How to Negotiate an Automobile Lease

Last week I had an unexpected opportunity to negotiate an automobile contract for a client who was in need of a new vehicle. Following a five (5) year financial plan developed based on my experience repaying personal debts; we are reducing their reliance on consumer credit and helping them save for retirement. My client’s current vehicle was paid-in-full, but began developing nuances common to aging used cars that are no longer under warranty. And unexpected costs can be detrimental to a financial plan that relies on consistent execution. For this particular situation, we looked for automobile financing options that would guarantee a payment of less than $300 per month for five (5) years, and provide the client with a reduced risk of unexpected automobile maintenance expenses. Our client required a mid-sized vehicle because of height restrictions that would cause uncomfortable driving conditions in a smaller vehicle. In addition, prior maintenance experiences had adversely affected their perception of American automobiles’ reliability and sought to acquire a vehicle from a Japanese automobile company. This left three options available to our client; the Honda Accord, the Toyota Camry and the Nissan Altima. We encouraged the client to test drive models of all three vehicles that had an approximate $24,000 price tag.

Excited to start their journal into financial solvency, our client called me on a Sunday afternoon informing me that they were at a Toyota dealership ready to acquire a new Toyota Camry. They had received a quote of $3,200 for their current vehicle and selected a new vehicle with a $24,000 price tag. But the only options presented by the dealership, a three (3) year lease option and a six (6) year purchase option, were generating payments above their requirement of $300 per month. In addition, neither of these options fit the mold of their financial plan.

To negotiate a fair lease price, I asked to speak with the financial agent who was providing my client with the leasing terms. My first request for the agent was to run payments for a five (5) year lease option on the vehicle my client had selected to gain a base payment to begin the negotiations. We selected a lease option because it divides the price of the car into two parts, the residual value that anticipates the vehicles future value at the end of the lease, and the non-residual value, which is the cost to use the vehicle for the duration of the lease. The non-residual value is then multiplied by a money factor to determine a monthly payment on the lease. Residual values and money factors are set by Toyota and provided to the dealership as a matrix but provide a slim opportunity for negotiation based on expected annual mileage. With a $24,000 price for the vehicle, a $3,200 trade in value on the clients’ car, $1,500 in tax, title and documentation fees and Toyota’s predetermined metrics, the monthly payment on a five (5) year lease came to $329 per month.

We reduced the non-residual value of the vehicle by negotiating the price of the vehicle. We began by discussing the trim level that my client had selected, what options were standard with that trim level, what option packages were selected and if costs could be saved through a combination of selecting a different trim level and different option packages. Our client had selected the fuel conservative four-cylinder version of the LE trim level which included a multi-adjustable powered driver’s seat, which was required by the client. A different trim level would have saved the client approximately $3,000 on the price of the vehicle, but they would not be provided with an option to add the multi-adjustable powered driver’s seat. But the client had added an option for alloy wheels, a feature which only added purely aesthetic value and approximately $900 to the cost. Our next step was to build additional cost savings by negotiating a discount from the retail price of the vehicle. Although we were unable to do proper due diligence into the profit margin of this particular vehicle, the dealership was amenable to our blind estimate of $2,000. We also asked the dealership to provide an additional $400 on the trade in value of our client’s current vehicle. This reduced the overall cost of the vehicle to approximately $20,700 providing the client with a monthly payment on the five (5) year lease of $291 per month.

To further reduce the monthly payment to our client, we inquired how many miles were being provided annually on the vehicle. Prior to getting involved, our client had selected an option for 15,000 miles annually or 75,000 miles over the duration of the lease. They chose this option because their current vehicle was owned for five (5) years and had accumulated 63,000 miles. The client was concerned about exceeding their mileage allotment. We suggested that they choose the option for 12,000 miles annually or 60,000 miles over the duration of the lease because minimal changes to their driving habits would keep them within that allotment. And by selecting the lower mileage allotment, we negotiated a monthly lease payment of $282 for our client, a $47 or 16.7% reduction from lease payments of $329 per month.

Through negotiation, we will save our client $564 per year in vehicle expense and $2,820 over the duration of the lease. Moreover, the three (3) year all-inclusive and five (5) year power train warranty, historic reliability of Toyota vehicles and favorable fuel economy has reduced the risk of unexpected maintenance expenses over the next five (5) years and makes the client less sensitive to rising fuel costs.

Microsoft Advertising Campain Evokes Nostalgia; Apple Still Catering to Consumers

Thursday night an old friend and NFC East football foe were watching the Washington Redskins and the New York Giants kick off the 2008 NFL season. We watched the contest at my neighborhood pub, St. Stephen’s Green, where the background conversation overshadowed the match’s in-game commentary. During one of the commercial interruptions I glanced at the screen and noticed comedian Jerry Seinfeld and philanthropist Bill Gates eating churros and trying on shoes. Unable to hear their conversation, the purpose of the commercial puzzled me until the Windows logo briefly flashed at the end of the commercial. Intrigued by two icons I envied during the nineties, I sifted through the internet to discover where Microsoft was heading with their commercials. After watching the advertisement online later that night, I found a conversation started by Michael Arrington of TechCrunch about the advertising campaign in an article titled Microsoft Ads: First Phase To “Engage Consumers, Spark Conversation”. Arrington, and other vocal leaders of the tech web, feel that the commercial was confusing and not funny. Arrington continues to say that the advertisement is“[...]mostly content free, with just one mention of Microsoft near the end. It’s a far cry from the brilliant Microsoft v. mac ads that Apple has run over the years.”

It was the mission for “a computer on every desktop and in every home” that allowed Windows to take its stake as the dominant operating system on home computers. Most of us, including the Apple-biased Michael Arrington, have spent considerable time using Microsoft’s operating systems on IBM-cloned personal computers over the past twenty five years. The new Microsoft campaign will not pit Windows versus OSX, but will nostalgicly remind its customers how Windows has changed their lives over the past two and a half decades. As Bill Veghte, Senior Vice President, Online Services & Windows Business Group at Microsoft states, “The first phase of this campaign is designed to engage consumers and spark a new conversation about Windows – a conversation that will evolve as the campaign progresses, but will always be marked by humor and humanity.”

I personally found the commercial to be filled with Jerry Seinfeld’s signature observational comedy with a hint of subtle humor. I find it particularly humorus that Bill Gates; one of the world’s wealthiest men, is shopping in a discount shoe store. It goes against our perception of the world elite who have staffs to handle such menial tasks, but here is Bill Gates being fit for new shoes in a store where he has been a long-time loyal customer. In addition, the use of Gates’ signature mugshot as the picture for his Shoe Circus Clown Club membership card is absolutely priceless. This demonstrates the humility that is Bill Gates.

On the contrary, I feel that Apple’s advertising campaign showcases their consumer-focused products and encourages their loyal fanbase to purchase each new-generation iPod, iPhone and iMac as they are updated. These commercials cater to a distinct subset of the American consumer that watch frequent Steve Jobs keynote addresses and read the weblog of a self-proclaimed “member of the cult of iPhone”. It is Arrington’s right to be biased towards one product over another, but it impedes his objective judgment on Apple’s advertising campaign. As one of Arrington’s readers, @TCCritic states;

The Apple ads are funny but they don’t appeal to the masses. They create lots of noise but they by now alienate people more than anything else. They’re about being sophisticated and “better” than someone else. But the average person in Ohio or Texas doesn’t necessarily want to be walking around with a hip iPhone. He or she is probably closer to the PC boy and hates the fact that like in high-school, they’re referred to as nerds. Most people don’t want to feel that they’re better than other people but that’s all that the Apple ads are about. Funny enough, Apple Macs are primarily used by geeks who want to think they’re not geeks. So Apple comes around and tells them, you’re not geeks, you’re cool. And then they buy a Mac or an iPhone.

Apple’s advertising campaign works tremendously well when the economy is booming because there are a higher percentage of consumers with disposable income to buy new hardware every six months. But rising energy costs and an economic hangover from last year’s subprime mortgage fallout, has lead to unemplyment exceeding 6.1% and the percentage of consumers who have disposable income to spend on flashy Apple hardware is diminishing. Those hardest hit by our current economic state are suburban and rural Americans who fled dense urban areas in the 1970s because of rising crime rates, desegregation, and the near-completion of an interstate highway system that funneled homeowners to cheap and abundant housing. Left without the benefit of dense housing patterns, high concentration of jobs and well-developed public transportation systems, these Americans are at an exponentially higher risk of limited disposable income due to rising energy prices than their fellow Americans living on the East and West coasts. And when these Americans have to stretch already limited funds to feed and furnish their families, it is unlikely that he will rush to purchased the Apple-du-jour.

Only time will tell if the new Windows advertising campaign will succeed or fail but I am enouraged to see how well Bill Gates has mind-melded his magnum Jupiter brain into those other Saturn-ring brains at Microsoft.