Why does the Auto Industry Lease Cars?

Why does the Auto Industry Lease Cars?

WHY???

This post is not your usual Personal Finance Blog post (although I like to think most of my stuff isn’t the “usual”).  This is not a post discussing whether I am going to lease or finance my next car.

Rather, I have had a burning question that I couldn’t find an asnwer for, by the way, if I did find the answer I would have just shared it rather than posing my problem!   So here it is:

Why do Automobile Companies Lease?

Of course I checked Wikipedia, but here is all the info I found:

For the leasor, leasing generates income from a vehicle the leasor still owns and will be able to sell or lease again once the original lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer’s business model.

Considering more and more companies are shutting down leases I must be on to something!

Lets do some real life math:

For our singular control example we are going to use The Wife’s old car.  We are using it because I know the numbers for it.  Her old car was a 2006 Nissan Altima which she leased for $265/month with $2,000 down – the asking price was a bit above $25,000.  The lease was for 36 months, so technically it shouldn’t even be up, but we negotiated the hell out of a 2008 model trading it in 8 months early due to mileage concerns.  This will make my math look even better later on.  Well:

  • $265 X 36 Months + $2,000 down payment = $11,540

 

So with a quick search I found on www.autotrader.com I could get a 2006 Nissan Alitma with about 36,000 miles (12,000 miles/yr for 3 years) for about $16,000 before negotiations from a Nissan Dealership.  So lets do some simple math:

  • $11,540 + $15,000 (I can’t even pretend that I would pay asking price on a 3 year old car) = $26,540.
  • The difference? $1,540

 

Lets put in some “speed bumps” in our calculations:

  1. I am sure I can get it even lower than $15,000 in this market
  2. If there was a brand new type of model then there would be an even great depreciation (think those current commercials – “The totally brand new Mazda 6″ – how much did the 3 year old Mazda 6s drop?
  3. Is the dealer going to have offer a new warranty?

Four Hypothesis Why the Auto Industry Leases

I do have four Hypothesis that are in order from least likely to most likely…but I would LOVE to hear other hypotheses (or an actual answer):

Hypo 1:

Try to dissuade people from returning their leased car.  When I say dissuade I mean making them jump through hoops to get rid of the car.

Hypo 2:

I am using the wrong car model –  Nissans aren’t a good example and the Wife and I are incredible negotiators and I worked the Nissan Dealership.  I hope the wife and I are this good.

Hypo 3:

The company is happy to keep the $1,540 and multiply this by hundreds of thousands of cars – YAY profits!

Hypo 4 – This is most likely the answer:

I am using the wrong numbers.  I shouldn’t be using the sticker price of $25,000 but rather the cost of the car to Nissan.  If Nissan is making $10K per car and then they are making an extra $1,500 plus the normal profit, now that makes sense.

Does anyone else know the real answer?

2 Responses to Why does the Auto Industry Lease Cars?

  1. Without going into the numbers too much, I would say the decision not to lease any longer is due to the bottom falling out in the resale market.

    As you said, you wouldn’t buy your car for 15k after 3 years, so why would the Big Three want millions of 3 year old cars after they only brought in 46% (11,540/25,000) of the original sale price when they can get it 100% MSRP through traditional financing, plus 7% interest if they’re lucky.

  2. Matt,

    While I would assume the resale market is increasing due to people’s natural tendencies to tighten up (i.e. If I were in financial constraints, would I purchase a 2007 Altima with a few miles vs. a 2009 for 17K or so more?), I still don’t get the leasing aspect in the past IF resales were historically lower today.

    Also, I didn’t even get into the repair aspects of a car, which during that lease, that got into an accident! Yeah the car is fixed, but at what cost? Who the hell buys a 3 year old car that has been totally reconstructed for anywhere near the value that we were talking about?

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