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# Introduction to Leasing

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• 1. Financial Services Management Training for Professional Sales Representatives Seeking to Further Their Careers and Enter Management
• 2. Introduction Benefits of Leasing Who is a Good Candidate for Leasing? Terminology Residual Value What factors determine this value? How is it calculated? Assessment
• 3. There are many benefits to leasing, and one must comprehend these benefits in order to see value in this financing option So who is a good candidate for leasing? Which consumers benefit from leasing? In order to calculate a lease, it is important to first understand the fundamental terminology and how the terms are derived Calculating a lease is a simple combination of basic mathematical steps OBJECTIVES: 1. Understand the benefits of leasing 2. Determine who is a good candidate for leasing 3. Learn basic leasing terminology 4. Calculate residual values INTRODUCTION
• 4. BENEFITS OF LEASING Leasing allows consumers to often times have a lower monthly payment than traditional financing. This means that consumers can drive &#x201C;more car&#x201D; for the money. Leasing provides flexibility at the end of the term. Consumers can purchase the car, trade the vehicle if they have equity, turn the vehicle back in, or certify the car and purchase it back with a Certified Pre-Owned Warranty. The most influential reason a consumer should choose to lease a vehicle is the transfer of liability. The consumer is not responsible for the value of the vehicle for the lease term. If the vehicle is worth less than the residual value, the bank is liable for the loss.
• 6. 1. Selling Price: The price a client pays for a vehicle, including any additional options or discounts. 2. Processing Fee: A fee the dealership charges to process the paperwork. 3. Acquisition Fee: The fee the lender collects for the lease, which offsets the cost of losses at the end of the term, as well as provides Guaranteed Asset Protection (GAP) should the vehicle be deemed a total loss due to fire, flood, theft, or accident. GAP ensures the customer will not have to pay for any negative equity due to a loss. 4. Sales Tax: The tax collected by the state where the consumer resides, often called a use tax. 5. Residual Value: A value pre-determined by the lender for what the vehicle will be worth at the end of the lease term. This is often given as a percentage of the Manufacturer&#x2019;s Suggested Retail Price (MSRP). TERMINOLOGY
• 7. TERMINOLOGY (Continued) 6. Term: The length of the lease contract. 7. Down Payment: Also known as capitalized cost reduction, this is true money down, and is in addition to the customer&#x2019;s first month&#x2019;s payment (due at signing). 8. Gross Capitalized Cost: Sum of selling price, sales tax, DMV fees, processing fee, and acquisition fee. 9. Net Capitalized Cost: Difference between the Gross Capitalized Cost and the Down Payment. The difference between the Residual Value and the Net Capitalized Cost is what the consumer pays in depreciation for the time they lease the vehicle. 10.Money Factor: A numerical value used to represent the &#x201C;rent charge&#x201D; on the lease. While in simple terms, it can be equated to something like interest, it is a number that is a multiplier of the Net Capitalized Cost and the Residual Value to determine the fee the lender charges each month for the rental of the vehicle.
• 8. MSRP &#x2022;The MSRP is the basis of the Residual Value. Usually, the Residual Value is a percentage of the MSRP. Residual Percent Table &#x2022;A Residual Percent Table is used to locate the Residual Value Percent. The table has the model and the term. Term &#x2022;The longer the lease contract term, the lower the residual value. As the vehicle value decreases over time, it is expected that the Residual Value will also decrease. Mileage &#x2022;The Residual Value decreases as the annual mileage decreases, as one would expect with an increase in mileage over time. RESIDUAL VALUE: What factors determine this value? Residual Value
• 9. RESIDUAL VALUE: How is it calculated? In order to calculate the Residual Value, all that is needed is the Residual Value Table, MSRP of the vehicle, Term of the contract, and the Mileage. 12 Months 24 Months 30 Months 36 Months 42 Months Model A 81% 72% 68% 63% 55% Model B 76% 67% 62% 58% 50% Residual Value Table The table above shows what percent of the vehicle MSRP the lending source believes the vehicle will be worth at the end of the preset terms listed at the top of the table (in months), and assumes the customer will drive 15,000 miles per year.
• 10. RESIDUAL VALUE: How is it calculated? 12 Months 24 Months 30 Months 36 Months 42 Months Model A 81% 72% 68% 63% 55% Model B 76% 67% 62% 58% 50% Residual Value Table To adjust for mileage: &#x2022; If the customer drives 12,000 miles per year, add 2% to the percentage listed &#x2022; If the customer drives 10,000 miles per year, add 3% to the percentage listed &#x2022; If the customer drives more than 15,000 miles per year, the residual value calculated must be REDUCED by \$0.15/mile for every mile over 15,000
• 11. RESIDUAL VALUE: Example A customer is leasing a Model A vehicle with an MSRP of \$50,000 for 30 months. What is the residual if she plans to drive 10,000 per year? 12,000 per year? 15,000 per year? 20,000 per year? SOLUTION: The residual table says for Model A at 30 months that the residual percent base is 68%. For 10,000 miles/year, add 3% to the residual percent base, which is 71%. 71% X \$50,000 = \$35,500 For 12,000 miles/year, add 2% to the residual percent base, which is 70%. 70% X \$50,000 = \$35,000 For 15,000 miles/year, simply use the residual percent base, which is 68%. 68% X \$50,000 = \$34,000
• 12. RESIDUAL VALUE: Example SOLUTION (Continued): The residual table says for Model A at 30 months that the residual percent base is 68%. For 20,000 miles/year, use the residual percent base, which is 68%, for the first 15,000 miles. 68% X \$50,000 = \$34,000 Then calculate the excess mileage charge. Each year, the customer will drive 5,000 more miles, and the term is 30 months, or 2.5 years. (20,000-15,000) = 5,000 5,000 X 2.5 years = 12,500 extra miles Excess mileage charge= 12,500 miles X \$0.15/mile = \$1,875 This must be subtracted from the residual value used for 15,000 miles \$34,000 - \$1,875 = \$32,125
• 13. ASSESSMENT Multiple Choice Questions 1. A cost the dealership charges to process the paperwork A. Acquisition Fee B. Sales Tax C. Selling Price D. Processing Fee 2. Difference between the Gross Capitalized Cost and the Down Payment A. Residual Value B. Sales Tax C. Gross Capitalized Cost D. Net Capitalized Cost 3. A numeric value used to represent a "rent charge" on the lease, and is a multiplier of Gross Capitalized Cost and Residual Value to determine the fee the lender charges each month for the rental of the vehicle A. Sales Tax B. Term C. Money Factor D. Down Payment
• 14. ASSESSMENT True/False Questions 1. Processing Fee &#x2192; A charge the lender collects for the lease, which offsets the cost of losses at the end of term, as well as provides Guaranteed Asset Protection (GAP) True False 2. Down Payment &#x2192; Also known as Capitalized Cost Reduction, or true money down, and is in addition to the customer's first monthly payment True False 3. Residual Value &#x2192; A dollar amount predetermined by the lender for what the vehicle will be worth at the end of the term True False