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Negotiating a fair lease payment is usually boiled down to considering the depreciation value and finance charge - which involves the capitalized cost, residual value, and money factor.

In the past, this has usually been a straight forward process. Research the value of your target car that is 3-4 years older, looking for similar trim and options, and get a rough estimate depreciation value divided by your number of lease months. The problem here, as a quick google search can support, is the pandemic has caused used car prices to spike dramatically. The same car in 2018 is selling for only $4K, sometimes even $2K less than a brand new 2021 model.

How do you even come up with a lease value that would be fair for the dealer when the residual value of used cars is so high right now?

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  • It's pretty likely that any effects of Covid on car prices will be over 3-4 years from now. – DJClayworth Oct 19 '20 at 23:40
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It might not matter (as much as it would seem) if the residual amount is off. When you lease, if the residual was calculated too high and at the end of the lease term the car is worth much less, then you turn it in and you got a good deal. If the residual ended up being calculated too low (as you suspect could happen right now), then you can simply buy the car for the cheaper price and either keep it or immediately sell it at the higher market value. Of course, this assumes that the current increase in used car prices will persist 3 years from now when your lease is up.

That being said, the reason leasing is usually a bad deal is not just due to a bad guess at the residual value. It's mostly due to the way they bake their profit into the lease payments in the form of interest and other fees, along with a usage estimate. If you drive less miles than predicted, and the car is worth much more than the residual, you can buy out the lease and either flip it or keep it, which is great. But, to get into that situation you were paying interest on that extra "purchased" residual that you didn't need. This is equivalent to taking out a term loan for $20K, paying interest on it, using half of it and putting the other $10K into a checking account, and never touching it. If you did that you would be paying double the interest you needed to pay.

So how can you negotiate a lease given this? It depends on what you can negotiate. Usually the residual is non-negotiable because it's set by the manufacturer. If you feel it's off, you're pretty much left negotiating a lower money factor, or a lower purchase price (and/or possible higher trade value if you have one- but really that's similar to just a lower purchase cost.) Sometimes the money factor is also set by the manufacturer (though it may be in credit tiers), and in that case you are left to negotiate the purchase price of the vehicle. The problem is, your argument will sound kind of funny if you say, "The residual is too low. This car is going to be worth way more than that. Therefore, you need to lower the purchase price of the car!" You'd get laughed right out of the dealership. So, the best advice I can think of, is if you think the residual is set too low, all other things being equal, buy the car instead of leasing it. Note if you are looking to buy a car and the 3 year old used car isn't much cheaper than the new ones, this makes it much easier to purchase a new car too.

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