Can someone explain to me why car residuals are higher for shorter the terms? Is it under the assumption that cars that are returned earlier with less miles will be more likely to be sold at a higher value in the secondary market? And do dealers have preferences whether whether doing a 24 or 36 month lease? Thanks in advance!
Residuals are higher on shorter terms, they are set by the bank so dealer doesn’t really have a saying on it.
Seriously?
The longer a car is used the less it’s worth.
I understand that… but as a leasehackr how come it seems most people end up opting for 36 month leases vs. 24 month leases assuming you are negotiating for zero down.
Amortizing your acquisition fees over 36 months vs 24 months.
Even though the residual is higher you have a shorter time to pay everything. But it really depends on the situation and the other incentives.
Recently volvo s90 leased better for 24 months but then they changed the incentives and residual and 36 months become the sweet spot. The residual is just one of the many variables.
Isn’t that usually like a percent or two for something less than 1k vs. 6% in residuals of the msrp for that year difference? Plus you get an opportunity to switch to a brand new car again.
Ha?
Just run some real world numbers in the calculator.
Generally the deprecation of a car in absolute numbers is non-linear and that is also reflected in the residuals. In the first year the car loses the most value (especially in the first week after taking delivery), in the second less, in the third even less etc.
In a lease you pay for the deprecation of a car.
If you lease for 24 months, you pay the deprecation for the 2 most expensive years of a cars lifecycle (but in return you get brand new one). If you add a third year to the lease, that usually brings your average monthly payment down, because the third year is “cheap” compared to the first 2 years.
Note that lease payments are usually a fixed monthly amount, even though in reality the deprecation of your car in the first few months will be much higher than what you paid so far (that’s also why thinks like gap insurance and gap waiver exist to prevent you having to a pay a ton of extra money to pay for this “gap” in payments vs deprecation when you incur a total loss of the car).
The sweet spot of leases is often 36 months, however when cars get extremely discounted (heavy incentives) this sweet spot sometimes shifts to shorter terms like 24 months, because the incentive is usually a fixed amount that gets diluted the longer your term is. If you take for example the Volvo S90 deals of the past months you see their extreme heavy discounting makes the 24 lease more favorable.
I developed a rough formula to compute easily how much total discount off MSRP (incl. incentives) one needs to shift the sweet spot from 36 to 24 months. If the actual discount is below that treshold it usually means a 36 month lease is overall the better choice, whereas when it’s above that treshold (like with some Volvo S90 deals in the past) a 24 month lease is the better deal.
Here’s the formula:
(((100 - Residual_2_years) / 2) - ((100 - Residual_3_years) / 3)) * 6 = discount_off_msrp_that_moves_the_threshold.
For example taking a BMW 4 series 10k lease:
(((100 - 63%) / 2) - ((100 - 57%) / 3)) * 6 = 25%.
So that basically means when the dealer sells the BMW 4 series to you at 25% or more off MSRP (incl. incentives) the 24 month will become better than the 36 month lease. My formula does not (yet) consider MF, taxes and acquisition fees so in reality you may need a bit more or less discount than 25% to make a 24/month lease more attractive, but you get the overall idea.
I would also imagine that 3 years is the most common new-car warranty. Any more, and with many brands, you’re out-of-warranty, and that can get expensive…
Thanks appreciate that clear explanation, I was trying to think somewhere along those lines but solved the puzzle for me 