|Buying vs. Leasing
|We're not going to tell you all the obvious things everyone else tells you about buying vs. leasing. It's obvious that by leasing a vehicle you create a situation where you have a lack of equity in a vehicle, you are subject to mileage limitations and penalties, and you are forced into certain lease end buy-out and replacement decisions. Instead we'd like to give you a couple of more unusual tips and things to consider.
The Costs of Leasing
Leasing consists of two major costs: depreciation of the vehicle and the cost of borrowing the money. Depreciation is by far the more expensive of these two factors. Leasing can become a really good deal when a car manufacturer, in an effort to dispose of excess inventory, increases the residual value of a vehicle significantly beyond its actual projected value in order to make the monthly payments highly attractive. This is called subventing.
Let's say you are looking at a $30,000 vehicle that the manufacturer estimates will be worth $12,000 after 3 years (this $12,000 predicted value is called the vehicle's "residual value"). Therefore, the total depreciation for that vehicle would be $18,000($30,000 vehicle cost - the $12,000 residual value). This results in a monthly depreciation of $500 per month ($18,000/36 months= $500/month). On such a lease a typical cost of money would be about $130 per month for a total monthly payment of about $630 ($500 monthly depreciation + $130 per month cost of funds). The easiest way to bring those payments down and make that lease significantly more attractive is to increase the residual value of the vehicle. If the manufacturer decides to subvent the lease by increasing the residual to $16,000, the depreciation part of the lease drops to $14,000 ($30,000 minus the residual of $16,000) or $388 per month ($14,000/36 months). A typical cost of money on such a lease would be around $145, for a total monthly payment of $533/mo. So by raising the residual, the monthly payment has dropped almost $100, or about $3600 ($100 x 36 months) over the length of the lease, thereby making it a much more attractive lease and within the acceptable monthly payments of many more people.
Just because the manufacturer sets a higher residual value in order to lower monthly payments and move more vehicles doesn't change the fact that a realistic end of lease value for that vehicle is still $12,000. Since the customer will usually walk away from such a vehicle at the end of the lease because the buyout figure will be too high due to the manufacturer's inflated residual, the manufacturer will have to absorb the loss of approximately $4000 per vehicle, the difference between the subvented residual of $16,000 and the actual market value of $12,000.
The manufacturer's loss is the customer's gain, and subvented leases can be smart buys for the consumer. If a lease seems extremely attractive, it is probably subvented by the manufacturer. If you want to check how realistic a residual is, check the residual against the same vehicle on our web site that is as old as the lease term. If you are looking at a 24 month lease, check a two year old value for the same vehicle, if it is a three year lease, check a three year old example, and so on. If the residual is thousands higher than our value, it is almost surely being subvented and can be a very attractive deal for the consumer.
Used Vehicle Leasing
Leasing a used vehicle rarely makes sense unless the lender uses a residual value that is significantly higher than reality supports. This sometimes happens when the company that sets residuals for used vehicles (usually not the lending institution) makes a mistake and projects an unrealistically high residual value on a used car. These are relatively rare, but can be highly advantageous for the consumer when they occur. Checking the residual value against our values as suggested in the above paragraph might indicate such a situation if the residual is close to the Galves value for a two or three year older example of the same vehicle.
Leasing & Mileage
Another myth about leasing is that you shouldn't lease if you put more miles on a vehicle than the lease allows, typically 10,000, 12,000 or 15,000 per year. There is a penalty for going beyond the mileage parameters set forth in the lease, but in many cases that penalty is actually less than the depreciation due to excess mileage that the vehicle would suffer if it was owned instead of leased.
For instance, if you leased a new Jaguar XJ8 for three years with a mileage allowance of 12,000 miles per year and put 20,000 per year on it instead, it would have 60,000 miles on it at lease end instead of the allowed 36,000, so you would have to pay a penalty on the excess 24,000 miles (60,000 actual miles - 36,000 allowed miles = 24,000 excess miles). Jaguar's penalty is currently 20 cents per mile, so the mileage penalty would be $4,800 (24,000 excess miles X $.20/mile =$4,800). If instead of leasing the vehicle, you purchased it and went to trade it in 3 years later with 60,000 miles on it, Galves' mileage adjustment for the excess mileage would be $7975, or $3175 more in depreciation than the mileage penalty if you had leased it. So you can see that the fact that you would expect to drive more miles than the lease allows is not always a reason not to lease. Also, if you do not like the concept of paying a large penalty for excess miles at lease end, some manufacturers offer the option to pre-pay for additional mileage and include it in the monthly payment.
You can compare these numbers for yourself once you know what the mileage parameters would be for your particular lease and what the mileage penalty is. Look up an example of the vehicle you are considering leasing that would correspond to the length of your lease (a 24 month lease means you would look up a 2 year old model, a 36 month lease means you would look up a 3 year old model, 48 months, a 4 year old model) and let Galves calculate the mileage adjustment for your anticipated lease end mileage. Compare that to what your mileage penalty would be if you leased it and you can decide whether leasing makes sense for you even though you expect to put on more miles than the lease allows.
A Word of Caution: If you attempt these comparisons with many of the other price guides whose mileage adjustments don't reflect reality, you could be misled. Galves online mileage adjustments are the industry leader and can be depended upon to accurately reflect the reality of the market.
Although leasing is not for everyone, it can at times be an attractive alternative to purchasing a vehicle outright. The Galves values can help you decide if leasing makes sense for you. We offer the Galves Money Back Guarantee so you have nothing to lose and lots to gain.
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