I answer a lot of questions on Quora. Many of those questions are about automotive things that may be of interest to CarNewsCafe readers. Like this one.
Why are luxury cars so cheap when leased?
My Answer: In three years from new, the average luxury car will lose somewhere around 40% of its value (new price versus resale price). Assuming average mileage and a good maintenance history.
A lease is not a purchase, it’s instead a loan based on the depreciation expectation and loss of retail value. For example, a $60,000 car might lose $24,000 of its value over 3 years. Add in the costs for the dealership to resell the car (say another 10% or $6,000) and that’s the expected cost of the lease. So the financing for the lease is based on $30,000 plus interest. Half the MSRP of said car.
It’s easy to finance a $30,000 car loan at low interest with low payments (under $500/month). Even easier with a lease since it binds the lessee with requirements like maintenance, care, and mileage restrictions. Thus if the lease is broken (payments aren’t made), the lessor (bank) is still getting back a premium-level car.
Leasing can make sense for some buyers. It’s especially smart for business buyers who’ll use the car for both personal and business use as the entire lease, which is based on depreciation, is a tax deduction. Versus buying, in which case only the depreciation is a write-off for most business types. On the flip side, however, the leased vehicle is not counted as part of the business’ assets, which can affect overall business value and thus ability to get loans or considerations.
That, in a nutshell, is why luxury vehicles, in particular, are popular lease options.
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