Role playing
Take the example of David, a single 30-something businessman who leased an Audi S4 in 2000. He had just landed a high-paying job, which enabled him to enjoy his first ever shiny new car. Why did he lease the car instead of buying it? He wanted a sporty car; he planned to keep it only four years, and it made financial sense for him at the time to pay $600 per month instead of more than $1,000 if he'd financed it. Further, having just made it big, he didn't have a large sum of money available for a down payment and he liked the idea of "owning" more car than he could really afford. Plus, he would never have to worry about repairs, as Audi offered free maintenance and a four-year warranty that would last the length of the lease. He would be able to simply walk away from the car at the end of the lease term.
His lease was up in December 2004. What did he do?
Initially he planned to purchase the '00 S4, as it turned out to be worth about $4,000 more than the residual value set in the agreement written four years prior. At the end of a lease, the lessee can choose to buy the vehicle for the predetermined residual value, and in this case, David would have a car worth more than he'd have to pay for it. On the other hand, if the car had been worth less than the set residual value, not only would he never have considered purchasing it, the lessor would have had to resell the car at a loss.
When he got to the dealership, however, they offered him a new lease on a brand-new 2005 S4. Initially he declined, still thinking he would buy his S4, but when the dealer offered him a $5,000 discount off the $52,000 sticker on the new car, resulting in a monthly payment only $20 more than what he had been paying for the past four years, he reconsidered. Moreover, he didn't have to pay any cap-cost reduction (down payment), which most leases require.
David knew the dealer would stand to make a profit on his returned car, but this arrangement saved him from the ownership risk involved in keeping the old car. All things considered, he decided leasing still made sense for him: He gets a tax break due to business use, it mitigated the potential risk involved with owning an expensive car after the warranty has expired, and best of all , he got to drive a brand-new car. He went for the deal.
Now imagine a slightly different scenario: It's been almost four years since David's friend Brad took delivery of the brand-new BMW M3 he financed, and he now only has one payment left. Once he's paid off the car, his bank will mail him the registration card (pink slip), and he'll be free of monthly payments.
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