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.

Now Leaving, Debtors Prison

Prior to its abolishment on the Federal level in the early 19th century, citizens could be placed in prison for failure to repay their debts. Debtors prisons were cold and unwelcoming buildings with no heat, cramped living quarters, and overcrowding. This made for unbearable and nausiating living conditions for citizens that owed as little as fifty cents, sharing their misery with criminals and mentally ill patients.
Today, citizens can still be jailed in the traditional sense for debts owed, but are traditionally limited to those that do not pay alimony and child support, and those who have committed fraud.

But the rest of us who have trouble repaying our consumer and business debts face a different type of debtors prison. One that allows us to freely walk the streets and shop the wealth of consumer goods found in the United States, but only if we bear enough cash to make the purchases. Credit reports and representative FICO score tells potential creditors in three numbers if they should lease an individual a place to live, provide an individual with monthly working capital, and offer an individual larger debts for capital expenditures. With strong credit all of these options are feasible but become limited as an individual’s credit rating declines. I have spent the past three years in nouveau debtors prison watching as my friends elevated themselves into new cars, new homes, and new lives while I put all of my efforts into erasing $13,645.22 in consumer debt. But today marks the end of my tenure here, after my final payment of $1,198.98.
————————
American Express - $0
Best Buy - $0
Circuit City - $0
Chase - $0
Target - $0
Total - $0
————————
This experience has taught me that taking responsibility for my mistakes, continuous hard work, and patience can lead to unexpected dividends. First and foremost, I have become accustomed to living effectively within an urban environment on a strict budget. My automobile and the associated insurance, maintenance, and gasoline expense has made way for walking, biking, and taking public transportation. And within walking distance, I have access to restauraunts, retail shopping, doctors, grocers, and many other services that I have needed or may need in the future. This experience has also driven me how to set goals, maintain focus on those goals, and attain them sooner than expected. Three years ago my goals were to repay old debt and build a small amount of savings. Today my goals are to buy a house, save for retirement, and build bootstrap | economist into a viable business. And finally, it has taught me how to be a better banker. My experience has provided me with first-hand insight into the warning signs of an over-leveredged customer, and the understanding to work with at-risk customers to provide them an opportunity to repay their debts.

As I journey through the entrance gate of debtors prison, the self-gratification of fully repaying my debt in an expeditious manner is a gift that I will own for my entire life.

Personal Branding

In banking, it is often touted as part of the four (4) C’s of credit that repayment of our loans comes from the character of the individual(s) who operate the businesses that we lend to. This requires banks to perform their necessary due dilligence including but not limited to how the company has historically handled their accounts payable, handled their prior debt obligations, and how the principals have historically handled their personal expenses. These factors plus market trends in the industries that the business serves and the overall economy are combined to form a risk profile for our potential customer. This provides a snapshot for the Bank to weight two decisions, whether or not to lend to the potential customer and the appropriate fees and interest rate to charge the customer to compensate for the risk.

When I was using my credit cards to finance fancy dinners, flashy cars, and expensive gifts during college, I knowingly jeopardized my personal brand. Mesmerized by America’s buy now and pay later philosophy, my credit card companies considered me a high-risk customer as evidenced by late payments and interest rates that rivaled batting averages. Coupled with my lack of a savings account, my personal brand became a rubber stamp with the word “DECLINE” in bold block letters. Although my friends had the foresight to maintain their financial solvency in college, there were many of my colleagues that graduated with similar debt levels as myself. But the difference lies in how we handled the challenge. Unfortunately, success stories such as my own are often overshadowed by those who refuse to take responsibility for their spending habits. About a month ago, I ran into a former colleague of mine from college who discussed his personal situation with me. Hampered by high-balance credit cards and student loans from college with a humble annual salary, he decided to neglect the credit cards altogether and maintain his consumerist lifestyle. Having a blatent lack of ownership for wastrel spending will ultimately hurt his personal brand when it is time to purchase a house, apply for new credit, and find future employment.

But the beauty of America is that it favors those who work hard and I have a hard-earned opportunity to try again.

Successful Debt Reduction

This post serves as an update to Let My Loss be Your Gain, an article I wrote last year for Geezeo, a personal finance web community. When I graduated from college in June 2005, I had $13,645.24 in revolving credit card debt, no savings, and was making less than $40,000 per year.
————————
American Express - $3,565.22
Best Buy - $704.30
Circuit City - $2,010.99
Chase - $3,687.42
Target - $3,677.31
Total - $13,645.22
————————
As we approach June 2008, I have substantially reduced my debt by cutting back on my expenses, saving money, and working hard to increase my salary by over 50%. It is with proud-tears that I present a three-year update of my college credit card balances.
————————
American Express - $0
Best Buy - $0
Circuit City - $0
Chase - $0
Target - $1,198.87
Total - $1,198.87
————————
It has been a difficult task, but by June 2008 my collegiate debt will be completely repaid. An accomplishment I never imagined when I joined Money Management International three years ago. Needless to say, I am excited to put this debt behind me and move on as a fiscally responsible adult.

Privilege of Opportunity

Long gone are the glory days of American business when companies strove to groom stars from within. Strong training and mentoring programs that companies used to mold employees into confident extensions of their brand, have been replaced by bare bones frameworks of top-heavy management and unhappy supporting casts. Many of my colleagues in American business dangle one foot out the door, and carelessly disregard momentum within their company for a few dollars more every pay period. Their underlying reasons for departure are uninspiring managers, unrewarding workflow and unclear growth opportunities. But instead of lamenting over the injustices of American business, I seek out managers willing to teach me the formalities and informalities of my industry. Beginning with my first co-operative education experience at Wyeth Pharmaceuticals through my current position with Commerce Bank, these managers have provided me with the requisite confidence to succeed in American business. Throughout the years I have learned how to interact with internal and external customers, and build the products that they want to see.

My experience at Wyeth Pharmaceuticals stands out because I was only nineteen years old, and had an experience that I could only dream of when I was stocking shelves of appliances at Best Buy. The job was a management information systems support position within Wyeth Pharmaceuticals’ Logistics and Supply Chain department, and was passed along to me by my friend Jacquie who had accepted a second offer. My primary task was to support an external consultant who was building the framework of a data warehouse that would ultimately build efficiencies between Wyeth Pharmaceuticals’ refining, manufacturing, and distribution channels. The task was mostly data entry with a tinge of analytical work, but it opened up opportunities for side projects to enhance my hands on education.

On one particular day, my team leader invited me into his office to discuss my interest in creating a set of project management forms that would improve workflow within the Logistics and Supply Chain department. Difficulties arose between the several teams that comprised the Logistics and Supply Chain department, and how they were reporting workflow to the department’s manager. My task was to interview the department manager and the team leaders, and create a standard set of project management forms that would be used by the entire department.

I began the project by compiling a list of open-ended questions to gain clearer understanding of the department manager’s requirements for the project management forms. As he was the intended audience, it was important that I accurately capture the information that he wanted to see. I revised my questions to reflect the department manager’s requirements and began talking to the team leaders, seeking cues to design the project management forms for ease of use among their respective teams. But during my interviews I noticed apprehensiveness about the project from several team leaders, and was unsure with how to continue. I met with my team leader who explained that while I had accurately portrayed the concerns of the department manager, my revised questions failed to capture the concerns of the team leaders and their direct reports. He explained further that the success of this project lies in the hands of the direct reports who would be using the project management forms, and their adoption would be critical. Refocused on the users, I revised my questions and was able to receive constructive feedback from the team leaders. Through their commentary, I was able to create a draft of the project management forms. The project culminated with me presenting the project management forms to the department manager and team leaders in a board room setting, and answering any questions that they had.My co-operative education experience with Wyeth Pharmaceuticals ended shortly after my final draft had been implemented.

The confidence that my team leader placed on me to complete this project has stuck with me through two additional co-operative education experiences, a number of student leadership roles, and my post collegiate career.

a (re)introduction

Are you thinking about purchasing your first investment property? Are you already an investor seeking to refinance your properties? Do you have a large-scale project in mind? Not sure where to start? I can point you in the right direction. Have no idea what LTV is? Go ahead and ask. I am here to help YOU. If you are looking for an independent analyst, you have come to the right place.
An Introduction

I started bootstrap | economist because I had a lot of ideas and I wanted to set them free on the web. I have been sharing parts of my life online for years, but this was my first time not hiding behind corporate firewalls and forum moderators. I had been keeping an offline journal for several months prior to starting bootstrap | economist, and realized that if I published my thoughts I would have an opportunity to help others and not just myself.

On the bus yesterday morning, I caught Michael Arrington’s notice that he was ranting on new media publishing politics.

And writing good content is only half the battle. You have to figure out the complex, dynamic web of politics between bloggers and mainstream media before you post to know where to get support. And you’ll need support in the form of links from other prominent bloggers. An early push can take a post and make it a headline on TechMeme, which leads to page views and notice by sponsors. But since blogging is almost by definition a conversation between bloggers, fights tend to break out over emotional issues. Cliques develop. Can you count on them to support you down the road?
- Michael Arrington, TechCrunch

I learned this lesson early on when Michael’s incredibly popular weblog, TechCrunch errantly credited me as the designer of FlashElementTD, an addictive web game I used to pass the slow days at work. When the story was published, I saw an immediate spike in traffic to my blog; which at the time was located at davidlitsky.com, and how quickly their posts were syndicated throughout the web. I subscribe to the Charles Foster Kane philosophy of “trying everything to see what works” and took an inch of a gesture and made myself an unwelcome guest by using their comment system as a soapbox for my perceived-to-be brash opinions. One of many mistakes that I chalk up to my entrepreneurial spirit.

But as I face new challenges in my career as a blogger with a full time job, I have recognized that I face different challenges than many of the other bloggers in this expansive social network. I am a financial risk manager for an east coast bank which provides me with an opportunity to meet numerous entrepreneurs across a wide range of industries, but because of regulation to protect our customers’ privacy, I choose not to speak about my experiences.

A few weeks ago, I re-read a May 2006 interview between then Risk Management Association (RMA) President and CEO Maury Hartigan, and RMA Board Member Bharat Masrani. At the time, Mr. Masrani was vice chair and chief risk officer of TD Bank Financial Group. In the interview, Mr. Masrani speaks about the risk of negative publicity which has the potential to cause a decline in the firm’s value, liquidity and customers. This risk; also known as reputational risk, is derived by all other risks that a firm identifies and manages including, but not limited to credit risk, market risk, operational risk, and regulatory & legal risk. When asked if there are any observable metrics or criteria in the area of reputational risk, Mr. Masrani responded:

My first answer is a simple one, and it’s a good test. Let’s say the bank undertakes a particular activity, in lending or management or in selling or manufacturing or trading a product. If that activity appeared on the front page of a business journal, would the bank be able to stand up and say, “You know what? I’m comfortable with that.” That’s what I would call the newspaper headline type of test. Am I going to be proud when this is announced? Am I going to be comfortable if this appears in print?

This particular quote reminded me of my eighteen (18) months as a risk manager for the Delta Rho chapter of the Alpha Epsilon Pi fraternity. A rewarding but thankless job, it was up to the risk management committee to identify and mitigate the high-risk behaviors of college-aged men that “just want to have a good time”. As an undergraduate student, most of us are self-absorbed and may not fully understand the consequences of our actions, and how they may negatively affect our organization.

But I digress. When I started blogging, I was appalled by what people were saying about members of their community. Although at the time it acceptable for me to use my words as inauspicious instruments, I chose to bite my tongue if I had nothing nice to say. This came off as creepy, weird, and fake to my friends that had brought me into the blogging community, but I felt that my reputation was more important to me than a few cheap links that would do very little to sustain the growth of my blog. I went against the grain, but as noted biographer and historian David McCullough says,

We need leaders, and not just political leaders. We need leaders in every field, in every institution, in all kinds of situations. We need to be educating our young people to be leaders. And unfortunately, that’s fallen out of fashion.

How to create a budget [skitch.com]

Every day that you open your mailbox, chances are there is at least one credit card offer waiting for you. Tempted by the gimmick of music, electronics, and air travel and we apply for the low interest rates and free balance transfers. We open up Pandora’s Box with the first swipe of the plastic.

debt dweezel info

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A guide to bootstrapping

Thank you to Sramana Mitra for sharing an excellent article on bootstrapping.

Bootstrapping reminds me that there are several parallels between companies and individuals.

Before my 24th birthday, I asked myself how much money do people really have? I was frustrated with myself for the mistakes I made in college, which I detailed last month in Let My Loss be Your Gain. After my 25th birthday, I gave an introduction and two months later gave an update.

Bootstrapping has taught me fiscal responsibility.

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