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Who are the Players in Setting up a New Car Lease? You’d be Surprised!

Before a customer can lease an auto through a dealer, several parties are involved to determine the residual value and the interest rate of the proposed auto lease. And understanding how residual values and rates are determined will help in negotiating a lower price.

Where does the money come from to pay the manufacturer?

First, a bank, credit union, pension plan or automobile manufacturer’s leasing or lending subsidiary (commonly called a “Money source”) agrees to provide funds to pay the dealer the selling price of the auto. The Money source must then find someone to determine residual values for every auto it proposes to buy from a manufacturer.

Who Determines the auto residual value?

The largest manufacturers may determine residual values in-house. Others will turn to outside parties, such as Automotive Lease Guide for help. If the market is depressed at the end of a lease and the residual value is higher than the used car value, then huge losses result to the Money source. This is not a business for the squeamish.

Who are Typical Money sources? (not necessarily current)
American Honda Finance Corporation
Banc One Credit Company
BMW Financial Services, NA, Inc.
Chase Automotive Financial Services
Chrysler Credit Corporation
Ford Motor Credit
Fifth Third Bank
General Motors Acceptance Corp.
Huntington National Bank
Mazda American Credit
Mercedes-Benz Credit
M&I Automobile Leasing
Mitsubishi Motors Credit of America, Inc.
Nissan Motor Acceptance Corp.
Provident Auto Lease
SouthTrust Bank N.A.
Toyota Motor Credit Corp.
Usbank
Volkswagen Credit, Inc
Wells Fargo Bank

The customer (lessee) actually contracts with a Money source that may, in fact, be a savings institution in which the customer has deposited funds. Some Money-sources are employee pension funds in which the lessee is essentially borrowing his own money.

Who does the lessee really pay?

The customer leasing the auto begins by agreeing to pay the Money source a monthly payment for the term of the lease. At the end of the lease the Money source (that actually owns the car) gets the car back and hopes it can be sold for at least as much as the residual value quoted to the customer in the lease, plus some incidental costs associated with the selling price. If not, the money Source loses money. For example, the Minneapolis Star Tribune reported that Chrysler lost of $400,000,000 in 2001 on end-of-lease cars that sold for less then the contracted residual values.

Who decides the interest rate on the lease?

Behind the scenes, the Money Source privately decides on an interest rate it needs to return a profit to its investors or lenders. A third-party firm, such as LeaseLink (on the internet), is hired to prepare the computer displays that are available to dealerships subscribing nationwide.

Based on data provided to it by its Money source customers, LeaseLink displays on the participating Dealer’s computers varying financing terms and monthly lease payments and the residual value and interest rates or money factors for the brands sold by the Dealer. Included in this information is the list of several potential Money sources

The Dealer’s role

The new car Dealer is simply a facilitator between the lessee and the Money source. It has no loyalty to its manufacturer in this regard and is really the customer’s best friend by showing the customer several leasing monthly payments and interest rates from several Money sources.

Money source vehicle preferences

Some Money sources choose to finance only certain types vehicles, such as Jeeps, based on historical residual resale value data and successfully having recouped the residual value in the eventual sale of the used Jeeps at the end of the lease.

When the lease is finalized, the Money source pays the sale price; a portion is used to pay the dealer’s cost and the balance is the dealer’s profit. And the happy customer drives away with a smile and a lighter wallet.

Submitted by:

Ralph Hoffmann

Ralph Hoffmann graduated from the Univ. of Wisconsin, majoring in Applied Mathematics. He has ten years experience raising venture capital plus added business experience and has used his math and additional business background to develop web site http://www.autotruckdata.com for anyone intending to lease or purchase a new car.

Note: He's completely rebuilt three car engines, hands-on, and knows the difference between hydraulic valve lifters and tappets. He also writes on other automotive issues.

right@skypoint.com





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