Who sets the residual values and interest rates on new cars
Before a customer can lease an auto through a dealer, several
parties are involved to determine the residual value and the
interest rate of the proposed auto lease. And understanding how
residual values and rates are determined will help in
negotiating a lower price.
First, a bank, credit union, pension plan or automobile
manufacturer's leasing or lending subsidiary (commonly called a
"Money source") agrees to provide funds to pay the dealer the
selling price of the auto. The Money source must then find
someone to determine residual values for every auto it proposes
to buy from a manufacturer.
Determining the auto residual value. The largest manufacturers
may determine residual values in-house. Others will turn to
outside parties, such as Automotive Lease Guide for help. If the
market is depressed at the end of a lease and the residual value
is higher than the used car value, then huge losses result to
the Money source. This is not a business for the squeamish.
Typical Money sources (not necessarily current) American Honda
Finance Corporation Banc One Credit Company BMW Financial
Services, NA, Inc. Chase Automotive Financial Services
Chrysler Credit Corporation Ford Motor Credit Fifth Third
Bank General Motors Acceptance Corp. Huntington National
Bank Mazda American Credit Mercedes-Benz Credit M&I
Automobile Leasing Mitsubishi Motors Credit of America, Inc.
Nissan Motor Acceptance Corp. Provident Auto Lease SouthTrust
Bank N.A. Toyota Motor Credit Corp. Usbank Volkswagen Credit,
Inc Wells Fargo Bank
The customer (lessee) actually contracts with a money source
that may, in fact, be a savings institution in which the
customer has deposited funds. Some Money-sources are employee
pension funds in which the lessee is essentially borrowing his
own money.
Who does the lessee really pay? The customer leasing the auto
begins by agreeing to pay the Money source a monthly payment for
the term of the lease. At the end of the lease the Money source
(that actually owns the car) gets the car back and hopes it can
be sold for at least as much as the residual value quoted to the
customer in the lease, plus some incidental costs associated
with the selling price. If not, the money Source loses money.
For example, the Minneapolis Star Tribune reported that Chrysler
lost of $400,000,000 in 2001 on end-of-lease cars that sold for
less then the contracted residual values.
Who decides the interest rate on the lease Behind the scenes,
the Money Source privately decides on an interest rate it needs
to return a profit to its investors or lenders. A third-party
firm, such as LeaseLink (on the internet), is hired to prepare
the computer displays that are available to dealerships
subscribing nationwide.
Based on data provided to it by its Money source customers,
LeaseLink displays on the participating Dealer's computers
varying financing terms and monthly lease payments and the
residual value and interest rates or money factors for the
brands sold by the Dealer. Included in this information is the
list of several potential Money sources
The new car Dealer is simply a facilitator between the lessee
and the money Source. It has no loyalty to its manufacturer in
this regard and is really the customer's best friend by showing
the customer several leasing monthly payments and interest rates
from several Money sources.
Some Money sources choose only to finance certain types
vehicles, such as Jeeps, based on historical residual resale
value data and successfully having recouped the residual value
in the eventual sale of the used Jeeps at the end of the lease.
When the lease is finalized, the money source pays the sale
price; a portion is used to pay the dealer's cost and the
balance is the dealer's profit. And the happy customer drives
away with a smile and a lighter wallet.