Why Lease Rates Can Vary So Much On The Same Vehicle Pt 2

Wednesday, 27. July 2011

Hi, Graham Hill here, thank you so much for visiting my blog, I hope you learn a lot and as a result end up driving a great car. In order to do so you can get all the information you need by buying my book, An Insider Guide To Car Finance or use me to finance your next car. Happy driving.

Insight Part 2: Whilst I’m in the mood to expose some of the trade secrets that lay behind contract hire rates let me delve a little deeper into the area of vehicle pricing and depreciation. Fleet News recently reported some incredible increases in new car costs, mainly as a result of the exchange rate against the Euro. Since January 2008, according to Mark Norman of car pricing experts, CAP, the pound has dropped 18% against the Euro which has resulted in pressures on prices in the UK. Even so we are told that the UK is the cheapest place in Europe in which to buy a new car, according to the EC Competition Report.

But what does all this mean when it comes to setting future values and estimating cost of depreciation for each car? It means it’s a bloody nightmare, especially when the leasing companies could wipe out all their profits simply by getting their depreciation calculation wrong by a couple of percentage points.

Amazingly the values of used cars after 3 years and 60,000 miles are remarkably similar to those of 10 years ago! For example a Ford Escort in January 2000 that was 3 years old with 60,000 miles on the clock was worth £3,875 but the equivalent Focus in December 2010 was worth £3,950.

In some cases similar cars are worth a little less now than the equivalent 10 years ago but prices have increased substantially.

To give the depreciation some perspective Fleet News took three cars and looked at the depreciation over 3 years and 60,000 miles for cars sold in April 2011 then looked at the predicted depreciation over the next 3 years, same mileage with some staggering results.

A VW Golf was found to depreciate by £8,330 to April 2011 but predictions over the next 3 years from May 2011 was now £8,605. Actually not bad. However, a Vauxhall Insignia sold in April showed a depreciation of £13,185 but the 3 year prediction from May was an amazing £17,665.

If you consider a Range Rover Sport the actual depreciation to April was £32,945 but the prediction from May is £44,265. In itself this makes a strong case against car ownership but clearly if the leasing companies get it wrong they could be out by millions of pounds over the course of a year.

And as price predicting is not an exact science you can see why it is easy to get it wrong and for leasing companies to look at ways to recover their losses through end of lease charges. By Graham Hill

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