Example: Higher Mileage Limit

Assume that you have a lease offer allowing 15,000 miles per year with a 15 cents per mile excess mileage charge and a residual value of \$12,350, but you expect to drive 17,000 miles per year, on average, over a 4-year lease term. If you return the vehicle, your excess mileage charge at lease-end would be \$1,200 (4 × 2,000 × \$.15). Ask what the residual value adjustment is for excess mileage if the lease is written to allow 17,000 miles per year. If the residual value is reduced by 13 cents per mile, you will save 2 cents per mile for the 8,000 excess miles, or \$160, by accepting the lease allowing 17,000 miles per year with the \$11,310 residual. (The residual equals \$12,350 – (\$.13 × 8,000) = \$11,310, a reduction of only \$1,040.) Assuming that the lease rate doesn’t change, although your monthly payment is higher, you will also pay less in rent charges when the residual value is lower. The table below compares two hypothetical leases, one having an end-of-term mileage charge and the other a lower residual value.

15,000-miles-per-year
lease with 17,000 miles per year driven
17,000-miles-per-year lease
Gross capitalized cost
\$22,300.00
\$22,300.00
Capitalized cost reduction
\$3,500.00
\$3,500.00
\$18,800.00
\$18,800.00
Residual value
\$12,350.00
\$11,310.00
Depreciation and any amortized amounts
\$6,450.00
\$7,490.00
Rent charge
\$5,295.00
\$5,118.21
Total of base monthly payments
\$11,745.00
\$12,608.21
Months in lease term
48
48
Base monthly payment
\$244.69
\$262.67
End-of-term mileage charge
\$1,200.00
\$0.00
Total of monthly payments and mileage charge
\$12,945.00
\$12,608.21

Alternatively, assume that you are comparing two lease offers that have different mileage allowances and different residual values and want to determine which is better. Assume that Lease A has a 4-year term and permits 12,000 miles per year with a \$10,000 residual value and a 13 cents per mile excess mileage charge. Assume that Lease B for the same vehicle has a 4-year term and permits 15,000 miles per year with a \$9,000 residual value and a 15 cents per mile excess mileage charge. If you plan to drive 15,000 miles per year, you will have 3,000 excess miles per year under Lease A, which will cost 4 × 3,000 × \$.13, or \$1,560. Under Lease B, the residual value is \$1,000 lower, compared with Lease A. Thus, Lease B has the lower cost for driving 15,000 miles per year.

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