Leasing as a hedging strategy Part 4- alphaleasing.com
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Leasing as a Hedging Strategy
 Automobiles are a large investment for most people


"Purchase assets that increase in value and lease assets that decrease in value"
Part 1: Introduction
Part 2: Keep Vehicle: Value> Residual
Part 3: Keep Vehicle: Value = Residual
Part 4: Keep Vehicle: Value < Residual
Part 5: Sell Vehicle:  Value > Residual
Part 6: Sell Vehicle: Value = Residual
Part 7: Sell Vehicle: Value < Residual
Part 8: Conclusion

Part 4 of 8: Keep Vehicle - Value is less than the Residual

In this scenario, at the end of the 4-year evaluation period, you want to keep the vehicle.  So, if you had purchased the vehicle, you do nothing, and if you leased the vehicle, you will purchase the vehicle at the end of the lease period for the residual value.  The vehicle has a current value of $13,000, while the residual is $15,000. 

Let's assume that if you purchase the vehicle you will finance the purchase.  The costs to purchase are shown in Table 1.  You will have a down payment of $602.48 plus 48 monthly payments of $693.40 each.  Your total cost to purchase would be $33,885.68.
   
The cost to lease are shown in table 2.  You will have an initial lease fee of $602.48 which includes the first payment.  You will have 47 additional lease payments of $404.98 for total payments of $19,636.54. 

If you leased the vehicle and decided to keep it, you could purchase it for the residual value of $15,000 and be in a break-even situation just like scenarios one and two.  Please see those scenarios for the details.

However, there is a better strategy.  You could turn in the vehicle at the end of the lease, and then purchase it for $13,000.  Executing this strategy might be easier than it might sound.  If you have leased the vehicle from a major financial institution, then they will auction your vehicle when you turn it in.  Since transporting a vehicle is so expensive, they will almost always sell it at the nearest major auction. 

It is very easy to find a dealer that will go to the auction and purchase your vehicle for you  for a small fee.  In table 2, we assume that you will pay a $250 fee to the dealer to purchase your vehicle, plus an auction buyer's fee of $150.00.  Often times, when the lessor knows that they

Table 1:  Total Cost to Purchase
Down Payment $       602.48
48 Loan Payments @ $693.40 $  33,283.20
Total Cost to Purchase $33,885.68
 

Table 2:  Total Cost to Lease
Initial Lease Fee $       602.48
47 Lease Payments @ $404.98 $  19,034.06
Subtotals $  19,636.54
Buy Vehicle at Auction $  13,000.00
Buying Fees $       400.00
Subtotal $  33,036.54
Less: Interest on Invested Cash $       799.34
Total Cost to Lease $32,237.20
are going to take a loss at the auction they will sell you the vehicle for less than the residual to avoid shipping and storage costs, and sellers fees.  You certainly have nothing to lose by giving them a call.

As Table 2 shows, the cost to lease is $32,237.20 , which is $1,648.48 less than the $33,885.68 cost to purchase.  When you lease, you are able to capture most of the difference between the actual value of your vehicle and the residual from the lease.  This is another advantage of leasing.  Please note that this strategy has some risks involved.  The bank may send it to another auction, or your vehicle may sell for more than you expect it to.  Please do not try this strategy if the risk of not getting your vehicle is not acceptable to you.

Summary
Under this scenario, leasing comes out ahead.  In general, anytime the value is less than the residual by at least $500, and you want to keep the vehicle, it will make sense to turn in the vehicle and try to purchase it at auction.  We have literally saved our clients up to $10,000 by using this strategy.
Part 5:  Sell the Vehicle: Value is Greater than the residual.

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