Just deduct $4K off dealer’s sale price to get idea.
The answer to the OP’s question is yes, but it is done through highly calculated risk management strategies. There is no easy way to know how much an RV is inflated by. You would need to have a lot of expensive industry data and hire a team of experts that know how to build a forecast model to set the right baseline RV to determine how much the BMW or MB RV is inflated by. There are a LOT of moving parts to maximize profitability when building and selling cars and the RV is just one small, yet critical, lever.
The process and strategy used to set residual values differs greatly among the captive and non-captive lenders in the industry but I can bore you all with what goes on behind technical curtains if you want to understand this business better.
The process usually involves starting with ALG’s published RVs. They have been around since the 50s and are the de facto benchmark of the industry. Their RVs are forecasting the future wholesale value of a vehicle. Specifically average condition price of a vehicle sold in an open auction. To get to these forecasted prices, you start with today’s price of a specific model/trim at auction. Normally that is the 3 year old or another age with high auction volume. Then they look at any product changes between the new model year and the old one at auction. Design, content, engine, etc. are all accounted for and modeled using historical auction premiums. Next is a forecasting layer that is trying to predict the future price movements at the industry, sector, segment and model-levels. This involves several complex statistical models, macro and other industry data, robust assumptions when specific data is not known and some deal of subjectivity when the model output doesn’t pass specific sanity checks.
The risk team at the lender will incorporate any of their own remarketing data (usually higher in value compared to the open auction prices) and often will build their own internal forecasting model to establish internal used price forecasts. Their risk appetite and profitability models determines the RV they are comfortable with . Most are baking in a specific loss amount on these RVs. The money factors are also set and sometimes done simultaneously when targeting specific monthly payments. The non-captives are done at this point and that is what drives their lease programs.
The majority of captives have additional risk sharing agreements in place between the captive finance and sales side of their business. After the finance side is done with their RVs, the sales side steps in to see how competitive they are with monthly payments. They will normally spend to buy down the MF first, then spend on the lease cash and finally if they still feel the need to drop the monthly payment, they will buy up the RV. This will increase the losses on the units that come back and are at risk. It will also increase their return rate (% of off lease vehicles that are at risk for a gain/loss). Normally, the sales division will allocate some of their incentive budget to reserve for these higher future losses and increased return rates. The risk sharing agreements come into play to determine how to share the losses on those returned units.
Each captive has a completely different strategy but this is the basics of what is going on behind the scenes to build a lease business. The industry is now leasing more than 30% of all new vehicles so the amount of money on the line for these captives and non-captives is higher than ever. The meetings to set RVs at the captive I worked for were always exciting and great discussions. A seemingly simple decision to enhance an RV by 1pt on a high volume vehicle could have an impact of several million dollars to future RV losses but at the same time help support market share numbers. It is all a balancing act with a long fall on either side.
Very interesting…[20 char]
Excellent.
Thank you for this.
I appreciate your detailed explanation.
(By the way, ALG used to have a FREE search for residual values. But I see they now charge $15,000.00 a year for it!)
One more question: why do people here focus so much on the Money Factor?
I understand the Money Factor is based on credit score. If true, the "stealer"ship can play all sorts of number’s games with the Money Factor. I find the Money Factor is nothing more than a “come on” - only to increase once we hit the Finance & Insurance office.
Yes, ALG licenses their data strictly as a B2B product. TrueCar owns them and has made a few broad price changes since the acquisition. They did away with their free lookup tool a long time ago. I believe you can subscribe to dealertrack.com for a relatively small fee. I’m not certain they allow consumers to subscribe. Their Salesmaker tool on their website allows you to look up the RV/MF on any current program from any lender (and ALG) for any model. DealerTrack sold ALG to TrueCar so there are a lot of data sharing agreements in place because of the acquisition.
People focus on the money factor because it’s a huge part of the equation that determines your payment. You should know your credit score before you get to the dealership and therefore what money factor you’re qualified to receive for the very reason you mention–dealerships can mess with it if you aren’t aware.
I appreciate the reply…
However:
Quoting a Money Factor rate to the world is like advertising 0% loans to the world. Because the VAST majority of people do not qualify for these low-quote rates.
Is it not classic bait and switch?
I am just surprised that the sophisticated car people in this forum think an advertised Money Factor is real world.
Plus, the sharks in the F&I office have the ability to adjust the Money Factor to amplify their profits.
Again, I am just surprised by it here.
Can anyone report that the advertised-to-the-word Money Factors hold up on the F&I office?
Yes. Provided credit score was sufficient to qualify for best tier.
Exactly.
This is my point.
The VAST majority of people who lease do NOT have Tier 1 credit scores.
As a result, the Money Factor is a useless guide.
I think that is important for new people to understand here.
I understand by law (in most states), the Finance & Insurance shark can pad 2 full percentage points to the APR/Money Factor - above and beyond what they are quoted by the leasing company.
I can say that I just picked up a VW GLI this weekend with a .0002 money factor–equal to 0.48% interest. Yes, I have Tier A credit according to VW–740+ FICO but nothing astronomical. It’s just like anything else–do your homework and don’t deal with scumbags who rip you off.
Knowing the money factor is still important even if you don’t qualify for the top tier. For instance, with VW the drop from top tier to second tier is .0003. So even with second tier credit you should know that you should be getting 1.2% interest and if you see something higher than that in the finance office you should call them on it.
Excellent point.
I appreciate you.
You are being overly dramatic, bordering on totally wrong. According to FICO, in April 2016, 39-percent of the population had a FICO score above 750. Another 17-percent had a FICO score between 700 and 750, some of which would also qualify for top money factors.
A general question: Should people with bad credit and no money lease a new car? Answer: No.
I am not looking to be dramatic or get into debates.
As a new visitor to this site, I see a lot of assumptions being thrown around as fact.
Let me give you some inside information from my F&I pal about credit:
Tier 1
750+ credit score
665+ co buyer
140% max advance
$60,000 max finance
Buy rate 5.5%
Tier 2
725-750 credit score
665+ co buyer
130% max advance
$60,000 max finance
Buy rate 6.25%
Tier 3
696 - 724 credit score
665+ co buyer
120% max advance
$58,000 max finance
Buy rate 7.0%
Tier 4
677 - 695 credit score
665+ co buyer
120% max advance
$58,000 max finance
Buy rate 8.0%
Bottom line: F&I has divided new car buyer’s into 4 tiers. And I highly doubt they created tiers that do not exist.
Consider finding your information on leasing from a different source other than the person you spoke to. The major players in leasing, i.e. Toyota Financial, Honda Financial, etc. do not lease cars at 5.5-percent to people who have good credit, unless they are extremely uniformed.
As an example, if you have a 750 credit score (as we have learned approximately 40-percent of the population has a 750+ credit score) you could walk into almost any Honda dealership in the country and lease a new Accord for $199/month for 36 months with $2000 down because this is an advertised offer. I would challenge you to make that calculation work with a 5.5-percent implied interest rate.
+1. 5.5% is an MF of .00229. That is way above the Tier 1 rates being discussed here in 2016. It might be an exception.
TFS/LFS has 7 credit tiers, so for people new to leasing, a small increase to your credit score can easily move you to another tier and a noticeable impact to your monthly payment.
Tier 1+: FICO score 720 and above.
Tier 1: FICO score 690-719
Tier 2: FICO score 670-689
Tier 3: FICO score 650-669
Tier 4: FICO score 630-649
Tier 5: FICO score 610-629.
Tier 6: FICO score 580-609.
Tier 7: FICO score 579 and below.
The MF for each tier vary by model and also by region.
It is not useless at all. Maybe to you, but not to me.
I’ve helped numerous friends & family with lease advice or calcs, and in all instances we have known what the Tier 1 buyrate would be or what the MF bump to the next tier would be.
In addition, many lease co’s do not allow their dealers to mark up the MF beyond a certain limit such as .00040… if they are using a non-captive lender, who knows. Yes, there are many ways an F&I guy can skin someone but that does not mean knowing the buyrate MF is “useless”
There is only so much one can do to help an uninformed consumer who chooses not to avail themselves of all the information that is freely out there. Back in the day, information was much more asymmetrical.
I’ve leased a dozen+ cars…not once has the money factor changed in F&I…in fact, not once has any element of the deal changed. Finance is usually the least stressful piece of the entire transaction.
The only things you need to be careful of in F&I are the additional warranties etc…that they sell. Just say no…unless of course, you are really careless with your car - then the insurance can pay off - but I’d argue that you shouldn’t get a new car if you bang it up so much!
The above discussion is EXCELLENT just what I was looking for. I have just ordered a MB GLS300 FWD because couldn’t find one with the build I wanted. The MSRP was $51,245 and I am paying $48,500 even with a few dealers saying we are selling at full price. (live in South Florida). My next step is to face the F&I guy in March when the car arrives. The above gives me a lot badly needed pointers for my second lease which I didn’t have with the 1st lease.
I do have one question. Can you play on dealer F&I against another dealer to get the best lease? Or am I wasting time?