Residual+MF+Incentive merry-go-round

What’s up with automakers and all the tinkering they do with the various moving parts that make up the leasing structure?

Often times I’ll see on the same model with different lease terms have different structuring to get to the same effective lease. Sometimes they add in more lease incentives and offset with higher MF and other times vice versa.

I understand if they are dropping residuals then adding incentives or reducing MF is offsetting the extra cost. But when they just adjust the incentives and MF nothing is actually changing.

I’m thinking it has something to do with a preffered financing structure but I dont have any good theories.

Anyone have any light for my shed?

I’ll prolly stay out of your shed, but I can say that different manufacturers/finance companies have different ways they like to make profit and, therefore, different areas they’ll play nice with the consumer.

If they want to record profits on units sold, the discount is miserly and the MF and RV prop it up. If they like banking on the finance side, the discount will be big and the MF sucks (reference Kia) etc.

Time of year, leadership’s whimsy, myriad other factors make this a swirling pile of goo that’s hard to predict and even understand for some. It goes, like many things in life, a lot deeper than the surface. And if you want to comprehend it totally, it’ll take some learning and time.


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Yes, this is what I’m trying to decipher. I wonder if anyone has a more sophisticated understanding of the when and why.
I have enough knowledge of finance and tax that these numbers pique my curiosity.

Nearly everything about car sales is designed to be overwhelming and confusing. It’s a bad business.

  • residual value is based on auction values
  • incentives based on best selling models or model that won’t sell, either to keep top ranking spot “most sold”, or to move lot rot
  • rate is based on how much the bank feels like making :woman_shrugging:

regardless, most of it’s perspective. here’s 5000 MEGA WOW SUPER AWESOME rebates but they tank the residual 5%. same deal, but seems better to average uninformed consumers.



The first premise of a lease is that the captive is expecting to get the car back. Actuaries model (based on MRR/auction reports and external influence) what the car is expected to be worth at disposition (less their costs to prepare it for resale and unload it). Non negotiable because RV + disposition covers their costs to Unload the Asa and recover the cash at disposition time

MF is the rent: the captive borrows the money (or has a cost of capital) to buy the car and rents it to you, then marks it up. If the captive is a third party (eg Bank of America DBA VolvoCFS, Chase DBA JLR Finance) they likely borrow for less but they make margin on the loan to the captive. Captive’s sets a base MF, it gets marked up by captive to price their risk, then dealership can (try to) mark it up to you (just like they can any loans except captive special financing).

Making up an example: base MF on a RR Sport for Tier 1 might be .00185

  • Chase CoC is .00060 per $100k
  • Chase charges RR .00085 (CoC + .00025 margin)
  • The portfolio managers at RR FS wants to make (margin) .001 on that loan to a Tier 1 customer, and more on lower scored people, taking on a mix or Tier 1-99 customers to yield the return they are targetting. Base MF (floor) is .00185
  • Dealership tells you it’s actually .00200 and you sign because you didn’t check Edmunds or LH. Dealership made .00015 (back end gross)



Incentives are usually thought of as “trunk money” or “cash on the hood”, for all the reasons that CSG mentioned.

But: if the manufacturer wants to move more metal for any reason (keep factories moving, too many cars at the port) they can SUBVENT the rate and buy-down the MF

So in my example above: RR pays what it pays to Chase to borrow $X, but if they want to move more evoques they can buy the MF down, says .0005

The portfolio managers at the captive are managing an investment that is expected to yield a return. They’re balancing that risk against their performance.

The manufacturer is managing production and profit margin. The captive exists to be a lender of first/last resort, with some extra levers to pull.

The dealership (specific to new car sales) is managing margin on the front/back, and number of units sold.


I knew you’d be here sooner or later.
Very lucid and clear explanation of the terms, the meaning, the role these components play.

Now say for example we take the 2020 Hyundai Sonata as our test subject. On the SE model we have a Residual of 56%, MF of .00145, and a lease rebate of $2k. On the SEL model we have a Residual of 58%, MF of .00160, and lease rebate of $2.5k.
The MF and lease rebates do a little offsetting dance for us, a scale balancing act, a yin yang taoist stabilization exercise. Why?
Why would the MF change here? Does the finance model shows greater risk for one over the other? What level of the finance chain is determining these changes?

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Why doesn’t Kohl’s just price and sell a shirt for $20?

Instead they mark it at $64 and then have a 40% off sale, and then throw in a coupon and an additional discount for using their credit card, and toss in some Kohl’s Cash to use on your next purchase.

A week later the shirt is 50%+ off with a different coupon offer but no ridiculous Kohl’s Cash.

Either way you ultimately end up paying ~$20 for a Walmart-caliber shirt, but you leave happy and tell your friends what a shrewd shopper you are.

I’m not sure how to take that. Did I stumble into some honey pot for systems thinkers?

To understand for realz, you’d have to ask the portfolio manager at hyundai. If you understand taxes you know a lot of it is about trying to affect behavior (even it it’s backfires 50% or more. See daycare pickup penalties). Some possibilities:

  • if the SEL has the nicer touch screen infotainment, did delco or whomever makes it offer hyundai some volume discount so they can offset that cost? When I got my xc60, the AWD models were about $3k more MSRP than 2WD. There was also $3k in trunk money on AWD models. Did they overbuild/over est demand? Did the AWD system maker kick them a rebate? Is it summer and to avoid a line stopage/reconfiguration/layoff they are giving away their markup to keep the lines moving and/or avg age on AWDs low? Unless they tell you, you’re guessing at the correlation.
  • Why is SE MF lower than SEL? Perhaps more SE buyers are Tier 2/3/4 so to help those buyers stretch and get an SE, moving more metal, they trim their margin on that trim so customer more easily absorbs that markup? Subventing in this way helps finance managers and dealers get more approvals, it increases portfolio performance risk, but if those leases perform captive makes more margin.

The captive decides and sends new rate sheet to their dealers at the beginning of the month. The manufacturer has a seat at the table (it’s their table after all).

I don’t remember Kohl’s in Columbus but lots of stupid big lots.

For you specifically, a useful add would be more examples on your credit impacting this. I’m stretching here but my guess is OP understands coupons and mattress sales.

There may or may not be. I buy all of my clothes at Sears.

A significant part of the answer to the main question is, “How do we use pricing to entice people to buy this crap?”

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Lands End or Mel Disco (K-Mart’s softlines)?

Mostly Wrangler denim suits.

I also love the cummerbunds from the Jaclyn Smith collection.

After shopping at Kohl’s? :smirk: