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.
Posted on September 15th, 2008 | By: bootstrap economist | Filed under Personal Finance
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