When you're looking to lease a vehicle, the bottom line usually is whether you can afford the monthly lease payments. Lease payments are related directly to the vehicle's depreciation value, so a better understanding of what depreciation value is and how it works in leasing may let you walk away with a better deal.
Related Definitions
In order to understand what the depreciated value is with a lease, you first have to understand some other terms dealers use when leasing. The first is manufacturer suggested retail price, or MSRP. This is the dollar amount the manufacturer suggests that dealers ask for the car based on what they calculate the car to be worth. This is the price normally put on the sticker in the car window. The second term is lease price, or cap cost. This is the price of the vehicle after you negotiate with the dealer based on the MSRP through rebates and other deals. The third term is residual value, or resale value. This is the value the car will have at the end of your lease. Because dealers can't know for sure what the market will be like for your vehicle in the future, residual value is just an estimate. However, dealers will use it to calculate the depreciation in your lease.
Lease Depreciation Defined
Once you have a cap cost for your car following negotiation on the MSRP, your dealer subtracts the residual value of the car from the cap cost. The difference is how much the dealer believes the car will depreciate over the course of your lease term. It represents the value of the vehicle you'll use up as you drive. The dealer divides the depreciation value by how many months are on your lease to get a base for your monthly payment. He then adjusts the monthly payment to accommodate other fees like interest to get your true monthly lease cost. For instance, if the depreciation value was $10,000 and you had a 36-month lease, your monthly payments would be about $278 a month before added fees.
Why Negotiation Matters
As LeaseGuide.com points out, some dealers may tell you it isn't possible to negotiate cost when leasing, but this is not true. When you get a lower cap cost, the difference between the cost and the residual value ends up being lower, giving you a lower depreciation value. Subsequently, you end up with lower monthly lease payments. Thus, negotiation is a vital component of getting the biggest bang for your lease buck.
Why MSRP Matters
In general, as Christopher Cruise of Bankrate discusses, vehicles with initially high MSRPs also tend to have high residual values, meaning they provide low depreciation values. Low depreciation values mean lower monthly lease payments. Thus, it can be to your benefit to look for a higher-end vehicle when you go to lease. However, this isn't a hard and fast rule, as some low- to mid-level vehicles maintain their values over time, as well. It all depends on the demand for the vehicle and the quality of the manufacturing.
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