careful on this one. They will always tell you the residual is set by the bank, this is true, but is it what they are giving you? If all the information you have tells you something different then what they are giving you, don’t buy the car. Go back home do more research to make sure you are right and then go to a different dealer.

Second warning: you want the residual to be as high as possible! This seems strange, but remember that most of the lease payment is the difference between the residual value and the Cap Cost. The smaller the number the lower your lease payment.

Unless you plan on buying the car after the lease, any down payment or money towards lowering the residual value is wasted. Think about this one. The bank says a car is worth 25K at the end of the lease, why would you want to pay money to bring this value down to 20K when you just plan to give it back? That means you gave the bank 5K you did not need to give them. Lets look at it in terms of rent for a house. What if a landlord told you the rent is $800 per month, but you need to put a down payment that is equal to 10% of the house price. This down payment you don’t get back when you leave, would you do it? I hope not, same with a lease.

One last thing on residual. It is always MSRP X Depreciation. Be careful, they may try to show you a residual value that is your cap cost X Depreciation (This assumes you are not paying more than the MSRP). If they calculate your payment based on a lower car price it lowers the residual value which is the opposite of what you want to do.

**Lease Factor:** They may not want to share this with you. If they don’t, you will have to do your own calculations. I would suggest if they don’t show you the Lease Factor then leave.

**Monthly Payments:** My biggest rule, do not negotiate the monthly payment. The payment is a function of depreciation, lease factor, and car price. You can negotiate all these factors and if you do well the monthly car payment will fall where you expect it to.

**Mileage and other fees:** Check what they are and make sure you will not be stuck with a big fee at the end of the lease. Mileage caps add up fast when you are charged .15-.25 per mile. If you are over by 10K miles you will be looking at a $2,500 penalty.

Be careful.Good luck, do your homework, and you will not get ripped off.

Please leave comments with your strategies for others to read!