At 21, I learned a ton about the car business by working as an account executive for a Beverly Hills, California leasing company.
While some things have changed over the years, especially the relative popularity of leasing versus buying, most things haven't.
And there's one key metric that you and I and everyone who drives a car should watch very carefully: A car's residual value.
Residual or "resale" value is what a car is expected to be worth after a given period of time, such as 24 or 36 months. Leasing companies try to predict this figure this with precision, because a car's monthly payment will be greatly impacted by its anticipated market appeal down the road.
Let's say you're looking at two cars, each of which is priced at $24,000. The key question is which one will be worth more by the time you get around to selling it or returning it to the leasing company?
If Car A is worth only $12,000 after 36 months, while Car B will fetch $15,000, you'll pay for the $3,000 difference over the course of your lease. When you factor in the cost of money, i.e. "interest," you'll pay up to $100 more per month to drive the car that will bring $3,000 less as a used car, three years later.
Another way of putting it is to say you can lease a lot better car for the same money if you choose a more desirable model.
Example: Recently, I priced out various leases on a Ford Mustang convertible. I was quoted $390-$550 per month, depending on model and the lease's term.
Shopping around, I found I could lease a Mercedes CLK 350 convertible for 27 months, with even more optional equipment, for only $595 per month, including scheduled maintenance. Yes, there was a slightly larger drive-off to be paid, but we're talking about being able to get a $58,000 ride roughly for the price of a $38,000 vehicle.
Granted, there was special manufacturer financing available on the Mercedes, but still, the difference is dramatic, and much of it is attributable to the way this Benz is expected to hold up in the marketplace a little more than two years from now.
Apart from maintenance, the ACTUAL COST OF DRIVING to you for a car that is under warranty, is mainly based on three things: (1) Initial price of the vehicle; (2) Financing; and (3) Residual Value.
Most people study the first two very carefully, but ignore the third, but as you can see it is critical.
How can you predict the resale value two years down the road? Take a hint from leasing companies.
They look at what the same model has done during the PAST two or three years, and they use the same percentage of depreciation as the predicted rate for today's new cars.
But what if you're considering a brand new model that doesn't have two years or more of history in the marketplace?
That's more challenging.
Leasing companies tend to use conservative percentages, saying for instance that today's new model will bring 65% of its initial cost 30 months later, but this is just a guess.
There are always surprises. If your car fares better than the average, you'll have some happy choices: (1) You can exchange it for a new lease sooner than you might have planned; (2) Sell it for more money; or (3) Keep driving it, knowing it is a good store of value.
On the other hand, if your car is dropping in value like a stone, you might consider dumping it right away for a better performing model, or resigning yourself to keeping it for a very long time, after which residual value becomes so low that it is a negligible factor in your decision making.
One more tip: Residual value of all cars takes a big hit just after the new models come out, so if you're thinking of selling or trading in, try to do it at least 60-90 days before the new ones hit the showrooms.
Dr. Gary S. Goodman is a top trainer, conference and convention speaker, sales, customer service, and negotiation consultant, and attorney. A frequent expert commentator on radio and TV, he is also the best-selling author of 12 books, more than 1,000 articles and several popular audio and video programs. His seminars are sponsored internationally and he teaches at more than 40 university extension programs, including UC Berkeley and UCLA. Gary's sales, management and consulting experience is combined with impressive academic credentials: A Ph.D. from USC, an MBA from the Peter F. Drucker School of Management, and a J.D. degree from Loyola Law School, his clients include several Fortune 1000 companies
His web site is: http://www.customersatisfaction.com and he can be reached at: gary@customersatisfaction.com. His blogs include: YOUR CUSTOMER SERVICE SUCKS! and ALWAYS COLD CALL! at: http://www.alwayscoldcall.blogspot.com
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