How do I understand a quote for a car lease?
November 13, 2023 10:50 AM Subscribe
I'm about to get a new car, an EV. I'm trying to get quotes from multiple dealers. I'm leasing it and finding it hard to compare quotes because of all the numbers: the price of the car, various fees, the trade-in, the implicit interest rate in the lease financing. How do I make sense of a lease quote?
I'm pretty sophisticated with financial stuff and numbers, I've just never looked at car leases before. What I'd like to understand is "this is what the price of the car is that you're paying. this is the extra fees we attach because you're leasing it. and this is the implicit interest rate in the contract". It gets doubly complicated with a trade-in where they use the trade in value to pre-buy part of the lease payments. I want to untangle all that so I can more easily compare quotes. Trying to be more sophisticated than just looking at the monthly payment number at the end.
FWIW the calculator at Leasehackr looks useful and the kind of thing I want, but contains things that don't match the dealer quote I have. Particularly curious about the "money factor" which I gather is the implicit interest I'm interested in. That's not explicit in my quote but the salesman told me that one car had a better MF than the other.
I'm pretty sophisticated with financial stuff and numbers, I've just never looked at car leases before. What I'd like to understand is "this is what the price of the car is that you're paying. this is the extra fees we attach because you're leasing it. and this is the implicit interest rate in the contract". It gets doubly complicated with a trade-in where they use the trade in value to pre-buy part of the lease payments. I want to untangle all that so I can more easily compare quotes. Trying to be more sophisticated than just looking at the monthly payment number at the end.
FWIW the calculator at Leasehackr looks useful and the kind of thing I want, but contains things that don't match the dealer quote I have. Particularly curious about the "money factor" which I gather is the implicit interest I'm interested in. That's not explicit in my quote but the salesman told me that one car had a better MF than the other.
EVs add one extra nuance because of the possible government rebates going on right now. Earlier this year the rules were changed to allow only US-made EVs to qualify for the rebate but somehow the rest of the manufacturers found a loophole that allowed for the rebate IF the car was leased...so the rebate gets wrapped into the deal sheet as a "discount".
So make sure you understand if a rebate was included in the quote, or if you qualify for one after the deal at tax time, or maybe none of it, or maybe some other combination. Ask. And check on state rebates too.
posted by JoeZydeco at 11:29 AM on November 13, 2023 [1 favorite]
So make sure you understand if a rebate was included in the quote, or if you qualify for one after the deal at tax time, or maybe none of it, or maybe some other combination. Ask. And check on state rebates too.
posted by JoeZydeco at 11:29 AM on November 13, 2023 [1 favorite]
Best answer: It sounds like you have pretty much now learned one of the basic tenets of car sales. Dealerships have THREE ways they can make money off you:
1. the purchase price of the car
2. the value of your tradein
3. the terms of the financing
So if you manage to negotiate a low price, watch out for the financing terms or tradein valuation.
Above, uncleozzy makes the point about how price and residual that go into the lease terms, which is effectively part of the #1 item above. I would add that IF there's a chance you might keep the car at the end of the lease, you really REALLY want to focus on the price more than the residual. A high residual does lower the lease price, but it increases the buyout cost at the end (if you decide to keep the car).
Twenty years ago, James Bragg described all this in his print book, and I presume that he does so now digitally on his website FightingChance.com. He sells a $50 pricing data package and I would absolutely pay for it, based solely on the excellent advice I got from his book so many years ago. In fact, I'm in the market for a new EV myself, and I'm going to buy it Bragg's data package, as soon as I decide exactly what car I want (and what I'm flexible on, a key point that Bragg makes).
But even if you don't buy that service, do take the time to carefully read his website.
For the entirety of the 2010s, I told people to only lease EVs, because the technology was improving so fast. Around 2020 that tech curve started to level out a little (still improving but not so insanely fast) so now it's OK to buy. That means that you probably won't regret having bought (instead of leased) the car three years from now, because the newer EVs will be better but not dramatically so like they were every three years in the 2010s.
posted by intermod at 1:58 PM on November 13, 2023
1. the purchase price of the car
2. the value of your tradein
3. the terms of the financing
So if you manage to negotiate a low price, watch out for the financing terms or tradein valuation.
Above, uncleozzy makes the point about how price and residual that go into the lease terms, which is effectively part of the #1 item above. I would add that IF there's a chance you might keep the car at the end of the lease, you really REALLY want to focus on the price more than the residual. A high residual does lower the lease price, but it increases the buyout cost at the end (if you decide to keep the car).
Twenty years ago, James Bragg described all this in his print book, and I presume that he does so now digitally on his website FightingChance.com. He sells a $50 pricing data package and I would absolutely pay for it, based solely on the excellent advice I got from his book so many years ago. In fact, I'm in the market for a new EV myself, and I'm going to buy it Bragg's data package, as soon as I decide exactly what car I want (and what I'm flexible on, a key point that Bragg makes).
But even if you don't buy that service, do take the time to carefully read his website.
For the entirety of the 2010s, I told people to only lease EVs, because the technology was improving so fast. Around 2020 that tech curve started to level out a little (still improving but not so insanely fast) so now it's OK to buy. That means that you probably won't regret having bought (instead of leased) the car three years from now, because the newer EVs will be better but not dramatically so like they were every three years in the 2010s.
posted by intermod at 1:58 PM on November 13, 2023
Response by poster: Thanks for the advice so far. Some things I've learned here already:
This explains the US tax credit for lease vs buy. Long story short: if you buy a car you may or may not qualify for the $7500 credit. But if you lease it, you almost certainly will. Or rather the car company will. Most of them pass that savings on to you. That's exactly what I've seen in the quote I have; the lease price is calculated with a $7500 difference from the buy price.
Uncle Ozzy's old post highlights two special parts of a lease contract that are different from a purchase. The lease includes a "residual value" and a "money factor" which are possibly negotiable and not part of a cash purchase contract. That's in addition to the sale price, the trade-in value, and the various fees + addon gimmicks that's a feature of both purchases and leases. I feel like if I understand those numbers I will be able to evaluate the quote.
posted by Nelson at 2:51 PM on November 13, 2023
This explains the US tax credit for lease vs buy. Long story short: if you buy a car you may or may not qualify for the $7500 credit. But if you lease it, you almost certainly will. Or rather the car company will. Most of them pass that savings on to you. That's exactly what I've seen in the quote I have; the lease price is calculated with a $7500 difference from the buy price.
Uncle Ozzy's old post highlights two special parts of a lease contract that are different from a purchase. The lease includes a "residual value" and a "money factor" which are possibly negotiable and not part of a cash purchase contract. That's in addition to the sale price, the trade-in value, and the various fees + addon gimmicks that's a feature of both purchases and leases. I feel like if I understand those numbers I will be able to evaluate the quote.
posted by Nelson at 2:51 PM on November 13, 2023
Residual value isn't really negotiable. It's the leasing bank saying "today your car is being purchased at $55,000. In three years and 10,000 miles of use per year we believe it will be worth a residual value of $33,000. So you will be financing the difference ($22,000) over the next three years". This is also the price you can pay to buy the car at the end, if you choose.
You can negotiate the starting value, but the ending value is figured by the bank. The mileage you choose per year may move that ending value slightly. But make sure you know how much you plan to drive the car because if you start to exceed the mileage amount at the end of the term it can add up to a big amount you'll owe if you choose to return the car. Like, literally, $0.25 a mile sometimes.
Residual values are a very educated guess but sometimes they work in your favor. I leased a car before the pandemic and when the lease was over, new cars were scarce and my used model was worth a LOT more than the residual. I could have flipped the car for a profit, but then I'd have no car. Or it would have been really expensive to buy a new one.
Right now I'm in an EV lease myself and I think the car will be worth less than what the bank predicts three years from now. I think battery technology and competition will eventually pull prices down and my model will be worth a lot less than the residual in 2026. In that case I hand the keys back to the bank (NOT the dealer, big thing to remember here!) and walk away.
posted by JoeZydeco at 6:54 PM on November 13, 2023 [2 favorites]
You can negotiate the starting value, but the ending value is figured by the bank. The mileage you choose per year may move that ending value slightly. But make sure you know how much you plan to drive the car because if you start to exceed the mileage amount at the end of the term it can add up to a big amount you'll owe if you choose to return the car. Like, literally, $0.25 a mile sometimes.
Residual values are a very educated guess but sometimes they work in your favor. I leased a car before the pandemic and when the lease was over, new cars were scarce and my used model was worth a LOT more than the residual. I could have flipped the car for a profit, but then I'd have no car. Or it would have been really expensive to buy a new one.
Right now I'm in an EV lease myself and I think the car will be worth less than what the bank predicts three years from now. I think battery technology and competition will eventually pull prices down and my model will be worth a lot less than the residual in 2026. In that case I hand the keys back to the bank (NOT the dealer, big thing to remember here!) and walk away.
posted by JoeZydeco at 6:54 PM on November 13, 2023 [2 favorites]
Money factor = APR(in percent) / 2400.
posted by kickingtheground at 8:44 PM on November 13, 2023
posted by kickingtheground at 8:44 PM on November 13, 2023
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posted by uncleozzy at 11:04 AM on November 13, 2023 [4 favorites]