Understand who profits from leasing
There are four parties who potentially benefit — make money — from car leasing:
- Car dealers
- Car manufacturers
- Car finance companies
1. Car Dealers Make Money with Leasing
There are a number of ways that car dealers make a profit from leasing.
First, like with any other method of payment, dealers buy vehicles from their manufacturer for a wholesale price (“dealer invoice price”) and sell at a retail price — the way that most businesses make a profit. Retail price is the price that is negotiated by the customer, and on which a lease is based. It’s generally called capitalized cost. Simply stated, dealers make their profit based on the difference between invoice price and capitalized cost, or cap cost.
Of course there are other ways in which dealers make additional profit from a car deal, regardless of whether it’s a lease or purchase. These might include document fees, prep fees, and sale of insurance, extended warranties, and other “add-on” products. They might also receive bonuses or factory-to-dealer cash from their manufacturer in certain circumstance.
Dealers use their “captive” finance companies to provide leases. Honda Finance, Ford Motor Credit, and BMW Financial Services are examples of such companies. Dealers may receive compensation from those companies for originating a lease and handling the front-end paperwork.
Dealers do not make money on monthly customer lease payments. After a lease has been approved and turned over to the lease finance company, a dealer makes no further profit from the lease, although if a lease customer brings his car back to a dealer for required maintenance service, the dealer benefits from that business as well.
2. Car Companies Make Money with Leasing
Car manufacturers make a profit when they sell cars to new-car dealers in their dealer networks. Although we can find dealer invoice prices (price charged dealers), we have no way of knowing how much profit is involved since we don’t know manufacturing and distribution costs. From a car manufacturer’s point of view, it doesn’t matter whether a dealer sells or leases his cars. It makes the same money either way.
3. Car Finance Companies Make Money with Leasing
Car companies make money selling cars to dealers. However, it’s their “captive” financial subsidiary companies that benefit from loan financing and leasing. For example, Ford Motor Credit provides loans and leases to Ford customers who need those services. Just like a bank, they make money by charging customers a monthly finance fee. In the case of a lease, it’s called money factor, which is similar to APR (annual percentage rate) interest on a loan. Currently (at the time of this writing), auto finance rates are very low, in the range of 0% – 3.9% for customers with good credit.
Lease finance companies also charge an acquisition fee at the time of lease signing. Although this fee is presumably required for administration purposes, there is no doubt that there is some profit included. The acquisition fee, which is standard in all car leases, is typically in the range of $595 – $995, depending on the car company. It is not negotiable.
It’s possible that car companies could make money when a leased vehicle is returned by a customer at lease-end. Here’s how. At the beginning of a lease, a vehicle’s future resale value is estimated and specified in a lease contract as residual value. This value is a key factor in computing monthly lease payments and pays for the anticipated depreciation in a vehicle’s value over the life of the lease. If a returned vehicle’s actual market value is higher, the car company’s finance company can sell the car and make an unplanned profit.
4. Customers (Might) Make Money with Leasing
Although the cost of leasing a car is predictable and expected by leasing customers, it is possible that there might be unexpected profit at lease-end. Let’s explain.
As we mentioned previously, a leased vehicle’s market value at the end of a lease can be higher than the estimated residual value that was set at the time the lease was initiated. The residual value is also the purchase option price, which means customers may choose to purchase their vehicle from the lease company for that price.
Smart leasing customers should always compare the purchase option price with their car’s current market value. If the market price is higher, the vehicle can be purchased from the lease company and resold for a profit. Although not all leases turn out this way, a high percentage of them do.