How can leasing be cheaper than depreciation?

[blindswelledrat]

Ive been browsing car lease deals a bit lately and I had always assumed that lease deals were directly proportional to depreciation but it doesn't seem to be the case at all.
In fact on some deals (especially higher value cars) the total cost of the three years lease is far less than the depreciation of the car in that time.
How does this work?
Someone must take a hit on that and lose money so who does? And why?

Thanks

[Graham]

manufacturer doing the leasing? so their figures are not based on the retail amount? but the build cost

[Vladimir]

My favourite subject. A shame it's never discussed here.


...oh....

[Ozzie Osmond]

Don't forget that with leasing you also have the benefit of not having to pay the price for the car in a lump sum at the outset. This is called the "opportunity cost" of buying a car. In other words, you have the opportunity to do something else with that money.

[vescaegg]

I've wondered this as I too have always thought that's how it worked. Some of the m135i deals were coming out at about £7 for 2 years and 20000 miles. Surely such a car would lose way more over that time if you simply bought one?

[blindswelledrat]

Vladimir said:

My favourite subject. A shame it's never discussed here.


...oh....

Is that a quirky way of saying "repost"?
Are you really amazed that some people don't read every thread ever made on PH?

[AudiWurst]

blindswelledrat said:

Someone must take a hit on that and lose money so who does? And why?

The manufacturer does.

Subsidising lease deals is a more discreet way of shifting stock than slapping "£5k discount" stickers on cars on the forecourt.

BMW 6-series and Merc SLK have been examples of this recently.

[laingy]

I assume tax is something to do with it, e.g. VAT and leasing tend to go hand in hand.

[Vladimir]

blindswelledrat said:

Is that a quirky way of saying "repost"?
Are you really amazed that some people don't read every thread ever made on PH?

Read almost any post. 99% turn into a heated discussion about leasing, PCPs,...zzzzzz....zzzz....

[Mr E]

laingy said:

I assume tax is something to do with it, e.g. VAT and leasing tend to go hand in hand.

Yup. One assumes the lease company doesn't pay VAT on the car.

[blindswelledrat]

AudiWurst said:

The manufacturer does.

Subsidising lease deals is a more discreet way of shifting stock than slapping "£5k discount" stickers on cars on the forecourt.

Makes sense.
Why do they do it though? Is it because they make cars due to predicted demand and sometimes the demand is not up to it?

[AudiWurst]

blindswelledrat said:

AudiWurst said:

The manufacturer does.

Subsidising lease deals is a more discreet way of shifting stock than slapping "£5k discount" stickers on cars on the forecourt.

Makes sense.
Why do they do it though? Is it because they make cars due to predicted demand and sometimes the demand is not up to it?

That's a question for the industry insiders on here.

I would assume that given lengthy planning/development cycle of a new car, it is possible for manufacturers to be caught out by unexpected shifts in economic cycles and consumer preferences. As you said in your original post, these "giveaway" lease deals are often on expensive and/or niche models.

[Foppo]

Next car for my daughter is to a lease scheme national health.She is a mental health nurse.Cars are becoming more and more like white goods they last a few years and then the scrap heap.

[Hackney]

AudiWurst said:

blindswelledrat said:

Someone must take a hit on that and lose money so who does? And why?

The manufacturer does.

Subsidising lease deals is a more discreet way of shifting stock than slapping "£5k discount" stickers on cars on the forecourt.

BMW 6-series and Merc SLK have been examples of this recently.

This.
Above all maintain brand value.

[jdw1234]

Volume. The vast majority of people don't earn enough/have enough capital to drop £30k or whatever an average car costs these days. Without a monthly payment model, people on an average salary would not be prepared to expose themselves to that much depreciation.

It also encourages customer loyalty through rolling deals into a new car.

[10 Pence Short]

The only way the lease deal will be less than the retail depreciation is that the capital value of the asset is less than the retail from the outset. In other words, you're funding less to start with.

Notice how the best lease deals tend to be on run out models or specials...

[5lab]

you'll also notice the 'best' leasing deals are generally on top-spec cars - for example, 135i, C63, bmw 635.

These cars generally cost very little more than the 'boggo' model to actually build - maybe a couple of hundred pounds - but they're sold a a fatter profit margin. If a manufacturer wants to shift some volume, they can do that by dropping hi-spec cars into the lease system at very significant discount, whilst still making a healthy profit and not devaluing the list price (people don't seem to get mad when a car they bought last year for £70k is leasable for £400, but they would get mad if a car bought for £70k is now sold for £50k, and they'll be unwilling to purchase again).

you don't get such good deals on cheaper cars, or cars from non-premium manufacturers, as the profit margins simply aren't there to start with

[Dave Hedgehog]

10 Pence Short said:

The only way the lease deal will be less than the retail depreciation is that the capital value of the asset is less than the retail from the outset. In other words, you're funding less to start with.

Notice how the best lease deals tend to be on run out models or specials...

what about M5s for £600 a month incl vat, that's getting close to half the depreciation of the car (new retail / book price on trade in)

[Foppo]

10 Pence Short said:

The only way the lease deal will be less than the retail depreciation is that the capital value of the asset is less than the retail from the outset. In other words, you're funding less to start with.

Notice how the best lease deals tend to be on run out models or specials...

Does that matter? It all depends what you can afford or willing to pay.Buy a old banger and hope for the best or have a independent indy who takes car of your car.

I think more and more people will lease a car in the future,they are not status symbols.

[Zwolf]

blindswelledrat said:

How does this work?

(MRRP - dealer margin - manufacturer fleet registration support - residual value)/ (6+(n-1)) = headline monthly lease payment, where n = number of months of contract.

As opposed to:

MRRP - negotiated amount of dealer margin - manufacturer retail support - residual value = depreciation

So where a brand gives a dealer a 15% margin on their cars, the figures may look something like:

Lease:

MRRP of £30k - 15% from dealer - 15% manufacturer support = £21,000 invoiced from supplying dealer to leasing company

RV of 50% of MRRP = £15,000

Lease cost needs to cover £21,000 - £15,000 = £6,000 lease costs

So over a two year lease with 6 months' advance rentals and 23 payments (typical payment profile), that's £6,000/29 = £207.

Advance rental of 6 x 207 = £1,242 plus 23 payments of £207.

Compared against the cash alternative:

£30k - 12.5% dealer discount - 2.5% manufacturer retail support = £25,500 invoiced to customer

RV (that may or may not be realised in reality, let's assume it is given as PX value for simplicity) of the same £15,000.

£25,500 - £15,000 = £10,000 depreciation.

Making it £4k cheaper to lease the same vehicle, from the same dealer, for the same duration and mileage.

The difference is accounted for by a higher proportion of dealer discount given to do a fleet deal vs. a retail one and higher amounts of manufacturer support for the latter too. The lower the difference between fleet and retail terms, the closer depreciation gets to the overall lease cost.

It's justified by the manufacturer and dealer as it contributes to higher volumes, sufficiently so to still make it more profitable to apply the higher levels of dealer and manufacturer discount.

For a given amount of profit, if a manufacturer can achieve more registrations and therefore increased reportable market share, the better.

Cash is king? Not any more.

Edited by Zwolf on Friday 24th January 15:17