I saw this ad on the MB site:
As I read it, I get a 2005 special edition ML350 for $3943 down, and
$449 a month for 42 months. At the end of the period they get it back
unless I want to buy it.
The fine print on the site:
"Available only to qualified customers by Mercedes-Benz Credit at
participating dealers through August 2, 2004. Not everyone will
I would think I qualify. If I don't, I'll walk away.
"Advertised lease rate based on MSRP of $42,220 less the suggested
dealer contribution resulting in a total gross capitalized cost of
$40,426.49. Dealer contribution may vary and could affect your actual
lease rate. Includes destination charge, Special Edition Package and
I guess this means the price could go up or down. If it goes up, I
walk away. What are the chances of negotiating it down?
"Excludes title, taxes, registration, license fees, insurance, dealer
prep and additional options."
Don't need options. Very suspicious of "dealer prep"; why would a
mercedes need that?
I have never leased a car in my life, and have never owned a mercedes.
I have purchased new cars before, and pretty much know the drill on
that, but feel like a real rookie on something like this.
On a lease, you pay two things: depreciation and interest. These items are
very simple to calculate and understand, but dealers often try to hide the
values from the customer. Also, they tend to use terms that are unfamiliar
to the normal consumer. Some of the terms are as follows:
* Lessor = The finance company or dealer that is leasing the vehicle to the
consumer and ultimately owns it.
* Lessee = The consumer that will take possession of the vehicle during the
term of the lease
* Term = The duration, in months, of the lease
* Mileage Allowance = The number of miles the Lessee is allowed to use on
the vehicle during the term, usually expressed in annual increments
* MSRP = Sticker price (of course most consumers probably understand this)
* Capitalized Cost (a.k.a. Cap Cost) = The negotiated sales price of the
vehicle, hopefully for the consumer, it is somewhat less than MSRP.
* Cap Cost Reduction = Money paid by the Lessee to lower the Cap Cost, much
like a down payment on a loan
* Residual = The value of the vehicle at the end of the term as estimated by
the Lessor, often expressed as a percentage of MSRP; this is a function of
the vehicle itself, the term, and the mileage allowance
* Money Factor = The interest charged during the term of the lease, usually
expressed as a five-digit decimal value which is the interest rate divided
by 2,400 (more on this later)
* Depreciation = The value that the vehicle loses during the term of the
lease, which is the difference between the Cap Cost and the Residual
* Gap Insurance = Insurance terms usually built-in to the lease agreement
that will pay to satisfy the outstanding lease payoff in the event of a
total loss where other traditional auto insurance does not pay the entire
* Acquisition Fee (a.k.a Inception Fee) = A fee charged by the Lessor at the
beginning of the lease; this often covers Gap Insurance
* Disposition Fee = A fee charged by the Lessor at the end of the lease when
the Lessee decides to return the vehicle (as opposed to purchasing it)
* Purchase Option Fee = A fee charged in lieu of the Disposition Fee that is
charged by the Lessor if the Lessee decides to purchase the vehicle at any
time during or at the end of the lease.
* Excess Wear and Tear Fees = Charges at the end of the lease to cover any
mileage used above the Mileage Allowance or to repair any damage; other than
mileage, the most common Excess W&T Fees are charged for cracked windshields
and tires worn beyond the specified tread depth.
In the case of the lease you are considering, the MSRP = $42,220 and the Cap
Cost = $40,426. They are asking for $3,943 down, which I assume is actually
a $2,844 Cap Cost Reduction, plus the first payment of $449, plus an
Acquisition Fee of $650 (typical of MB leases). If this is the case, then
the actual "adjusted" Cap Cost used to calculate the lease would be
$40,426 - $2,844 = $37,582.
The monthly payment is made of three components: Depreciation, interest, and
taxes. To calculate the monthly Depreciation component, subtract the
Residual Value from the Cap Cost, then divide that by the Term. In this
example, if the Cap Cost is $37,582 and the Residual is 61.5% of a $42,220
MSRP, then the Residual Value is $25,965, so the depreciation is: $37,582 -
$25,965 = $11,617 divided by 42 months = $276.60 per month.
To calculate the interest, you *add* the Cap Cost and the Residual Value,
then multiply by the Money Factor. Using an example interest rate of 6.5%,
the Money Factor would be approximately .00271, so the monthly interest
charge would be: ( $37,582 + $25,965 ) * .00271 = $172.21. The reason that
the Money Factor is an interest rate divided by 2,400 is just a way to make
the math more simple for the person calculating the lease. First of all, an
interest rate of 6.5% is actually an Annual Percentage Rate. To get a
monthly rate, divide it by 12, which is 0.5416%. Since this is a
percentage, it must be divided by 100 in order to become a multiplication
factor, which is 0.005416. Basically, a monthly interest factor is the
divided the APR by 1,200. This still does not explain the 2,400 that we
used to get the lease's Money Factor. Also, there is still the question of
why the Cap Cost and Residual are *added*. Basically, it's all the same
answer. The monthly interest component is based on the *average* of the Cap
Cost and the Residual. To get that average, *add* the Cap Cost and the
Residual and divide by 2, giving $37,582 + $25,965 = $63,547 divided by 2 $31,773.50. Now multiply that by the APR (6.5), divide by 100 to get it
from a percentage to a factor, then divide again by 12 to get the monthly
amount, which is (approximately) the same monthly interest payment of
$172.21 calculated using the Money Factor above. So, the reason the Money
Factor is the APR divided by 2,400 is because it algebraically includes
dividing by 2 for the average, dividing by 100 to convert the percentage
into a multiplication factor, and dividing by 12 to get the monthly rate
from the annual figure.
Adding the monthly depreciation of $276.60 to the monthly interest of
$172.21 gives us a monthly payment of $448.81, or approximately the $449
advertised. Keep in mind that the numbers used here are just examples that
were estimated to come close to the advertised offer and may not represent
the actual values charged by the Lessor. Also, it is not necessary to pay
any money "down". The Cap Cost Reduction can be omitted, and the
Acquisition Fee and first month's payment can often be rolled into the Cap
Cost. Of course this increases the "sales price" of the vehicle which in
turn will increase the monthly payment. Your best lease deal is made first
by negotiating the lowest sales price for the vehicle. From there, you will
then want to negotiate the best interest rate (yes, believe it or not, the
interest rates are usually marked-up by the dealer). Finally, you will want
to work with the dealer to explore options on the lease Term and Mileage
Allowance. You are generally better off building more miles in on the front
of the lease rather than paying Exceeds W/T Charges at the end, but then
again, you should still do the math based on your driving habits. Some
vehicles have better lease deals at 39, 42 or even 48 months, but sometimes
a good deal can be had at 36 months or a shorter Term. Also, sometimes the
depreciation between a 12,000 mile per year and 15,000 mile per year lease
can be almost negligible, but other times, it can be almost as much as
paying excess on the back-end. Again, you have to explore all the options
for the best deal, and the advertised deals are generally *not* the best
Finally, if your state, county or municipality has any lease or use taxes
those will need to be added as well. Most lease taxes are calculated as a
percentage of the monthly payment. Where I live, it's 4.75%, so in this
example, the monthly payment would actually be around $470. Of course if
the dealer adds any prep charges or if the vehicle in question has a
different MSRP due to dealer installed options, then the numbers will have
to be recalculated to include those items.
They do declare interest rate... but depending on their calculation... you
might end up paying much higher interest rate instead of the declared...
pretty common practice that they do until you catch them on it.
Whenever you go through the dealer for financing, the lender will offer an
interest rates based on the customer's credit score. The dealer will
generally mark-up this rate before offering it to the customer. This is
done for two reasons. One, it gives the dealer an opportunity to make some
"back-end profit" because the creditor will rebate money to the dealer for
selling the loan at a higher rate. Also, if the deal is very close to being
made and the customer is continuing to hedge based on monthly payments, it
gives the dealer some margin with which to work toward meeting the
Even if you were to go to your local bank and get pre-approved for a given
rate, the dealer may still be able to get you a loan through that same bank
with a lower rate, and even with that lower rate, there will still likely be
some back-end profit build in for the dealer. The reason is that the dealer
may sell enough loans through that bank that they get better rates, or they
may even use that bank for their own short-term loans used for inventory
Remember, everything that goes on in the sale, finance, or lease transaction
of an automobile is designed to make profit for the dealer. Because of
this, the consumer must be well prepared and work to keep every cent
possible in his own pocket. Even after making what you think is the deal of
the century, rest assured the dealer did not lose anything on it and likely
made a profit. This should not be discouraging. Don't sign a deal that you
are not happy with accepting, and when you do accept a deal, don't worry
about what the dealer made on it. Simply be happy that you got the vehicle
you wanted at a price or payment that you were willing to accept.
Motorsforum.com is a website by car enthusiasts for car enthusiasts. It is not affiliated with any of the car or spare part manufacturers or car dealers discussed here.
All logos and trade names are the property of their respective owners.