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Leasing cars in recent years
has become very popular among the young generation as they seek to drive a
new car to their new job. The convenience of driving a late model car for
the safety reassurance is very appealing as well. The lessee does not have
to be concerned with any repairs since the car is under the manufacturer’s
warranty, which could be great savings considering mechanics’ repair rates
today. Most likely the only thing that the car would require is the
regular maintenance such as oil changes, brakes, tune up and tires
replacement if any.
If leasing a car is
financially sound, then you should look into car subleasing, assuming lease
payments or swap a lease because that is even
more rewarding. Even though the subleasing market is still in its early
years, it provides an important service to the car market.
The current lessee might need to get out of the lease without hurting their
credit for multiple reasons such as being transferred, offered company car
or worst case scenario being laid off and no longer can afford the
payments. The person subleasing might be searching for a bargain, either for a
short period of time, or less than regular lease term. On the other hand,
person looking to purchase a used car has an opportunity to have the car
subsidized by subleasing. How is that possible?
First of all, assuming a car
lease is pretty straight forward. Your credit history must be very
clean in order to assume a car lease. Plus in subleasing, there is no
security deposit or down payment required either. All that is required
is that you make the sublease payments on time.
Well let us do the math
now and
again this applies to any car because same rules apply to all leased cars.
In order to fully understand the savings involved, we need to understand how
a car lease really works.
When a car is leased, the
lessee (person leasing the car) is actually only financing the value of the
car during the term of the lease. The residual value, or the value of the
car after the lease term is usually the market value of the car. This
portion is not financed at all. Usually the leasing company sets the
expected residual value of the car at the end of the lease term and purchase
price of the car should the lessee be interested in purchasing the car after
the lease term. In or for the leasing company to get its money upfront
faster, residual values tend to be truly less than real market value.
This is irrelevant to the lessee, because the intention of the lessee was
never to purchase the car at the end of the lease to start with. On the
other hand, a person subleasing a car, might find a great incentive to
purchase the car at the end of the contract, due to the lower cost benefits.
Also the lessee has no idea about the future market value of a car to start
with, so leasing companies are free to estimate the value they wish.
This is where you come in.
Usually the value of the car depreciates the most within the first 48
months. You can safely assume that most cars would have depreciated close
to 50% of its value, yet the car could be in excellent condition.
Let us start with a car
valued at $27,000 brand new, but due to special lease program the car was
priced at $25,000. The original lessee in most likely scenarios would have
put down at least $1500 payment for the car. Financially speaking, the
price has been reduced to $23,500. Now let us assume that the car has 40%
depreciation within 4 years lease term. That translates to a residual value
of $15,000 at the end of the lease term. The sale price of the car as
agreed in the lease contract at the end of the lease term was stated as
$15,000. Assuming that the residual value was not reduced to pump up
the financed portion, and is the real market value of the car.
The original lessee wants
to get out of the lease term for whatever reason, and offers you $500
incentive to take over the lease. Now you accept and you must continue to
pay the monthly payment for an additional year. At the end of the lease,
you decide to purchase the car. You know that the agreed price was stated
as $15,000, but if you do not purchase the car, the leasing company will
have to auction the car and it knows very well that it will not get the
$15,000 as noted on the lease agreement. So you step in and make a
reasonable offer. Remember if it is not reasonable, it will not be
accepted. What you have to consider is that on the average a dealer who
would purchase the car would want to have $3000 Gross profit margin, because
the dealer really has no idea what repairs it might need if it needs any.
So instead of paying $15,000 you offer the financing company $13,000 to buy
the car. After some haggling you agree on $13,500.
Now let us look at the
savings. First there was the $1500 the original lessee placed, add to it the
$500 incentive to take over the lease. Then there was an additional $1500
savings when you bargained with the leasing company. Total is $3500
savings. Not only that, you got the option of testing the car for a year
before buying it, and by now you can tell for yourself if the car is really
in great shape or not. You no longer have to take somebody’s word that it
is in great condition without any problems! Nobody really knows the car
better than you do by this time.
Just remember that in most
cases people who initially lease cars, never had in mind to buy the car
after the lease is over in the first place. You, on the other hand,
might consider subleasing to take advantage of certain circumstantial
situations, and even buy the car if it is a bargain. At autolanes.com,
we strive to bring you full options and guide you what is really best for
you without any obligations whatsoever. In this case, car subleasing
will really help you in saving money if you decide to purchase the car.
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