I have a friend named Stan who wanted a 2015 BMW 335i. He’s a pretty savvy negotiator, so he spent many torment-filled hours at the local BMW dealer battling back and forth over the price. In the end, he bloodily emerged, proud of how he got the dealer to knock $2200 off their price.
It was a lease, so I looked over his numbers and told him something that made him turn green, red, then green again – that he just agreed to pay $99 a month in profit to the dealer, every month, over the next 3 years and 3 months, for a total of of $3896.10, all of which, sadly, was just as negotiable as the list price. It’s like in those Friday the 13th movies when the lingerie-wearing female slays a chainsaw-wielding villain, after which she stumbles to the nearest tree stump for a good cry, and Jason rises up and kills her, and 17 more campers.
That being said, auto dealers have every right to slay unsuspecting campers, for consumers who show up at the serial killer’s cabin armed with a pillow will get what they deserve. It’s not a fair fight. Dealers are sneaky, making the leasing numbers very complex, on purpose. Those who get the best deals are the ones who don’t let their guard down after the purchase price is agreed upon.
When financing a car, it’s pretty easy to calculate your finance charges, for your interest rate is proudly trumpeted across the dealer website, and reflected in your monthly payments. For example, a 2015 BMW 335i with a MSRP of $43,750.00, offers a 60 month financing package at 3.1% APR for $788.47 a month, which multiplies out to $47,308.2. That’s $3558.00 higher than the MSRP, so I’m calling that the Total Rent Charge. However, calculating your Total Rent Charge on a lease is much more difficult, for dealers intentionally shield a few critical numbers from you. (On that note, leasing this same vehicle for 36 months, and your Total Rent Charge is $3,888.32!!!) I’ll show you how to figure it out for yourself, so you don’t get ripped off when you lease a car.
Here are the 2 most important numbers to understand when leasing: The Net Capitalized Cost, and the Residual. The Net Capitalized Cost is how much you owe on the car when it leaves the lot. The next number to understand is the Residual. That’s how much your car will be worth in 3 years. The Depreciation is the difference, which is what your lease payments are funding for 3 years.
So here’s a number the dealers don’t want you to know. The depreciation divided by the number of payments. That’s how much your car payment would be, if the interest rate was zero. Any number above that is dealer profit. (Auto leases don’t use percentage rates – they use something called a money factor, which is a 4-place decimal intended to obscure what you’re paying. To calculate your interest rate, multiply your money factor times 2400).
Let’s look at Stan’s lease closer. Net Capital Cost of $47,196.00, a residual of $32,382.00, leaving $14,814.00 in depreciation. Over 39 months, a $14,814.00 depreciation comes out to $379.85 payment a month. Guess what Stan had to pay BMW? $479 a month. That’s almost $100 a month, which over 3 years, adds up to almost $3900. That $3900 is what I call the “I’m driving a car I really can’t afford” tax. Put it this way – if you’re aged 35, and you invest $99 a month in an IRA making 12% until you retire, that’s $321,107.65 you’ll have in the bank. Invest your $479 car payment, and you’ll have $1,553,642.09 to spend on a post mid-life crisis Porsche.
2 years ago, I thought I was a genius, and took over someone else’s BMW lease on a popular lease-swapping site. Yes, I did save on the $5000-ish down payment, however, I ended up paying around $100 in finance charges.
If you can’t afford to pay cash for a car, you can’t afford it. Buy a $2000 car. Save the money you would have spent on a payment towards a better car, or simply invest it. Put it this way. To finance or lease a car from you, dealers require and arm and a leg. But they’re just as content bleeding you over the course of several years, which gives them even more flesh from you, in a way you won’t notice.