Setting residual car values
Start with a big pot of money called the "Money source" shown below or any group having a lot of money to invest. The link to Money sources lists a few.
Determining the car residual value
Usually the Money source hires someone to determine the
car residual values. If the
residual values are wrong, and if three years later at the end of a typical lease, the market is depressed and the
residual value is higher than the used car value, then huge losses result to the money source. Here's why.
Financing car leases is not for the squeamish.
The customer, based on
tips for leasing a car he got from the Internet, agrees to pay the money source monthly payments for the term of the lease based on the price and the
auto residual value. At the end of the
lease the Money-source gets the
car back and hopes it can be sold for at least as much as the
residual value agreed to in the
car lease
For example, the Minneapolis Star Tribune® reported that Chrysler® lost over $400,000,000 in 2001 on end-of-lease cars that sold for less than contracted residual values Within the last few years, a major. New York bank lost over $300,000,000(that's million) because it used car residual values that were too low, and when the cars came off-lease they could not be sold for enough money to equal the
residual value plus the cost of sales (profit to the used car dealer who sold the off-lease vehicle).
Sample Funding Sources (not necessarily current)
- American Honda Finance CorporationTM
- Banc One Credit CompanyTM
- BMW Financial Services, NA, Inc.TM
- Chase Automotive Financial ServicesTM
- Chrysler Credit CorporationTM
- FairLease/CUSI (Credit Union Services, Inc.)TM
- Ford Motor CreditTM
- Fifth Third BankTM
- General Motors Acceptance Corp.TM
- Huntington National BankTM
- Mazda American CreditTM
- Mercedes-Benz CreditTM
- M&I Automobile LeasingTM
- Mitsubishi Motors Credit of America, Inc.TM
- Nissan Motor Acceptance Corp.TM
- Provident Auto LeaseTM
- SouthTrust Bank N.A.TM
- Toyota Motor Credit Corp.TM
- UsbankTM
- Volkswagen Credit, Inc.TM
- Wells Fargo BankTM
Typical Sources of Residual Values
Two typical companies developing residual values are Automotive Lease Guide® (ALG.com) and Black Book® (Carworks.com). ALG has a staff of over 100 mathematicians monitoring sales from hundreds of dealers, both new and used. There is no universally agreed upon amount for the
residual value of any specific car.
Auto lease residual amount
These must take into account future trends, future new models (usually kept secret for as long as possible) and future flow of off-lease vehicles. In short,
lease financing is a very hazardous business and can cost a money source a lot of money if the
residual amounts are off base. Only the very largest, such as General Motors Corporation®, develop its own
residual values for a
car
Residual amount Interest rates vary daily
Check any daily newspaper business section. That means that the money source may change its interest rate anytime it decides it must do so to take
advantage of changes, and it means that the residual interest component of Car X one month from now may be slightly different than it is today as well as the lease payment.
Notice too that the dealer is not obligated to get the money from his manufacturer. A General Motors Dealer, for example, can get the money from any money source. GM doesn’t care as long as it sells the car (to the money source).
By: Ralph M