Start with some basics. At least up until today, auto leasing served one or both of two functions:
- To obscure the true cost of the car to the buyer.
- To allow the manufacturer/dealer to capture the resale value.
And so now they are stopping leasing because there isn't enough money in it. Say, wha--? Don't these guys have MBAs? Didn't somebody teach them that anything is a bargain at the right price? So, if they aren't making enough money at the current price, then raise the price, right? Sure, I suppose sales will fall, and they may make less money. But less trumps none. The explanation doesn't wash.
Tedious expansion: Unpacked, I suppose that what they are saying is that the resale price of an SUV is not likely to be as great in the future as it was in the recent passt. Fine, so be it. So if they have to cover the cost of the vehicle, they will need to charge more for the lease term. You gueys want to borrow my calculator?
Here's a numerical example. Dealer has a new Belchfire on offer at $50,000. Pick an interest rate: 5 percent . If the buyer pays the whole price in 36 installments, he is looking at a payment of $1,459 a month.
Compare a "lease." Suppose the dealer chooses to "lease," predicting that the vehicle will be worth $40,000 when he gets it back after three years. This means he has to amortize $10,000 (50-40) of the value over the three year term. At five percent, this implies a monthly lease payment of $300 a month. We can stipulate that $300<$1,459, but after three years, the dealer gets his property back and the lessee is looking for a new set of wheels. But suppose that the resale price falls while the total price remains the same, so the dealer has to amortize, say, $20,000 at the front end. The payment jumps to $599 but otherwise, the same rules apply. BTW, this example assumes that the resale value falls while the new price remains the same. I don't know why we should expect this. Seems to me we would expect the market price for the new vehicle and the resale to fall at pretty much the same rate. Fn.: See expansion in the comment infra.
5 comments:
"Seems to me we would expect the market price for the new vehicle and the resale to fall at pretty much the same rate."
Will you elaborate, please? I can think of a couple of rationales for this assertion, e.g., inability to sell this year's model at retail to consumers after the year of introduction. But I am not sure that these rates of would equalize.
Thanks!
Well, I can try. Seems to me that what is driving lease prices down is fuel price. But this ought to affect old and new about equally. So, suppose you are in a market where a new car sells for $100 and a used car, for $50. Suppose fuel prices go up by enough to make the vehicles 10 percent less attractive. This should make the value of the new car $90 and of the used car, $45.
OK - that makes sense. Thanks.
The reason leases generally work well is that a consumer can drive a nicer make/model for less payment because all that is being paid for is the depreciation. Regular finance requires a higher payment because of the requirement to acquire and build equity. In addition, the consumer doesn't have to worry about the value of the vehicle at lease termination. The consumer has all the options. If the leased vehicle is worth more than the residual (guaranteed future value), the consumer can sell the vehicle or trade it in and keep any overage. If it is worth less than the residual, the conusmer merely lets the lessor take it back and take the hit. It is pricisely what is going on today. Consumers have had the privilege of driving vehicles that have depreciated rapidly because of the gas crunch, but they haven't had to take that hit. Its the banks or OEM captive finance arms taking the hits. If that's not good for consumers, I don't know what is.
So why would they take such a gamble? Shorter terms means selling more vehicles. Plus, they get some depreciation advantages because the vehicle title is in the bank/lessor's name.
Lease prices are not going down, they are going up because the lender/lessors are becoming much more conservative on the values they will guarantee in an uncertain world. So now the consumer might have to pay what they should..... BUT... they always have to the option to recapture any residual benefit at lease end. The real losers are the people who purchased and /or financed their big trucks and SUVs a few years back! The ones who leased came out smelling like a rose!
Anon's comment vividly discloses why I can never make any sense out of leasing. Of course the consumer pays less and gets less. But one's first thought is that these two cancel each other out. If they do not cancel, then one of the parties is making money at the expense of the other. It might be that the transferee is profiting at the expense of the dealer--but since professionals (as a general rule) know more than amateurs, I would regard this as unlikely.
Is there any reason to think that the dealer is taking profiting at the expense of the transferee? I am not certain, but here is one possibility: there may be a certain portion of the transferee market that will overpay a deal precisely because it is complicated and they don't understand it. Recall the insight that a lottery is a tax on people who can't add: it may be that leasing is a kind of tax on people who can't multiply or divide.
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