What's with all the cheap leases all of a sudden? These things are cheap. Spend an hour watching television and you'll believe that a Mercedes at $159 a month is a perfectly reasonable price. But you know it ain't. Your grandmother told you something about this, I'll bet… "if it's too good to be true…"

truck   So, right now, cheap leases are the Big New Deal. Only this new deal is just another one in an ongoing cycle of the exact same "new" deals. I've watched this same parade three or four times already in my career, and I'm still young enough to ignore half-price adult diapers. Sadly, this New Thing is the Same Old Thing, and I know how it turns out. Somebody always gets burned.

How it Works

Here's how it works – some cars are sold. Some of the guys building the cars sell fewer than the other guys who are building cars. Orders come down from some higher level of corporate godliness to "do something to kick the crap out of those other guys who are building cars." (Yes, it's almost always worded just like that.) And there are only just so many ways to sell more of the cars that you build. Someone with a finance degree takes hold of the problem vigorously. And eventually notices that leases are, well, funny. A lease is basically the act of subtracting the eventual value, at some point in the future, from the cost of the car today, and then only financing that difference. So, since nobody really knows what these cars are going to be worth in three years, if you just made that number - the residual value - a little bit higher, you would have a really cheap payment. And their customers mostly don't have finance degrees and really only pay attention to the payment anyhow, so…

Residual values get pushed. Contorted and squished out of all semblance of market reality, in service to the gods of low monthly payments and increased market share. If Car Maker A determines that their product is worth 50% of the original MSRP in three years; then Car Maker B will determine that their product is worth 56% in three years. So Car Maker A will move to 60%. Car Maker B will declaim that their much superior product will bring 65%. Meanwhile, A proudly announces that recently discovered pie charts and a set of rare bar graphs prove that their product is worth 73% in three years. All the while, the people who make a business of studying residual values are trying in vain to point out that the accuracy of these resale values is about as likely as John Cougar Mellencamp making a comeback top-ten single. To no avail.

Residual Values

Residual values will go higher and higher (not the actual resale value of the vehicle, just the fantasy value assigned by the vehicle manufacturers), and advertised payments will go lower and lower. The lower the payments go, the more of this type vehicle gets sold. Meaning, of course, that in three years, the used vehicle market will be flooded with that particular model, depressing prices on that model at precisely the same time that the vehicle manufacturers discover that what they own these cars for (remember those over-heated residual values?) is much higher than normal resale– and much, much higher than the current depressed market value.

A financial bloodbath will ensue. Massive losses will occur. In one such cycle, Jaguar's losses on lease returns were so large as to threaten the company with bankruptcy. The manufacturers, in an attempt to stem losses, will begin strictly enforcing mileage penalties and lease-return damage charges, sending their customers invoices for thousands of dollars when they return a vehicle. Customers and consumer groups will agitate against car makers, customer satisfaction levels will plummet, serpents and frogs will rain from the sky, and Slim Whitman will issue an album from the grave. Very bad things indeed.

So if the manufacturer takes the hit, is the cheap payment a good deal for you? Not if you're talking about commercial vehicles. They are mostly excluded and, in any case, unless you only deliver very, very soft pillows on a very short delivery route, the mileage and damage suffered by most fleet vehicles would end up costing you way more than any savings on the monthly payment. But if you're getting yourself a new personal car? Maybe, if you keep your mileage low, follow all the rules, and repair every last bit of damage before you turn the car back. Mostly likely you won't want to buy it at that point, since the option to purchase (assuming things have indeed blown up as they have in the past) is probably higher than the market value.

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