Lease Losing Luster

For many car buyers, leasing has been the most practical way to obtain a new vehicle. Most people prefer this form of purchase, because it includes monthly payments, rather than paying in full at once. This is usually the best option for a buyer, because the lease is based on the concept that a buyer pays a dealer the difference between the original value of a vehicle and its value at the end of the lease term, which generally varies between 2 and 5 years. This final value is called the residual price of a vehicle and varies between different makes and models. Vehicles with the lowest depreciation value, or the smallest difference between original value and residual price, are generally the best candidates for a lease option.

For example, in a 2-year lease, the customer would agree to pay the difference between the total value of the car at the time of the lease and the estimated value 2 years later at the end of the lease term. If the MSRP (Manufacturer’s Suggested Retail Price) of a vehicle is $ 30,000 and its estimated value after 2 years is $ 20,000, the buyer would pay $ 10,000 over a 2-year period, plus interest. Most leases set explicit limits on annual mileage and the amount of acceptable wear, and any excess can result in additional payments. At the end of the lease, the lessee has the option of returning the vehicle to the dealer with payment of the additional charges or purchasing the car for the residual value.

However, with the current economic downturn, car leasing has started to lose its appeal. Leasing generally allows customers to get a car that would normally be out of their budget, and it has become even less desirable than before to commit to a financial obligation that cannot really be paid. Leasing has also lost its luster for automakers due to rising gas prices, making the previously popular option of leasing the most expensive trucks and SUVs undesirable for customers due to its all-consuming nature. of gas. As a result, the residual value of these expensive vehicles has decreased, causing lessees to reject the purchase option at the end of the lease term, while retailers bear the loss, which amounts to the difference between the estimated residual value and the actual residual value. value. The bottom line is that automakers can no longer afford to offer leasing options and customers can no longer afford to assume financial obligations that previously allowed them to live beyond their means.