Explaining A Lease Profile
Saturday, 11. September 2010
In the course of one week I’ve had what could be best described as a lively debate with two customers, over the contract profile that they took their cars on. One had his car on a 3+23 profile and the other 3+35. I have explained the way the profile works to the point of tedium, reported it on the blog and given examples but people are still confused and I really can’t see why? I think we all accept that a car depreciates the worst when the tyres hit the road for the first time. As a general rule of thumb we say that a car will lose about 30% of its cost in year 1, a further 20% in year 2 and a further 10% in year 3. This means that on average the car will depreciate by 60% over 3 years leaving a value of 40%. It’s a very rough guide but clearly if a contract was taken out and the customer defaulted after a couple of payments the leasing company would stand to lose a fortune so they like to load the front end payment. Obviously the leasing company will attempt to recover its loss from the customer but if he has gone bankrupt the funder will be seriously out of pocket. So in the same way that an HP company would ask for a 10% or 20% deposit, the leasing company asks for the same protection with a loaded first payment. When you buy a car you know the cost so it’s easy to calculate a 10% or 20% deposit but with a lease you don’t know the cost of the car so it’s easier for the first, loaded payment, to be shown as a multiple of the only figure known, the monthly rental. It also makes it cheaper. Now I should add that this isn’t a con, what the leasing company effectively does is take the amount he wants paid over the lease and divide it by 26 for a 2 year agreement or 38 for a 3 year agreement with the equivalent of 3 monthly rentals paid in advance. If you were going to pay 6 in advance the monthly payments would reduce as the 2 year agreements would be 29 rentals (ie. 6+23) and 3 years would be 41 (6+35). There would be a slight adjustment as the higher the initial payment the less interest you pay, but you see the principle. At no time is there ever any mention of any money being paid back or refunded at the end of the lease. The number of payments remains consistent, over 2 years it will be 24 and over 3 years it will be 36, but with the first payment, known as the initial rental, a multiple of monthly rentals. The monthly rate is determined by the number of rentals paid within the initial rental. I hope that has cleared it up. Have you understood that? Let me know? By Graham Hill
