Leasing as a hedging strategy Part 7- 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 7 of 8: Sell Vehicle - Value is Less Than the Residual

In this scenario, at the end of the 4-year evaluation period, you do not want to keep the vehicle.  So, if you had purchased the vehicle you will will need to sell it, and if you leased the vehicle you will just turn it in at the end of the lease.  The vehicle has a current value of $13,000, which is less than the residual of $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.  We estimate that you will incur $500 in expenses when you sell the vehicle.  This would include minor repairs, advertising, finder's fees, etc.  You sell the vehicle for $13,000.  Your total net cost to purchase would be $21,385.68.
   
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 lease, you will have $288.42 in extra cash each month.  We assume that instead of spending the money, you invest it in something conservative like a money market fund and earn 3% interest.  If you do this, you will earn $799.34 in interest over the 4-year period, which reduces the total cost to lease to $18,837.20. 

Since you don't want to keep the vehicle, and the value isn't greater than the residual, you just turn in the vehicle at the end of the lease period. 

The total cost to purchase is $21,385.68 and the total cost to lease is $18,837.20, which is a difference of $2,548.48.  The person that leased the vehicle comes out way ahead of the person that purchased the vehicle.  Not only does the person who purchased the vehicle come out behind, they have to go through the hassle of having to sell a used vehicle.

Table 1:  Total Cost to Purchase
Down Payment $       602.48
48 Loan Payments @ $693.40 $  33,283.20
Less: Selling Price of Vehicle $  13,000.00
Selling Fees $        500.00
Total Cost to Purchase $21,385.68
 

Table 2:  Total Cost to Lease
Initial Lease Fee $       602.48
47 Lease Payments @ $404.98 $  19,034.06
Subtotals $  19,636.54
Less: Interest on Invested Cash $       799.34
Total Cost to Lease $18,837.20

Summary
Under this scenario, the person who leased comes out ahead.  In general, anytime the actual value of the vehicle is less than the residual, the person who leased the vehicle will come out ahead.  And this doesn't even take into account the hassle of having to sell a used vehicle.  If you think that we are exaggerating this difference, think of the unlucky person who is trying to sell a used SUV in the fall of 2005.
Part 8:  Conclusion

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