Leasing a car may not be for everyone, but it might be your best option when considering a new car. Like anything in life, the key to success is seeking to understand all sides of the subject at hand. In this case, the subject is leasing from the points of view of the consumer, the manufacturer and the lending institution.
Over 20 years ago, leasing a car received a bad reputation because at the end of the lease term the bank or financial institution would determine the value of the vehicle, and the difference or risk would generally be passed on to the consumer. These leases were called “Open Ended Leases.” The consumers liked the low monthly payment but were surprised and not prepared to pay the unexpected loss in vehicle value at the end of lease term. Obviously, the banks or financial institutions wanted to pass this financial risk on to the consumer. The bank’s viewpoint was that it was only in the business of making interest on loans.
As time went on, luxury vehicles like Mercedes and BMW entered the leasing market with great success. These manufacturers understood their customers’ needs and tailored a lease that catered well to their customer base. Their customers wanted to drive a new vehicle every two to three years; wanted the latest in safety and technology; wanted their vehicle under factory warranty for the entire time they had the vehicle; wanted the tax benefits; and wanted to pay for only the part of the vehicle they used. They also wanted to use the vehicle before repair and maintenance costs occurred, and of course they wanted the best luxury vehicle for the lowest payment. Today, don’t all customers want these benefits?
Thus entered the “Closed End Lease.” The vehicle’s lease end value is predetermined upfront and on the day the lease is signed. To minimize the risk to all parties, the manufacturers and their finance division join together (e.g. Ford, the manufacturer, and Ford Credit, the financing institution) and predetermine lease end values for each vehicle in their lineup. By combining the manufacturer’s and financial institution’s goals along with all the benefits the consumer wants, a win-win-win situation is created. The manufacturer’s goal is to produce and sell as many vehicles as possible, while the manufacturer’s financing institution’s goal is to finance as many vehicles as possible, yet without the risk of absorbing any loss in vehicle value at the end of the lease. This partnership forced the manufacturer and financing arm to predict what the vehicle value would be at lease end and to commit to the customer at initial lease signing and remove any valuation risk.
In leasing, the consumer pays for the difference between the vehicle’s value at the initial lease signing and the forecast value at lease end. In essence, the vehicle’s depreciation is predetermined, and the consumer’s payment includes this depreciation and the interest on the money borrowed. This shared risk creates the perfect combination. Manufacturers who own a strong financing arm have success in both manufacturing and financing. When a vehicle is purchased rather than leased, the buyer assumes all the risks of vehicle value and depreciation. My experience indicates that a strong manufacturer has a better understanding of future vehicle values, which generally favor the customer. Many banks and financial institutions without this direct relationship with manufacturers have exited the leasing business and/or have become uncompetitive.
A 24- or 36-month lease may be your best financial decision, but a detailed needs analysis and assessment should be presented to you by a knowledgeable dealership with finance professionals willing to offer full transparency on the manufacturer’s leasing and purchasing options. FBN
Alan Chan is the owner/dealer at Babbitt Ford Lincoln in Downtown Flagstaff. He presents a unique dealership viewpoint because of his background as a mechanical engineer, MBA, former CPA and financial advisor. Babbitt Ford is one of the oldest Ford Dealerships in the nation. Chan continues the Babbitt Ford tradition established in 1912 offering outstanding customer value and customer service. He has been with the dealership for more than 25 years. Chan can be reached at alanchan@babbitt-ford.com or 928-774-5063.