New Car Leasing, Part 2
One of the key elements of a
lease is the residual value. The residual value, which represents the
theoretical value of the vehicle at the end of the lease, is important
because it has such a strong effect on the monthly payment. Lease payments
are calculated by adding the average depreciation per month to the rent
charge per month as shown by the lease payment equations below:
Avg. Depreciation Per Month
= (Cap Cost minus Residual) / Months
Rent Charge Per Month = (Cap
Cost plus Residual) x Factor
Base Monthly Payment = Avg.
Depreciation per month + Rent Charge Per Month
Leasing companies often subvent (subsidize)
leases by inflating the residual value above what the vehicle will be
worth at the end of the lease. This artificially high residual can
dramatically reduce the payment and lower the total cost of the lease.
However, a higher residual usually means a higher purchase option price at
the end of the lease and higher costs in the event of early termination.
Note: Although the above
lease payment equations are relatively simple, there are many elements to
a lease agreement that can quickly cloud the picture resulting in the
consumer losing track of where the money is going. That's why we recommend
the use of a top-notch leasing program such as Expert Lease Pro to help
you crunch the numbers and avoid getting ripped off. See below for more info on Expert Lease
about Residual Values
1. How do I obtain the residual value on
a lease? Unfortunately the only source for the actual lease residual
is the dealership. This information can sometimes be found in the fine
print at the bottom of newspaper ads often described as lease-end value
(LEV) or purchase option price. The residual value will also appear in the
disclosure section of your lease agreement.
2. How do I tell if I am getting a good
residual? We recommend comparing the residual from the dealer to the
values in the National Auto Research
"Black Book" Residual Guide. Residuals are expressed as a
percentage of MSRP and indicate what the vehicle will be worth in 2, 3, 4
and 5 years. Black Book residuals are conservative and reflect a wholesale
or trade-in type value. By looking at the difference between the residual
set by the leasing company and Black Book's residual, you can get a feel
for how aggressive the lease terms are. For example, if the dealer is
quoting 59% of MSRP and Black Book lists 50% of MSRP for the same vehicle
and lease term, the difference of 9% represents the subsidy on the
residual. Typical residual subsidies range from 0 percentage points (no
subsidy) to 10 or 11 points (very aggressive) over the Black Book number.
Black Book residuals are included as part of Chart Software's Expert Lease
Pro (see below).
3. Which is better, a high residual or a
low residual? All other things being equal (vehicle price, money
factor, months, miles and fees), a higher residual should result in lower
monthly payments and total cost of the lease. However, there is a catch:
If your lease has an inflated residual and you terminate the lease early,
the leasing company will charge you for unpaid depreciation in addition to
early termination fees. In other words, they will recover the entire
subsidy on the residual which could easily be $1,000 to $2,000 (or more).
So if you sign up for an aggressively subsidized lease, be sure you are in
a position to go the distance and make all of the payments required by the
4. I plan on buying the car at the end
of the lease. Does this mean I should look for a low residual so that my
purchase option price will be lower? No. If you do that, your monthly
payments will be a lot higher. In spite of what dealers say, it's rarely -
if ever - cheaper to lease first, then buy the car at the end, so if
you're going to lease, be sure to lease the smart way: Aim for low monthly
payments that result from a very aggressive, subsidized residual. Then, at
the end of the lease (if you still want to buy the vehicle), negotiate for
a price that is significantly lower than the inflated residual/purchase
option price. If the leasing company won't budge on the price, turn in the
keys and walk away.
About Expert Lease Pro
from Chart Software is arguably the best software package available for
analyzing automotive leases. Originally developed in 1992 by Chart
Software founder Charles Hart, Expert Lease Pro has been used by over 5000
consumers and businesses to successfully negotiate the lease or purchase
of both new and used vehicles. Although designed for consumer use, Expert
Lease Pro has also been used by state prosecutors to investigate car
dealers and lease companies for deceptive leasing practices. Expert Lease
Pro is also used by many professional car buying services and consultants
as their main tool for negotiating deals. Money magazine
calls Expert Lease Pro "An Equalizer: a computer program that lets
you fill in the missing details...Saved Leo Galanti $3,000!"
Here are some of the things
you can do with Expert Lease Pro:
- Analyze both leases and loans.
- Spot hidden
fees and undisclosed costs.
- Make sure that trade equity and cash
down payments are properly credited.
- Tell you which is cheaper: Lease,
Loan or Cash.
- Make Lease Comparisons.
Book" Residuals are included for all new vehicles.
- Look up Dealer
Invoice and MSRP for any new vehicle, including options.
- Includes "CarDeals"
report which lists all rebates and
- Create tables of monthly payments.
Expert Lease Pro costs only
$69.95 and it's money well spent. Think about it: If Expert Lease helps
you spot one hidden fee or win just one concession during negotiations, it
could easily pay for itself 10 times over. Listen to what some recent
users of Expert Lease Pro have to say about the program:
"Thanks for putting
me 'in the drivers seat' in more ways than one. I was in total
control during the lease negotiation. I now have a new pickup and
have got a really good deal by using your program as suggested in
the user guide. Your program was worth every penny."
Estimated savings with Expert Lease Pro: $2,000
"This is a really
amazing product. I just got a new car with almost $2,000 savings
to my pocket. This is the most powerful negotiation weapon I have
ever seen. Thank you."
Yakov. P., Brooklyn,
NY., via e-mail
|"I made the decision
to lease after careful consideration of the facts. As an
accountant I knew the 'right' economic model could exist if only
there was a way to calculate the Ever Changing Variables.
Voila!!! THIS IS THE BEST KEPT SECRET OF AUTO LEASING!!!
Your software got me the facts, quickly...I thank you, my family
thanks you, several thousands ($$$) times over!!"
Scott and Diane Dunham,
Pro) gives you a great psychological boost: You and the dealer
have the same information and the means to manipulate it."
Street Journal Smart Money Magazine
Click here for more information on Expert Lease Pro
Click here to purchase and download Expert Lease Pro
using a secure online order form.
[How To Buy A New Car]
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