Car Leasing, Residuals etc..

Factual Questions
1

I’m hoping sombody here can give me a very simplified explanation of the pros and cons of leasing/paying off a car with a residual/balloon at the end.

Example A without residual:
If I was to purchase a car valued at $45,000 and spread the payments over 3 years paying fortnightly, my payments will be approximately $670/per fortnight. Based on an interest rate of 10%, the amount I’ve paid for the car at the end of the loan will be $53k (approx). I get to keep the car.

Example B with residual/balloon of 50%:
If I was to purchase a car valued at $45,000 and spread the payments over 3 years paying fortnightly, my payments will be approximately $420/per fortnight. Based on an interest rate of 10%, the amount I’ve paid for the car at the end of the 3 years will be $32k (approx) with a residual payment of $22,500. I get to keep the car if I pay $22,500.

Now, assuming that car is worth $30,000 at the end of the three years, does that mean I can use $7,500 difference between resale value and residual towards the purchase price of a new car or even just pocket the cash difference?

Am I missing much here?

2

You are confusing the crap out of me in some ways.

I was suddenly take back to the middle ages with the term “fortnight” and it was very whimsical until I realized that we are talking about leasing strategies on a brand-new car. I don’t think I have ever heard a person use fortnight as a contemporary word before.

I am getting seriously confused by the part where you ask about getting an extra $7500 for use yourself through this process. That makes no sense whatsoever. In one scenario, you just buy something and with financing, that is pretty straightforward.

In the leasing scenario, you are basically just renting for a few years. It isn’t your car. At the end of the lease, you can just hand them the keys, pay for any excessive mileage and damage, and then walk away. You could also choose to pay the agreed upon amount and keep the car if you really wanted to.

At no time does money flow back to you. You could either just buy the car or pay a leasing company some extra money so that they have ultimate responsibility for it and allow you to walk away after a set amount of time.

3

It depends on the options you put in place at the start of the lease.

For instance, if as I stated in my example I have car worth $30,000 with a residual owing of $22,500 at the end of the three years, I only have to pay the $22,500 to own the car outright.

By the way, fortnight/ly is a very common term over here.

4

That is the part that I am not getting though. You just agree to a purchase price up front and you can buy it at that at the end of the lease. The vehicle value could fall like a sack of potatoes if people learn that it is extraordinarily unreliable or it could be a great deal if they turn out to be really reliable, fuel efficient cars that are highly sought after on the used car market.

There is no way to know that in advance and the leasing company is always going to structure the deal so that it thinks it will make money. In rare cases, both of you may make out.

All leasing consists of is, introducing a middle-man that gives you extra options with the financing and/or with the ability to just walk away from a car. Although there are some cases where the actuaries make a mistake and the leasing becomes financially beneficial to the leaser over all other options, the general concept is that the middle-man makes money as well as the car dealer so the consumer ends up paying more. The benefits are worth it to some people but the average person has to pay more by the requirements of the system.

In your ideal case, you could end up with a car that is worth more than the buyout amount. More likely, the reverse will happen but people will still keep the car out of shear convenience.

5

Under Payment Plan A, you’ve spent something like $53K. If you sell the car at YK, then your net difference is 53-Y K.

Under Lease Plan B, you’ve spent approximately $ 32 K…

Under Plan A, you’re done paying for your car, you can drive it without further payments…

Under Plan B, you either pony-up the payout, or start all over again. You can’t sell the car unless you buy it. Since the payout is 22.5K, your total cost is 32 + 22.5 K = $54.5K. So if you keep the car, you’re paying a $1.5K Stupid Tax…

If you sell the car under Plan A, your net is $ 53-Y K, where the car sells for $YK.

If you complete the lease and buy the car on the backside, your net is $ 54.5-Y K, where the car sells for $YK.

Leasing makes sense if you always want a new car. The downside is that there are all sorts of milage/wear/tear penalties built into the lease. The average cost of the car is less per month, while you operate the car. Of course, then you’re always making car payments.

Buying makes sense if you’re going to drive the car into Car Valhalla. You’ll have a post-finance period of car driving without payments, offset of course by maintenance and repairs. This arrangement makes sense if the car has a good record of reliability and durability.

Example A without residual:
If I was to purchase a car valued at $45,000 and spread the payments over 3 years paying fortnightly, my payments will be approximately $670/per fortnight. Based on an interest rate of 10%, the amount I’ve paid for the car at the end of the loan will be $53k (approx). I get to keep the car.

Example B with residual/balloon of 50%:
If I was to purchase a car valued at $45,000 and spread the payments over 3 years paying fortnightly, my payments will be approximately $420/per fortnight. Based on an interest rate of 10%, the amount I’ve paid for the car at the end of the 3 years will be $32k (approx) with a residual payment of $22,500. I get to keep the car if I pay $22,500.

Now, assuming that car is worth $30,000 at the end of the three years, does that mean I can use $7,500 difference between resale value and residual towards the purchase price of a new car or even just pocket the cash difference?

6

I think there may be a country disconnect happening here.

In Australia it is common to lease a car, but I think the leases are different to what you are talking about from an American point of view. It is essentially the same as financing the car except there is a balloon amount. There are, in my experience, no wear and tear conditions. In my experience the balloon amount is often significantly less than the cars actual value at the end of the term.

I have a Toyota Corolla on a lease, at the end of this year I can buy it for $4500, the car will be worth closer to $10,000 though. So, at the end of the year, I can pay the car out, and sell it, then get another lease on another car, pocketing around $5000 dollars (or conversely, using that money to reduce the amount to be finianced on the new car.)

7

1920s Style “Death Ray” has raised a point I admittedly missed in regards to the difference in terminology used between the two countries.

Thanks for the feedback so far.

8

Tastes Like Burning, leasing can be good if your company is willing to do a novated lease. This is where your employer enters into the lease agreement as a third party. They pay your lease payments from your salary. A portion of the lease payments are paid from your pre-tax salary. The more kilometers you do on the car, the more of the payments are taken from pre-tax salary. You also get a fuel card which is paid off from your pre-tax salary. Any maintenance, insurance, or registration payments are reimbursed to you from pre-tax salary.

Depending on your tax bracket and the amount of driving you do, it can save you several thousands of dollars annually when compared to a normal lease. Obviously, if you are in the top tax bracket (48%) then you are effectively getting almost a 50% discount on anything to do with your car. Contrary to popular belief, there is absolutely no requirement to use the car for work. The car is your own private vehicle and can be used for whatever you like.

For more info check http://www.smartsalary.com.au

9

As 1920s Style “Death Ray” has said, over here it is actually more likely the car will be worth more than the payout amount.

The car I’ve used for my example is a Subaru Liberty/Legacy station wagon (less than 3 years old), which according to a small amount of internet research has a resale percentage of approximately 66% after three years.

10

Thanks heaps for the info.

The reason I’ve asked this question in the first place is that I’ll be starting a new job soon which differs from my old one in that I will no longer have a company car. I know a little about novated leases, but not enough at this stage as to whether my new company will be willing to entertain one.

The advantage of the new job is that the pay is more than enough to compensate me should I decide to buy my own car, plus my proximity to work is now close enough that we can quite easily get by with just my girlfriend’s car.

11

It’s definitely worth asking them if they’ll do it. The idea of companies like SmartSalary is that they take care of all of the administration, so all your employer needs to do is sign the agreement, and them pay SmartSalary the required amount from your pre and post-tax salary each pay.

With anything like this, it depends on your own financial situation, both SmartSalary and the leasing firms are happy to discuss it and provide detailed comparisons between a novated lease and a non-novated lease, based on the specific vehicle you want.

You don’t need to get a new car, from memory I think the leasing company was happy to take on any car with a value of at least $10,000.

It can initially be quite confusing, so an accountant might be helpfull in deciding what the best course would be.

It has actually not worked out very well for me because I needed to do 15,000 kms per year for it to work. I moved from Darwin to Broome some time ago and Broome is such a small town, with no decent other towns within a reasonable driving distance (i.e., less than 1000 kms) that I haven’t been able to do anymore than about 10,000 kms without going on a big road trip each year. So, although it was good in Darwin, the novated lease has no great benefits while living here, and I am up for a $500 tax bill (too much of the lease payments came from pre-tax salary.)

Living in Perth, I wouldn’t imagine you’d have the same problem.

12

Actually the stupid tax is probably a fair amount greater that $1,500.
Most people don’t have a spare $22,500 laying around. So at the end of the lease, you decide to buy the car. Not having a spare 22.5 large you go visit the banker who is more than happy to loan you the money at a very nice profit for him.
to find the true cost of the stupid tax you have to add the interest of the $22,500 loan to the $1,500 to get the true stupid tax.
Buying a car at the end of the lease, becasue you like is is really really dumb.