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The rate the lessor offers is pretty immaterial. What counts is the lease amount, and the interest rate you could get for a purchase.
Present value the payments calculated at the "subvented" rate using the prevailing interest rate you can get from your bank or the dealer and subtract that, plus your up-front money, plus the present value of the lease termination fees, and you should have a residual value figure for the car. If it's a 3 year lease, look at the prices people are getting at auction or wholesale for 3 year old cars. If their getting a lot more than the calculated residual value it may well be better for you to purchase rather than lease.
It's kind of like the law of conservation of energy only think as a banker and substitute the word "Money" where "Energy" might be. "Money is neither created or destroyed, just transformed, or transmuted" -or something to that effect.
Same is true for lease vs. purchase. The leasing company discounts the stream of payments with a bank at whatever the prevailing market discount rate is. They may calculate your payments based on some lesser, or "subverted" amout (if that's the right term). it just means the present value of the difference needs to be made up somewhere else; like residual value, or manufacturer incentive. Since the stream of payments isn't enough to cover the cost of the car, they need to borrow that amount as well.
Sounds a lot like a balloon payment doesn't it? Only they're doing the balloon on the bet that the value of the vehicle at lease-end plus extra charges they get you to pay, and lease termination fees will be enough to cover it. And as you'd expect from any good capitalist, they do their best to structure it so they're more likely to pocket some extra cash at lease end, than fork $ out.
But, it doesn't always work out that way for them -I think this is the "gap" you refer to. GMAC financed SUVs in the late 90s on the bet that resale values would remain high even with more and more competitive products hitting the market every fiscal quarter. Resale values for SUVs went in the toilet and they got burned big time -so no more $250/month leases on Tahoe, or Yukons.
I think "Balloon" loans never got that popular because people are somewhat risk averse. They'd rather let the leasing company take the risk that the resale value will be high enough to cover the outstanding balance. They also don't like having to sell their cars. That's fine, a lease may be a good good for them. Just realize that when you add up the purchase rebates you didn't get, the up-front money you paid without gaining equity, the extra milage costs you pay (interesting that they charge for extra milage, but don't give you money back for low milage), the tires, or glass, or other parts you have to replace, or pay extra for when you turn the car in, termination fees, factor in something to account for early termination if you need to, etc...and finally, the equity you don't have to put toward your next vehical, then leasing can start to look pretty expensive.
Personally, I don't lease, and wouldn't balloon a loan either. I'd rather pay for my car over a short enough period of time that the amortized balance remains at or below what I could sell the car for. That way, I have a paid for car at the end I can use to reduce the payments on my next car. the good thing about a balloon vs, lease is that you get to drive your car as much as you want to without the fear that you'll wind up with several thousand dollars in extra milage charges. If I drive less, the car will be worth a little more when I sell it.
posted by 216.40.164...
, Fri, 10 Jan 2003 20:57:30
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