Why Zacks? Learn to Be a Better Investor. Forgot Password. Car dealers like to lease vehicles. The leasing option usually gives a dealer more ways to make more money compared with cash or regular financing. The finance company also does OK with leases, but it puts itself on the hook concerning the future value of a leased car.
Lease Financing
As a car dealer, you can make money by leasing a car in many of the same ways as if you were selling the car. For example, you can profit from the price the customer agrees to at both the start and the end of the lease. You also can make money on the interest rate of the lease, the amount the customer receives on his trade-in and any extras he purchases. When you put up a car for lease, the customer pays you the amount by which the car depreciates in value over the period of the lease. Since no car has a set depreciation amount, the amount of that payment will be the result of your negotiation with the customer, just as if you were selling the car. When you and the buyer agree on a price, that price is known as the capitalized cost. The higher a capitalized cost you can get the customer to agree to, the more profit you stand to make. The other main pricing variable in a car lease is the residual value, or the amount the car is worth at the end of the lease period. This is also an area of negotiation between you and the customer. A lower residual value results in more profit for you as a dealer, as the customer must pay the difference between the original capitalized cost and the final residual value. When you offer a car for lease, you must buy the car from the manufacturer. Unlike a car sale, in which the customer will take out a loan and pay you the full amount of the car upfront, with a lease you must front this cost.
New Car Sales
In this sense, you are essentially loaning the customer money to lease the car, which will probably cost you interest. You can recoup this cost and more by negotiating the interest rate on your customer’s lease payments, which is known as the «money factor. By charging a higher interest rate than you have to pay yourself, you can make additional profit on the lease.
Accepting Trade-Ins and Selling Used Cars
Small Business — Chron. Used Ford. Note: Depending on which text editor you’re pasting into, you might have to add the italics to the site name. Check out a few of the ways in which car dealers make money below. Used Mazda. There is a lot of debate over whether or not people should invest in extended warranties when buying a new or used car. But they also make money by doing more than just selling new cars.
Offering Financing Options to Car Buyers
Can dealers make a profit from leasing? The answer is a resounding Yes, and in the same ways one would make a profit from selling a car. Dealers will make the profit from the price the customer agrees on at the beginning and end of the lease. Dealers will also profit from the money factor and any add-ons they sell to the customers.
Marking Up the Rate
Two main areas where dealers can maximize profit will be with the Capitalized Cost and Residual Value. When dealers lease their vehicles, the customers pay the amount of depreciation over the period of the lease. The depreciation will be determined by the difference between Net Capitalized Cost and Residual Value. The dealer and the customer will negotiate on an agreed upon value. The agreed upon value is also known as the Capitalized cost. The higher the capitalized cost, the more profit the dealer can make. The second main area to maximize profit will be with the residual value. The lower the residual value the higher the profit since the customer pays the difference, the amount of depreciation. The dealer can also boost profit based on the money factor. The money factor is the breakdown of the APR for the lease payments. The dealer can charge a higher rate while it still looks attractive towards customers. For example, an APR of 20 percent breaks down to a money factor of. Also by law, the money factor does not need to be disclosed on the lease agreements making it easier for dealers to charge higher rates.
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