Unfortunately, the residual value of a leased car is rarely negotiable. Banks are in the business of making a profit. The residual value is the bank's best estimate of what the car will be worth at the end of the lease term. Accepting an amount lower than the residual value for the car means a loss for the bank.
Residual Value
The residual value is the amount you can buy the car for after the lease term is up. A low residual value equates to higher monthly payments to lease the car. For example, if you leased a $30,000 car whose residual value is estimated at 50 percent of its original price --- or $15,000 --- for 36 months, your monthly payment would be $15,000 divided by 36 months, or $417, excluding interest, tax and fees. Conversely, if the same vehicle's residual value goes up to $20,000, your monthly payment declines to $294, excluding interest, tax and fees.
Negotiating Upfront
The best time to negotiate is before you sign for a car lease, particularly if you have intentions of purchasing the car at the end of the lease term. The dealer is more open to negotiating the price of the car upfront; he can then turn around and present this negotiation to the bank that's financing the transaction. You should also know the historical resale value of the car before negotiating with the dealer. You can obtain residual values by referring to the quarterly Black Book, which may be available at your bank's auto loan department. You can also check residual values online by going to the Automotive Lease Guide website.
Calculating Lease Payments
You need to understand the lease calculation to negotiate the terms when making your offer to the dealer. First you need to know the monthly depreciation rate on the vehicle. To calculate the depreciation, take the difference between the cap cost and residual value. Divide this number by the number of months you plan to lease the car. Next calculate the finance charge by adding the cap cost and residual value and multiplying this by the money factor. The dealer isn't required to disclose the money factor, but you can take an annual percentage rate, or APR, for financing the vehicle and dividing it by 2,400 to get an approximation. The APR is the yearly cost of borrowing, which includes interest rate, the origination fee and other fees. Finally, add the monthly depreciation and monthly finance charge to derive the lease payment.
Hidden Costs
Read the lease document thoroughly before signing it. Hidden costs can actually have you paying more for the vehicle than what it's actually worth. For example, in an "options" scam, a dealer charges you for car options --- e.g., a high-end stereo --- that aren't in your vehicle, thereby inflating the price of the car. Be aware of all the fees associated with your lease, such as the vehicle acquisition fee. The best way to know what you're paying for is to ask for an itemized lease agreement.
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