End of Year Car Leasing Has Pitfalls

Bargain shoppers love the end of the model year but leasing can be tricky

Shopping at the end of the model year has reached legendary proportions for bargain-hunting car shoppers. With the stock market on the upswing and the belief we will put the pandemic behind us, the desire to get a new car before the new model year begins is on the mind of bargain-hunters everywhere. Yes, there are certainly good deals to be had as the end of the model year approaches because many dealers are seeking to hit monthly sales targets and clear out last year’s stock. But you can’t go blindly into a dealership in August and expect that you’ll come away with a great deal. This goes double for those who are going to lease, because end of the model year leasing can be counter-intuitive.

According to a recent analysis by nationwide car lease marketplace, Swapalease.com, consumers can often get a better lease deal if they opt for the incoming model year (in this case a 2021 model) versus the previous model year.

What the analysis reflects is the effect of residuals on the overall cost of the lease and, importantly, on your monthly payment.  For example, a new, never-titled 2020 vehicle might be currently is available for lease at $325 per month, while a -brand-new 2021 version with very similar equipment is priced at $199 monthly. Why? There could be several reasons.

First, the vehicle manufacturer could be subsidizing the lease costs on the new 2021 model to persuade consumers to buy the car and get its model-year sales off to a good start. Then, very importantly, there is the matter of the residual value of each vehicle. Since the 2020 is one year older than the 2021, at the conclusion of the lease term it will be worth significantly less than the 2021 even if it has the same mileage on the odometer. This discrepancy is factored into the overall deal, and it means that you will pay more to lease the vehicle over the period of the lease.

Negotiate the “cap cost”

You can mitigate this significantly by negotiating the “capitalized cost” (cap cost) of the 2020 vehicle downward during your pre-lease negotiations, because it is in residual terms about to become a year old. Many lessees, however, don’t negotiate the cap cost at all. Instead they allow the dealer to set the capitalized cost at the Manufacturers Suggested Retail Price or even higher, which will guarantee higher lease payments than if the dealer had agreed to a lower price.

In any car-leasing situation, it is to the consumer’s advantage for the capitalized cost to be low (certainly lower than MSRP) and for the residual to be high. While consumers can bargain on the cap cost, they typically have little influence on residual, because those values are recommended by experts like ALG, who set industry standards.

The one area in which you can affect the residual is in the vehicle mileage limit set in the lease contract. Agreeing to a lower mileage cap (say, 10,000 miles per year versus 12,000) should result in a higher residual value since the vehicle will have fewer miles on it when the lease is over and thus will be worth more. But beware of agreeing to a mileage limit that does not reflect your actual projected use. Penalties for going over the mileage limit are severe – much higher than any savings you’d get from a higher residual.

Bargain on the interest rate

Another area of negotiation is the interest rate on the lease. The complicating issue with the interest rate is that in leasing nomenclature the interest rate is expressed as the “money factor,” and it is not presented in typical interest rate terms (e.g. 4.5 percent interest.) Because credit is extremely important in a lease environment, you might not have much leverage in negotiating the money factor. The better your credit, the stronger your chance for negotiating a better money factor on the lease.

How can you avoid paying more than you should if you’re doing an end-of-the-year lease? First, ask plenty of questions during the negotiation stage and be sure to have the dealer explain in detail how they arrived at the monthly payment they propose.

Further, be sure to have the dealer do a side-by-side comparison of a new 2021 model lease versus a 2020 model lease for the same vehicle make/model with the same equipment. It seems logical the 2020 model should be accompanied with a lower payment than a vehicle that is a year newer, but this is not always the case. Dealers are often willing to agree to a steeper discount off MSRP on a year-old “new” car than a fresh-from-the-factory equivalent. A never-titled 2020 model might act, seem and smell brand new, but the 2021 is newer…and that’s a big deal at the conclusion of the lease.