[j4yav]

How do the economics work out for the seller? Depreciation is highest at the beginning, when these people are paying the per month price. If they can't afford a loan for the price of the car, how are they making a lease payment that covers the depreciation for the leasor? I'm sure there's a reason but I can't think of it.

[Dalewyn]

I don't think you understand how car loans work?

Let's say a car costs $50,000 and Joe wants to finance it (because he either doesn't have $50,000 or just doesn't want to spend $50,000 right now), so he gets a $50,000 loan to buy it. Let's also say the loan will mature in 10 years, also obviously the loan has interest but we don't need a specific number for this conversation.

The minimum payment per month will be set such that Joe will pay off the loan in 10 years, and Joe presumably can afford the loan's minimum monthly payments since he accepted it to buy that new car.

If Joe wants to pay off the loan sooner and he can afford it, he can just pay more than the minimum due during a given month.

So Joe gets a loan from a bank (oftentimes middleman'd by the dealership), the bank pays the dealer in full, Joe gets his car, the bank becomes the lienholder on the car until the loan is paid off.

[j4yav]

Thanks! Indeed I've always paid cash for any new cars I've bought. But I still don't see how companies that provide leases are able to purchase a car, lease it out for cheaper than the cost of a loan to people who couldn't afford the loan, and still make money despite the depreciation?

Imagine a car that costs 50,000 - a 10 year loan will be 500 or so per month according to https://www.calculator.net/auto-loan-calculator.html.

If I want to buy a car and lease it out to make money, but charge half that much so people who can't afford it can still get it, then let's say I charge 250/month. It would take 17 years of leasing it at the rate that it was worth when it was new in order to just break even and get my outlay on the car back.

So it's possible that I'm missing something else key about how car loans work but the numbers don't seem to add up for the leasor that your market is people who can't afford a car loan. Even https://www.bankrate.com/loans/auto-loans/lease-vs-buy-calcu... seems to indicate that you pay a little less for the loan than leasing, so I'm still not getting how leasing is the budget option that helps people get a car they can't otherwise afford a loan for.

EDIT: the answer is here: https://www.thecarexpert.co.uk/car-finance-pcp-explained/. Apparently in the UK, leases work with a small monthly payment, but at the end of the lease term there's a gigantic balloon payment where you pay back the difference between your cheap payments until then and what you actually would have owed if you had a normal lease or loan the whole time - thus making the leasor whole. The system is designed such that the leasor will always have received the cost of depreciation (plus more) at any point in the term.

[saltcured]

Answering from a US point of view... Generally, the total cost of leasing a car is going to be more than the total cost to buy a car on a loan and resell the car in the same time period. In a perfect market, I think the difference in the total cost of loan versus lease is essentially the value of transferring risk from the consumer to the lessor as to whether the car retains its anticipated residual value at the end of the term.

With a loan, the buyer pays off the principal and interest and absorbs any discrepancy between the resale value and the remaining debt. With a lease, the lessor absorbs the discrepancy as long as the consumer meets the other stipulations of the lease, such as mileage limits and maintenance. The lessor acts almost like an insurer to charge fees and absorb this risk across a whole fleet of cars.