Lease Hacking – What is it and how do you do it?

What is lease hacking

Lease Hacking – What is it and how do you do it?

If you’ve leased cars for a while and rummaged through the Internet to find some deals, you have inevitably heard about lease hacking.

You’ve read all these crazy stories, about how people trick the system and get into very nice Bimmers, Mercs, Lexuses and even Ferraris for almost the same price as regular non-luxury vehicles. Meanwhile, you’re paying buckets of money and you’re nowhere near close to driving a premium brand.

Lease hacking is a science and an art. It takes some dedication, and a fair amount of math. There’s quite a bit of hassle in store if you want to drive an Audi at VW prices. Well, you probably can’t halve the price, but if you do everything right, you can shave a significant amount of money on your monthly payment, and more importantly, the total cost of the lease.

What is lease hacking?

Lease hackers are just automotive enthusiasts who have figured out the inner workings of the leasing industry. They have an in-depth understanding of how lease prices are formed and what factors contribute to raising or lowering the price of individual vehicles.

Lease hackers have insight into how vehicles move through the market and how manufacturers and dealerships make money through leasing cars. They can spot unique opportunities to snatch vehicles that have fallen through the cracks at significantly reduced prices.

Lease hackers are great researchers. They go into a negotiation armed to the teeth with the latest information on prices, discounts, interests rates, residual values and the various fees dealerships add to increase their profit margin.

Not all of this information is easily available to customers, so dealerships simply inflate the values as high as the market allows and earn a great profit. Lease hackers gather and analyse this information in order to counter dealerships and negotiate the price down to the lowest possible amount they’ll take.

Without further ado, let’s look into the hacks you can use to reduce the price of your new leased vehicle.

How to research and gather information

Information is the most critical component of lease hacking.

If you’re new to leasing, you should get yourself acquainted with terms like capitalized cost, cap cost adjustments, depreciation, money factor, residual value, sales tax and the various fees that go hand in hand with your lease contract.

We have excellent leasing 101 articles which will give you a great starting point:

Now that you know how leasing works, it’s time to dig in and do extensive research on the vehicles you’re interested in.

At the bare minimum, you need the following up-to-date information about each vehicle you’re considering:

  • MSRP and invoice price
  • Available incentives and manufacturer programs
  • Money factors applied on different lease configurations and locations
  • Residual values for different lease configurations
  • Lease term and annual mileage combinations.

Armed with this information you can reliably calculate a fair lease price and reasonable targets for your negotiation. Equally as important, you can reverse engineer the offers you get from dealerships and see where they’re adding up and nudging the price in their favor.

Spoiler alert: they do this in many more ways than you think!

You can make the calculations yourself, or just use the LeaseHackr calculator to quickly analyze opportunities.

Here are the major things to look out for:

1-Never judge a lease on the monthly payment

The first trick any dealer will try is offer a monthly payment based on your budget. In reality, the size of the monthly payment tells you nothing about the actual price of the lease, unless you also consider its duration.

The difference between $500 per month on a 36-month lease and a 48-month lease is $6,000 in the total cost of the lease. That’s absolutely massive. Yet dealers will try to play around and get you into expensive (or overpriced) cars that you can technically afford to pay month to month, but will cost you an eye watering amount of money in the long term.

Always judge a lease offer based on the total cost from start to finish with all taxes and fees accounted for.

How much do you pay for:

  • Depreciation
  • Interest
  • Fees and charges
  • Add-ons and extras
  • Total cost over your tenure

2-MSRP is not the invoice price

Manufacturer suggested the retail price is just that – what BMW thinks you should pay for a new 2020 M4. The dealership is getting it for a lot less money.

The price dealers pay is called an invoice price. It’s available on the invoice issued to the dealership, when the car was delivered brand new from the factory. You can look for invoice prices online and get good estimates, like this 2020 Jaguar F-Type. You can also simply ask the dealer to show you the invoice. They’re not obliged to do that, but many will in order to gain your trust.

Usually, the cost for the dealer is even less than the invoice price due to various manufacturer programs, which offer sizable discounts to promote their products or clear surplus inventory. There may also be government or state programs, which subsidize specific vehicles – usually environmentally-friendly alternatives like EV and hybrids.

For the sake of fairness, there may also be fees and charges which dealers themselves have to pay, but you should not be concerned with their operational expenses.

The final cost for the dealer to obtain a particular car, after all price adjustments are accounted for, is called triple net. You probably can’t get the triple net price, unless on special occasions, however, a good starting price to shoot for is a few percent less than the invoice price.

This isn’t an extraordinary accomplishment though. Dealerships are usually willing to accommodate such negotiations. If given the opportunity, they will most definitely add a chunky margin for themselves, however, dealerships actually don’t make their money on the starting price of the vehicle.

Either way, you must remain vigilant, check your prices and always negotiate on getting the lowest possible starting price, before manufacturer incentives are applied.

3-Double check the money factor and residual value – use Edmunds

Money factor is just another name for interest rate that’s used around the leasing industry. It’s simply the annual interest rate, or APR, divided by 2400

4% APR equals a money factor of 0.0017.

There’s no practical difference for you except one is more difficult to follow. It’s such a small number, it’s way easier to miss if your dealer is marking up the money factor to 0.0024 for example. Convert it back into APR, and you’ve got 5.76%. That’s a massive 35% difference, which will amount to hundreds or even thousands of dollars on the total cost of your lease.

This is direct profit for the dealership.

Same goes for residual value. It’s estimated based on complex predictions about the future of the automotive market.

Most dealerships follow the Automotive Lease Guide, which is updated every year and offers wholesale price predictions on vehicles after 2,3,4 and 5 years. Since most dealerships get rid of returned leased vehicles through auctions, the ALG price estimate is more or less equal to the residual value you’re going to get on your lease.

Actual residual values are usually set 1-2% higher than ALG estimates to account for various manufacturer subsidies and offer competitive lease prices to customers.  You can buy an annual subscription to AGL for $100, however, that’s not really necessary, if you’re not planning to offer your lease hacking services and just want a good lease deal.

The best way to obtain the current money factor and residual value for your vehicle and lease configuration, is the Edmunds forums.

Just search for the vehicle model + money factor + edmunds and you’ll get a thread like this one for the 2020 Mercedes GLA-Class. There’s a thread for practically every vehicle and you can inquire about your specific location and lease configuration. A forum moderator will come back to you with the up-to-date money factor and residual value, as well as any incentives that are applicable to you.

Dealerships usually don’t mark up the residual value, however, it’s absolutely essential to check if they are in fact giving you the accurate number.

1% less residual value on a $50,000 car is $500 + additional interest in the dealer’s pocket.

4-What other fees, services and extras are added in the price?

There are always going to be some fees and extra charges attached to your lease. While you can negotiate some of them down, others you’ll have to pay. Research how different dealerships in your area stack up against each other.

Arguably, dealerships make the most of their money through extra services.

Starting from the hardware upgrades, we’re talking about clear bras, ceramic coatings, wheels and tires, roof racks and other accessories, window tinting, alarm systems and anything else you’ve seen over the years. The dealership service department will most certainly charge you for profit on the installation and sometimes even profit on top of the product itself.

You should always shop around to see what prices you can get at 3rd party shops. You’ll be surprised how much cheaper you can get certain products and services. Many times, you can get a far better quality and service, since these 3rd party shops need to stay competitive to win new customers.

Then, there is the Finance and Insurance department. You’ll be jammed in a tight room in the back office and shoved a healthy variety of warranty and insurance products. Bumper to bumper warranty, aftermarket warranty, extended warranty. Third-party insurance, comprehensive insurance, GAP insurance, window protection, wheels and tires protection, paint and body protection. The list is endless and they can even do a custom plan for you, just so they can get you into a contract.

All of these financial products will be sold to you at a profit for the dealership – sometimes 100% or even 200% on top of the actual amount charged by the bank.

It used to be that you can only get warranty products from an official dealership at the moment of purchasing or leasing the car. That’s no longer the case and you can shop around to see if another company won’t give you a better deal. And you’ll find many will.

Of course, you’ll want to do that prior to closing the lease deal, so you know your options and can make informed decisions, not giving in to sales tactics and pressure from the dealership’s salespeople.

5-Don’t put money down

Dealerships will often try to persuade you to accept a down payment of some thousands of dollars in order to reduce your monthly payment. That’s true and it even reduces the total cost of the lease, as the interest rate (money factor) is applied on a smaller sum. However, there’s something important which nobody ever tells you – there’s risk involved.

Say you pay $5,000 down and the car gets stolen or totalled in an accident a few months later. The insurance company will pay for the car, and you’ll walk away free from the lease, however, your down payment will go into the insurer’s pocket.

Since you’ve paid the money as a capital cost reduction, it’s not insured as part of the vehicle. The insurer will only pay for the final cost of the car, but you won’t see any money back.

And you’re not saving a whole lot on your lease either – a few hundred dollars spread across 36 months or whatever your lease term is.

What and when to lease

If you’ve already decided what brand and model you want, it’s down to analysing all existing stock in your area. The more specific you want it, the broader your search area needs to be in order to find competing vehicles. Obviously, lease hacking works best in dense markets with multiple dealerships from the same brand competing against each other.

The biggest opportunities will present themselves if you consider all available vehicles in a given category – for example, a mid-size SUV, sporty coupe, family sedan for 5 people.

Cars are not made and bought equal. Alongside their starting price, design, features and performance, different brands and models depreciate at their own unique pace over time.

Here are some things to look out for:

1-Look for cars with low depreciation

Some just age better than others. Porsches hold their value incredibly well, keeping more than 55% of their value after 5 years. The Macan holds the record with 62.4% residual value after 5 years.

Other vehicles which depreciate extremely well are Toyota 4x4s and Jeep Wranglers, all of which keep more than 65% of their value after 5 years.

Some luxury vehicles don’t fare as well over the years. Jaguar XJ keeps just 32.3%, Acura RLX – 37.3%, Genesis and Cadillac sedans also fall below the 40% mark after 5 years. BMW 7-series, 6-series and 5-series depreciate heavily, the last one retaining only 28.7% residual value after 5 years.

High residual value (low depreciation) means you borrow less money from the leasing company, which is your biggest expense when leasing. Always look for cars with high residual value.

2-Look for banks offering a low money factor

Since the money factor is essentially the interest rate on a lease deal, it’s value will depend primarily on your own credit score.

FICO scores of 720+ will always get the lowest money factor since they’ve proven to be low-risk investments for leasing companies. Customers with poor financial history will see their money factor climb inversely proportional to their credit score.

Your credit score and money factor are automatically determined through complex financial formulae. For the most part, they are non negotiable. That said, if you catch your dealer inflating your money factor for profit, you’re certainly in your right to make a fuss and negotiate for a fair rate.

You’re always free to shop around and see which leasing company will offer you the smallest money factor. Therefore, don’t just limit yourself to the services offered by the dealership which has the particular car you want.

3-Look for aged inventory, demo and loaner cars

When dealers get new inventory, they’re looking to get it off their lot within the first 30 days. If they sit any longer, cars start losing their profitability for the dealer.

Many dealers purchase inventory using financing, just like us consumers. If the car does not sell or lease out within 60 days, for whatever reason, it becomes a liability for the loan. The dealer will desperately look to shove it to somebody, even if that means forfeiting some of their profit.

These vehicles can be amazing opportunities. You can negotiate and knock a big chunk off their starting price, then apply all available manufacturer incentives and still get a great money factor and residual value. Stale stock usually presents the best opportunities for great lease deals.

Another vehicle to watch out for is the so-called demo car. These are vehicles which were used for test drives and perhaps served as the manager’s ride for a while. These cars are frequently not registered and sold or leased as new cars. They’re obviously used – some having 1,000 – 3,000 miles on the odometer.

Then, there are program cars, which have been used as the main transportation for manufacturer directors and other higher ups. After their service time has reached its conclusion, they are shipped to dealerships to sell at a big discount…most of the time.

Finally, there are loaner cars, these served as temporary transportation for customers who had their car in the service department for repair or maintenance.

These vehicles can be amazing opportunities. You can negotiate and get great discounts on their starting price. However, be vigilant!

Sometimes, you can’t apply the same manufacturer incentives and regional credit on demo and loaner cars, as you can with a brand new vehicle. And, more importantly, since the cars already have miles on the clock, you WILL NOT get you the same residual value you see on Edmunds. Double check these figures and see how that adds up to the depreciation and total cost of the lease.

There’s no defined guide on how to price these used new cars, so you need to weigh your options. A demo or a loaner car should not be more expensive than a new car at invoice price with all rebates applied. Then, the price needs to come down depending on its mileage. A fair discount is 20 – 30 cents per mile, assuming the vehicle is in immaculate condition.

If you see the slightest ding or scrape, and many times you will, the price needs to come down further. Of course, you always need to run such cars through CARFAX and make sure there’s no damage reported. If there is, and it’s not a dealbreaker for you, demand a further discount. Just acknowledge that the residual value on a car with reported damage will tank significantly. Also, make sure all your warranties and insurance are still valid for the duration of the lease.

All in all, stale stock, demo, program and loaner cars can come attached with several thousand dollars in discounts. If you’re not too picky on color and options, these vehicles can present a unique opportunity to lease your model of choice on the cheap.

  1. Strike a lease deal at the end of the month or year

If you’re not in a hurry to lease a new vehicle, dealerships are always more willing to negotiate in the final days of the month and especially mid-December. Dealerships have targets to complete and making a last-second hit is always a tempting opportunity for them. In fact, it’s so tempting, many times you can get to negotiate additional discounts on the price.

  1. Prices are not set in stone

You need to acknowledge that all the values and parameters we’ve mentioned in the article change constantly. The money factor, residual value, manufacturer incentives can change month to month and there may be limited periods when all the factors stack up and allow you to bring the price way down – up to 5 figures off the MSRP on more upscale luxury models.

These opportunities appear and disappear on a whim, so you need to monitor the market. If you’re not getting the deals you’re looking for and you can wait, exercise discipline and sit it out for a month or two to see how prices change.

1% MSRP Lease Payments

As a measure of success, the lease hacking community has adopted the 1% rule. If you can negotiate a lease payment equal to 1% MSRP for any given vehicle, with no down payment and all taxes and fees rolled in, you’re getting good value.

1% lease payment means you’ll reach the car’s MSRP in 100 months or 8.3 years, which is more or less in line with the honest depreciation of the vehicle.

A more advanced metric is the LeaseHackr score, available on their calculator. It measures how many years it will take for your monthly payments to exceed the MSRP of the vehicle. Obviously, you want the number larger than 8.3. Some excellent lease deals can score 10 years and beyond, at which point there’s practically no argument for buying and owning the vehicle at all.

Not all cars can match the 1% rule. Hard as you may try, you won’t get the lease payment on a Porsche or a Mercedes AMG at 1% MSRP. It may happen once in a blue moon, but don’t hold your breath.

Work on your pitch

Speaking of negotiating, after spending weeks to amass all of the information and research data, it’s time to put it to work.

Don’t waste your time going to the dealership directly. Even if you hand them a print of the deal you want, the salesperson will still try to do their dance, and try to get you into spending more money with them. Regardless how much you try to hurry the deal along, most of the time, they can’t write off the majority of their profit without the manager’s approval.

Instead, it’s best to simply send a well thought out email to the sales manager directly and state your intent. For example:

  • You want a 2020 Lexus UX 250h F Sport
  • Base price is $34,500, but you add a couple of options so the MSRP is $38,315
  • You want the lease for 36 months at 12k miles per year
  • You don’t want to pay anything, except your first monthly payment walking out the door. All fees and taxes need to be rolled into the payment.
  • There are $3,750 worth of incentives that apply and you want all of them.

At this point, the negotiation part starts.

So, you’ve researched the figures online and found out the Edmunds is listing:

  • The money factor at 0.00021 – that’s 0.5% APR
  • The residual value at 55%

Stopping here, you’ll net a monthly payment of $477, but that’s not good enough. You know the invoice price is lower than MSRP – probably a good 10% under. So, you demand a discount – in this case 7.4% off MSRP, which results in a final selling price of $35,488.

That gets you a monthly lease payment of $389 with taxes and fees included. In this configuration, the lease has just $6 on top of the 1% MSRP monthly payment and it has a Leasehackr score of 9.1 years, which is great value.

You’ve done the dealership’s work for them and you’re presenting them with a simple decision:

“Do I want to move this car at this price, or not?”

It might not happen the first time around. You may need to budge in a little bit or talk to other dealers in your area and try to have them compete with each other. You need to put in the effort, and you most definitely need to treat these people with respect and be as polite and as nice as you can possibly be.

If you’re not unrealistically slashing the prices, and the dealership still gets more from the car than it’s wholesale price at an auction, there’s a fair chance you will get the deal.

The example above actually happened. It’s a real story shared on the LeaseHackr forums. They did it and so can you!

If lease hacking is not for you, try a broker

So, if you read through this entire article, you should realize lease hacking is a very time consuming process. You need to spend days if not weeks on the Internet, searching for the right deal and then there’s no guarantee of success.

So, if it sounds like too much of a hassle, you can try a lease broker. Below Invoice will do the lease hacking for you and charge you one flat fee. There’s no research needed, no hassle, and no hours wasted sitting at the dealership’s office. Our team will negotiate with the dealership in your name and get the car to your door as soon as today!

You still get the car and lease price you want, but you pay to use our lease hacking stills to your advantage.

Sounds like a smart move? Contact us today!

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