Car dealers like to lease vehicles. The leasing option usually gives a dealer more ways to make more money compared with cash or regular financing. The finance company also does OK with leases, but it puts itself on the hook concerning the future value of a leased car. If you are looking to lease, don't forget to negotiate price and payments as you would with a regular purchase.
Price of the Vehicle
When you lease a new car or truck, the dealer has arranged for the financing of the vehicle in the form of the lease. To the dealer, leasing is little different from using a regular car loan. The leasing company is the financing source. After the lease paperwork is turned in, the dealer will receive the selling price of the vehicle, which will include the dealer's profit margin. A benefit -- for the dealer -- of leasing is that the actual selling price of the car is not separately listed on the lease contract. The price is included in the "gross capitalized cost," which is a number that can include other items.
Marking Up the Rate
With a lease the interest rate turns into a "money factor" that is applied to the lease capitalized cost of the car. The money factor is how the leasing company sets the interest rate for leases. The dealer has a money factor that the leasing company requires but has the freedom to increase -- "mark up" -- the factor used and receive money back from the leasing company for the extra yield. Because a lease does not show any interest rates, it is very difficult for the customer to determine what rate is being charged and whether it could be lower.
Selling cars by leasing may allow a dealer to more easily add on products or services for extra profits. Gap insurance, which covers the difference between the car's actual value and what you owe, is close to a mandatory item to go with a lease, and the dealer makes more money when this insurance is included in the contract. Other items, such as service plans or extra warranty, also can boost the profitability of a lease. These items also apply to regular car financing but are often easier to sell with the structure of a lease.
Leasing Company Results
The finance company providing the lease earns interest on the money it gives the dealer to pay for the car. A significant portion of the lease payment is finance charges going to the leasing company. The biggest risk is the residual value of the car at the end of the lease. If the leasing company gets the car back and sells it for less that the residual value, there will be a loss on that part of the lease. If the person leasing the car buys it or the vehicle sells at auction for more than the residual, the leasing company breaks even or adds a little profit.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.