Leasing vs. Buying
Future Value
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Glossary |
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Leasing vs. Buying
Future Value
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| Leasing | Buying | ||||||||||||
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| The lessor bears
the risk for the future market value of the vehicle. |
You bear the risk
for the vehicle�s market value when you trade or sell it. |
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Factors affecting future
value. At the beginning of a lease, the vehicle's market value at
lease-end cannot be known. The vehicle�s future value can be affected by
a wide variety of factors and market changes, including
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Factors affecting future
value. At the beginning of a finance agreement, the market value
when you sell or trade the vehicle is unknown. The vehicle�s future value
can be affected by a wide variety of factors and market changes, including
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| Known future value.
At the beginning of a closed-end lease, the lessor sets a future value for
the vehicle. This future value, called the residual value, is used to calculate
your monthly payment. The residual value determines the amount of depreciation
you will pay over the lease term because Depreciation = Adjusted capitalized cost – Residual value |
Unknown future value.
You may have considered the vehicle�s record of retaining its value when
you made your purchase decision, or you may have monitored the value after
you purchased it. However, you will not know the precise market value of
the vehicle you own and the actual depreciation until you sell it or trade
it. The trade-in or sale price determines the amount of depreciation you
will incur over the finance term because Depreciation = Original purchase price – Trade-in or Sale price The higher the trade-in or sale price you negotiate, the less the depreciation. |
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| Depreciation cost.
The residual value indicates how well the vehicle is expected to retain
its value. You can compare the residual value in different lease offers.
The higher the residual value (without changing any other variables), the
less depreciation you will pay over the lease term.
Fixed depreciation cost. In a closed-end lease, the amount of depreciation you pay over the term of the lease is fixed, or closed, when you sign the lease. It is disclosed in your lease. At the scheduled end of the lease, you have the right to return the vehicle, pay any charges related to your obligations under the lease, and walk away. See the section Vehicle Return. You have no obligation if the vehicle is worth less than the residual value, that is, the actual depreciation was greater than the amount you paid for depreciation in your lease. In this case, you would have paid less for depreciation than the amount the vehicle actually depreciated. For example, consider the following lease:
If the actual value of the vehicle at lease-end is $8,500, the actual vehicle depreciation over the lease term is $10,500, which is $1,500 more than the lease depreciation you paid. In contrast, consider the case in which the vehicle is worth more than the residual value. For example, consider the same lease with a lease depreciation of $9,000. If the actual value of the vehicle at the end of the lease is $11,500, the actual vehicle depreciation is $7,500, which is $1,500 less than the lease depreciation you paid. You would have paid more for depreciation than the amount the vehicle actually depreciated unless you buy the vehicle for the residual value amount. If you buy the vehicle for the $10,000 residual value, you will have paid $9,000 in depreciation plus the $10,000 purchase price for a total of $19,000. Because the vehicle is worth $11,500, your actual depreciation is $7,500. Purchase-option opportunity. In most leases, you have the right to purchase the vehicle at the end of the term for the amount stated in the lease or in a specific used-car guidebook. If you believe that you can sell or trade the vehicle for more than the purchase-option price (plus the cost of selling the vehicle), it is in your economic interest to exercise your purchase option and re-sell the vehicle. In this way, you have the opportunity to capture some or all of any positive difference between the actual resale value of your vehicle and the residual value stated in the lease. Purchase-option costs. When exercising your purchase option for the purpose of re-selling the leased vehicle, be sure to consider what effect other costs and fees will have on your ability to make a profit. These fees and costs often include sales tax, license plate and vehicle registration fees, vehicle inspection fees, and the costs of financing your purchase. If the lessor uses a vehicle dealership to process the transaction and you have any questions about the costs of exercising your purchase option, you should contact the company holding the lease agreement. |
Depreciation cost. You can determine the depreciation by comparing the initial purchase price with the trade-in or sale price. For example, if you purchased a vehicle for $19,000 and traded it (or sold it) 4 years later for $10,000, the depreciation in 4 years of using the vehicle was $9,000:
(This example does not include the effect of any remaining loan balance.) |
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