Lease vs buy car: the long running question

Lease payments are determined mainly by three things:

What you actually pay for the vehicle, called capitalized cost

The lease factor (basically, the interest rate)

The lease residual percentage

Residual value is usually expressed as a percentage of the new car’s MSRP (Manufacturer’s Suggested Retail Price), or “sticker price.” As an example, if the 36-month residual value is 50 percent on a car with a sticker of $32,595, the wholesale amount it is expected to be worth is in three years is $16,297.50.

The residual percentage is set by the leasing company, whether it is the manufacturer and its captive bank, its partner bank (like Chase for several car companies) or independents like US Bank that do their own leasing.

All these base much of their final residual percentage on the numbers that a little Santa Barbara, California-based company called Automotive Lease Guide, generate. ALG has been around for 45 years, and is the undisputed leader in this area of the car business.

What ALG, banks and the car companies themselves are doing is trying to figure out what any shiny new car will be worth, wholesale, in two, three, four or more years, based on the economy, the auto market, consumer tastes, the price of fuel and myriad other factors, most especially how that car compares to similar models. Obviously it is incredibly complex.

You, as the lessee, are paying the depreciation between capitol cost–“cap cost” for short–and the residual value. The lease payment isn’t just half of the purchase payment though; interest is calculated on something else. I go into more detail on this, and the whole “lease vs buy car” pros and cons, in my eBook, the Car Buying Tips Guide. But obviously, the higher the residual value, the lower your lease payment, all else being equal.

Lease residuals peak

The reason lease residuals are peaking is that there has been such a shortage of used cars on the market. The fewer the cars, the more they are worth. The bottom of this trough in available used vehicles will continue of about two more years, until the increase in new car sales and leases that began in 2009 starts to filter into the used car market. That’s because the average new car buyer historically keeps their ride about three and a half years, and most leases are on a three year term.

ALG has begun to lower the residual values of 2012 models in comparison to those of 2011s. They are still near historic highs, and combined with the super-low interest rates available right now, make leasing more compelling than it has almost ever been.

About the Author(Article Source:
Iam a automotive broker who helps to arrange every part of the vehicle transaction, watching out for the best interests of the client.



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