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Pre arranged trade in.... Posted by Mike Lynch [Email]  (#81) [Profile/Gallery]
(more from Mike Lynch) on Tue, 20 Nov 2007 11:36:40
In Reply to: Lease????, bever77, Mon, 19 Nov 2007 16:10:43 Members do not see ads below this line. - Help Keep This Site Online - Signup |
With a purchase you pay the whole thing off, plus the interest charge, plus sales tax. With a lease a trade in value or residual or option to purchase price is established and you pay the difference between the selling price also known as the capitalized cost or cap cost, and the residual divided by the term and this lease component is called depreciation.
The residual value is always expressed as a percentage of the MSRP, not the actual selling price or cap cost. Residuals are adjusted up or down 1-3% depending on miles. The standard residual is 15k per year, low mileage is 12k per year and ultra low is 10k per year. Typically 10k is 3-4% higher residual the standard 15k residual. Advertised leases are usually 12k.
So at the end of the lease you have the option to purchase the car for the residual, if you know you want to keep it or because it's particularly low miles, resell the car for more than the residual if the market is strong (rarely) or terminate the lease early because the value of the car exceeds the residual somewhat before the end of the term, or walk away from it because the residual was too high (very common), less any excess mileage or wear and tear charges, which IMHO are usually very reasonable.
The other component of a lease is called the money factor and that's computed as a figure like .00250 called a money factor times the sum of the cap cost and the residual. Lately GMAC has been expressing lease charges in APR's and the generally accepted conversion factor is 2400 so a lease rate of 6% = .0025. The reason the money is calculated on the sum of the residual and cap cost is to make the lease a "level yield", that is as the residual goes up in relation to the cap the lessor is carrying more money an deserves more income.
So a $30,000 car with a 60% residual = an $18,000 residual and a 24 month term. So thats $30k less $18k = $12k/24 = $500 monthly depreciation, the first component.
Now take the $18k and add it to the $30k = $48k times .00250 = $120 a month for the money factor.
$500 + $120 = $620 + sales tax on the payment. Tax on the only the payment is a siginificant lease advantage as opposed to tax on the whole thing.
Residuals and rates are established by the leasing company and the highest residuals and therefore the lowest payments are always the factory residuals and sponsored rates. From time to time the purchase incentives can be so large that an outside leasing company who has low residuals and high rates can almost be competitive....well actually not in my experience.
So now throw a $2k discount and a $4k factory incentive and the $12k depreciation goes down to $6k for 24 mos = $250 and the cap cost is now $24k.
Throw in a factory sponsored rate of 3% = .00125 and the sum of the residual, still $18k or 60% of the MSRP, plus the new cap cost of $24k = $42k times .00125 = $52.50
And now you've got $250 + $52.50 = $302.50 + local sales tax, a very typical Saab style equation, a decently high factory sponsored residual residual value as compared to the stronger BMW and MBZ residuals, a factory incentive and a dealer willing to discount, and a factory sponsored low rate.
The equation above would normally require the first payment up front, plus sometimes a refundable security deposit equal to the first payment, but many times no security deposit required, plus local license fees, plus the sales tax on the payment. This total is called drive offs and is the check you need to write for a lease with zero down. Sometimes a dealer will include the drive offs in the selling price for a true zero down, but the norm is for the customer to pay the drive offs for zero down.
Advertised leases almost always also have a down payment or cap reduction in order to hit a payment, usually around 10%. This reduces the cap cost therefore lowering depreciation and the money factory. The down payment is taxed and is added to the drive offs.
Got all that?
, Tue, 20 Nov 2007 11:36:40 <-- Viewing This Message, Wed, 21 Nov 2007 07:20:12, Tue, 20 Nov 2007 18:40:01
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