Lease a BMW rather than a Pontiac for the same monthly payment, simply by comparing relative residua
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Mar 1, 2007
Ralph M
Lease a BMW rather than a Pontiac for the same monthly payment, simply by comparing relative residua
Here are the definitions to help evaluate vehicle residual values
Vehicle residual value
This is the value that the manufacturer, not the dealer, says the car will be worth at the end of the lease. Sometimes it is a percent, such as 60% of the MSRP, the price of the car. A $20,000 car with a 60% vehicle residual value would have a residual value of $12,000.
The lease contract says you can rent this $12,000 for x years by simply paying a percent, such as 4% of the $12,000, or .04 times $12,000 divided by 12 months or $480/12 equals $40/month
Amortization
The $8,000 left (the $20,000 car price minus the $12,000 residual value) is a standard loan, just like a house mortgage, which requires a monthly payment for not only the interest but also a little of the $8,000. This will always be a much larger payment than the interest paid on the residual value.
Here is where the magic is
Higher quality cars, such as a BMW or Mercedes or Lexus, will always have a higher relative vehicle residual value than a Chevy or Pontiac or Dodge. That means that although the interest paid on the higher quality vehicle residual value is more than that paid on the lower quality car, the monthly payment paid on the depreciation is a lot less, so that the sum of the two on a BMW can be the same as the sum (the lease payment) on a lesser quality car.
Use the resource box at the end of the article to see an actual example of two vehicles having the same lease payment but differing in price by several thousand dollars.
How to exploit this anomaly in vehicle residual values in a Lease calculation
The easy way
On the Internet, search for any manufacturer's web site and simply find a lease payment by focusing on any higher quality car costing a few thousand collars more than your initial choice. Ignore the fact that the residual value is not given. What you're really after is a monthly lease payment on a Vehicle B that is the same, or almost the same, as the lease payment on the initial vehicle A that you chose.
The hard way
To narrow your search for a secondary choice, be sure to limit it to a vehicle that has a higher residual value percentage. Because few car manufacturers will provide the residual value on the Internet, go to other sites that do offer this information. To get the percentage residual value, divide the vehicle residual value by the MSRP and you have the percent. Example: 12,000/20,000 equals 60%.
After initially deciding on what car to lease, get a lease proposal on a different make that costs as much as $5,000 more. You can do a lot of this secondary searching on the Internet. Make sure each choice has similar features and that neither one is loaded with a lot of optional accessories.
The next step is to actually visit the second choice dealer showroom and see if Car B meets your needs, such as comfort, room, and any other requirements that led you to pick vehicle A in the first place. Ignore its price, because you're only concerned about its monthly lease payment.
Vans, SUV's and Light trucks?.other classes of Vehicles
The same logic applies to these vehicles and their vehicle residual values. You'll be surprised how they vary from one vehicle make to another. In many case the light trucks of a given domestic manufacturer will have better residual values vs-a-vs a foreign made light truck than you find in their sedans. That's because the domestic light truck makers got a few years' head start on the foreign makers.
Other options
Consider that it's possible that the Sedan you picked as choice A might have a lower (or higher) lease payment than the Van you really wanted. So also shop between classes.
Copyright 2006 by Beacon Data LLC All rights reserved
Vehicle residual value
This is the value that the manufacturer, not the dealer, says the car will be worth at the end of the lease. Sometimes it is a percent, such as 60% of the MSRP, the price of the car. A $20,000 car with a 60% vehicle residual value would have a residual value of $12,000.
The lease contract says you can rent this $12,000 for x years by simply paying a percent, such as 4% of the $12,000, or .04 times $12,000 divided by 12 months or $480/12 equals $40/month
Amortization
The $8,000 left (the $20,000 car price minus the $12,000 residual value) is a standard loan, just like a house mortgage, which requires a monthly payment for not only the interest but also a little of the $8,000. This will always be a much larger payment than the interest paid on the residual value.
Here is where the magic is
Higher quality cars, such as a BMW or Mercedes or Lexus, will always have a higher relative vehicle residual value than a Chevy or Pontiac or Dodge. That means that although the interest paid on the higher quality vehicle residual value is more than that paid on the lower quality car, the monthly payment paid on the depreciation is a lot less, so that the sum of the two on a BMW can be the same as the sum (the lease payment) on a lesser quality car.
Use the resource box at the end of the article to see an actual example of two vehicles having the same lease payment but differing in price by several thousand dollars.
How to exploit this anomaly in vehicle residual values in a Lease calculation
The easy way
On the Internet, search for any manufacturer's web site and simply find a lease payment by focusing on any higher quality car costing a few thousand collars more than your initial choice. Ignore the fact that the residual value is not given. What you're really after is a monthly lease payment on a Vehicle B that is the same, or almost the same, as the lease payment on the initial vehicle A that you chose.
The hard way
To narrow your search for a secondary choice, be sure to limit it to a vehicle that has a higher residual value percentage. Because few car manufacturers will provide the residual value on the Internet, go to other sites that do offer this information. To get the percentage residual value, divide the vehicle residual value by the MSRP and you have the percent. Example: 12,000/20,000 equals 60%.
After initially deciding on what car to lease, get a lease proposal on a different make that costs as much as $5,000 more. You can do a lot of this secondary searching on the Internet. Make sure each choice has similar features and that neither one is loaded with a lot of optional accessories.
The next step is to actually visit the second choice dealer showroom and see if Car B meets your needs, such as comfort, room, and any other requirements that led you to pick vehicle A in the first place. Ignore its price, because you're only concerned about its monthly lease payment.
Vans, SUV's and Light trucks?.other classes of Vehicles
The same logic applies to these vehicles and their vehicle residual values. You'll be surprised how they vary from one vehicle make to another. In many case the light trucks of a given domestic manufacturer will have better residual values vs-a-vs a foreign made light truck than you find in their sedans. That's because the domestic light truck makers got a few years' head start on the foreign makers.
Other options
Consider that it's possible that the Sedan you picked as choice A might have a lower (or higher) lease payment than the Van you really wanted. So also shop between classes.
Copyright 2006 by Beacon Data LLC All rights reserved
Article Source: http://www.articlerich.com
Ralph is an author of automotive articles for people who want to save money when leasing or buying their next car. Visit his web site at www.autotruckdata.com Learn how to Calculate Lease payments and to Calculate the Vehicle residual value and visit www.autotruckdata.com
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