Negotiating the Residual Value of a Car Lease: Insights and Tips

When you think of negotiating the terms of a car lease, the first things that come to mind might be the monthly payment or the interest rate. But did you know you can also negotiate the residual value? While it can be challenging, there are strategies you can implement to increase your chances of success. In this article, we’ll explore when and how you can negotiate the residual value of a car lease, along with valuable insights from real-world experiences.

The Basics of Residual Value in Car Leases

The residual value of a car lease is the estimated market value of the vehicle at the end of the lease term. This value is crucial because it affects the total amount you’ll pay throughout the lease due to depreciation. High residual values mean lower monthly payments and less equity owed when the lease ends, while low residual values can result in higher monthly payments and more equity owed.

Tips for Negotiating Residual Values

Here are some tips that can help you negotiate the residual value of a car lease:

1. Research

Before entering into any negotiation, do your homework. Use online resources like Edmunds and Kelley Blue Book to understand typical residual values for the make and model you are interested in. Knowing these averages can give you a strong starting point for negotiations.

2. Leverage Competition

If you are considering multiple dealerships, use their offers as leverage. If one dealer offers a better residual value, share that information with the others. This practice can help you secure the best possible deal.

3. Focus on the Overall Deal

Dealerships may be less willing to budge on the residual value if it means adjusting other terms. Instead, focus on the overall deal, such as negotiating the money factor, interest rate, or purchase price of the car. This can help you achieve a more favorable outcome.

4. Timing Matters

Dealerships might be more willing to negotiate at the end of the month or year when they are trying to meet sales goals. Use this to your advantage by securing a better deal when the time is right.

5. Be Prepared to Walk Away

If the terms are not favorable, be prepared to walk away. Having this option gives you leverage in negotiations and ensures that you make an informed decision.

Real-World Example

To illustrate the impact of residual value, let’s consider a real-world example. Imagine leasing a 2019 Ranger with a Manufacturer’s Suggested Retail Price (MSRP) of $45,000.

The residual value was set at $30,000, which is about 65% of the MSRP. The buyout, including disposition fees and taxes, came to $33,500. Financing for 5 years even at a seemingly low interest rate of 2.9% led to monthly payments of $600, assuming no down payment. However, the lease fees and taxes were approximately $3,000, making the net cap cost $39,000. The difference between the net cap cost and the residual value ($39,000 - $30,000) represents about $250 of monthly depreciation.

The finance manager used the phrase “Pay me now or pay me later,” highlighting how high residual values correlate with lower future payments. In this case, the residual value was set at 65% of the MSRP, which meant that the car’s value would depreciate by $250 per month during the lease term.

Conclusion

While the residual value is often set by the leasing company, being informed and assertive can sometimes lead to better terms. By researching the typical values, leveraging competition, focusing on the overall deal, timing your negotiation, and being prepared to walk away, you can maximize your chances of achieving a more favorable residual value in your car lease.