End of Year Car Leasing Has Pitfalls

Bargain shoppers love the end of the year but leasing is tricky

The 2018 Hundai Kona

Shopping at the end of the year has reached legendary proportions for bargain-hunting car shoppers. And yes, there are certainly good deals to be had as the end of the year approaches because many dealers are seeking to hit monthly and year-end sales targets. But you can’t go blindly into a dealership on December 30 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 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 2018 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 2017 Ford Fusion currently is available for lease at $327 per month, while a new 2018 version with very similar equipment is priced at $199 monthly. Why? There could be several reasons. For instance, Ford (the vehicle manufacturer) could be subsidizing the lease costs on the new 2018 Fusion to persuade consumers to buy the car. Plus there is the matter of the residual value of each vehicle. Since the 2017 Fusion is one year older than the 2018, at the conclusion of the lease term it will be worth significantly less than the 2018 even if it has the same mileage on the odometer. This discrepancy 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 2017 vehicle downward during your pre-lease negotiations, because it is 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% 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 2018 model lease versus a 2017 model lease for the same vehicle make/model with the same equipment. In many cases the 2018 model should be accompanied with a lower payment, but this is not always the case. Dealers are often willing to agree to a steeper discount off MSRP on a 2017 than a 2018. The car might act, seem and smell brand new, but the 2018 is newer…and that’s a big deal at the conclusion of the lease.

About Tom Ripley 52 Articles
Born in Boston, Tom Ripley has been writing about the automotive industry and the human condition for more than a decade. He's a frequent traveller but nominally resides in Villeperce, France.