Driving a Hard Bargain : Today’s Economy Makes It Easier for Consumers to Wheel and Deal When Buying a Leased Vehicle
Tom Gluck has discovered a secret that many car leasing companies don’t want you to know: You can renegotiate the final purchase price of your car and potentially save thousands of dollars.
Gluck, a Woodland Hills resident, was wild about his 5-year-old Porsche, but its lease was about to expire. He could buy the car. But, according to his lease agreement, he’d have to pay $29,000 for it--substantially more than the car was worth.
He was ready to walk away from his pristine white and tan convertible when the leasing company said it was willing to make a deal. The company shaved $6,500 off the purchase price. And Gluck bought his Porsche.
Gluck’s experience is by no means unique. Thanks in part to the lackluster national economy, the market for used cars--particularly luxury cars--is sluggish. Leasing companies are becoming more and more willing to negotiate the amount you pay to buy a leased car at the end of the lease term--the so-called residual.
And that’s put some consumers in an enviable position. If they negotiated their lease terms aggressively upfront, they may find that back-end price slashing allows them to get a car cheaper than ordinary car buyers.
But good front-end negotiating is rare because leases are complex and few people fully understand them.
“Most people get their ‘faces ripped off’ when they try to lease a car--that’s a technical industry term,” quipped one leasing executive who asked not to be named. “The negotiating on the back end just brings them a little closer to reality.”
Leasing is similar to renting a car for a long period. You pay little or no money up front, but you do make monthly payments. You’re also bound by certain restrictions. If you drive more than a set number of miles, for example, you may have to pay a fee at the end of the lease. If you ding the fenders or don’t properly maintain the car, you’ll pay a penalty too--just as you would if you were renting.
Many car manufacturers have been pushing leases over purchases for a practical reason: They sell cars. If you lease a car for 36 months, you’ve got to turn in the keys or buy it within that time.
A lot of people turn in the keys, so they’re back in new-car showrooms within three years. That’s more than twice as fast as the average American car buyer, who holds on to his car for roughly seven years, says Ashly Knapp, founder of Autoadvisor, a Seattle-based car buying service.
Leases have also become popular with consumers for a practical reason: The monthly payments can be far lower on a lease than on the purchase of a car.
Why? A big piece of the puzzle is the residual: the amount you would have to pay to buy the car at the end of the lease term. The residual is the equivalent of the down payment for a new car buyer, but instead of paying it on the front end, you pay it on the back if you decide to keep the car. Just as you could keep your payments low if you had a huge down payment when buying, lease payments fall in direct correlation to the size of the residual.
Leasing companies, speaking only on the condition of anonymity, say they habitually pad the residual a bit to get people into leased cars. Indeed, some acknowledged that on a $20,000 car, the residual may be set $4,000 to $6,000 too high--on purpose.
Why would they do that? Several reasons. First, many leasing companies are affiliated with car manufacturers. Padding the residual is partly an advertising gimmick that allows them to say the car holds its value over time--a selling point. They can do that without losing money because most people pay too much for their leases in the first place.
Moreover, 50% of those who lease cars turn in their cars before the end of the lease term--and pay a hefty penalty in the process. Finally, some people who want to keep their cars don’t realize that the residual price could be negotiated downward, so some buy at the inflated contracted-for price.
The end result is that leasing companies have got room to negotiate with the relative handful of people who decide they want to keep their cars at the end of the lease term but aren’t willing to pay inflated prices.
“They all negotiate, but they don’t want to admit it because it’s like opening up the floodgates,” says David Breslow, president of Auto Purchase Consulting in Los Angeles.
The leasing company won’t cut the price to wholesale levels, experts caution. But they will usually drop the price to somewhere between the retail and wholesale Kelly Blue Book price. In reality, they’re still making more off you than they would by selling the car elsewhere. But you may be getting a good deal too.
That’s because you got the benefit of those low monthly payments and later forced someone else (the leasing company) to absorb a great deal of the car’s depreciation. If you simply bought the car at the start and it depreciated more than anticipated, no buyer would knowingly help you absorb the loss.
Still, the financial viability of a lease boils down to whether or not you can do the front-end negotiating like a pro. That requires keeping your eye on both the terms of the lease and the financial details. And that’s tricky.
“Don’t even consider a lease unless you have a financial adviser help you go over the deal,” says Knapp. “Most people don’t know what they’re getting into and they end up getting burned.”
