Why does the Auto Industry Lease Cars?

This post is not your usual Personal Finance Blog post (although I like to think most of my stuff isn’t the “usual”).  This is not a post discussing whether I am going to lease or finance my next car.

Rather, I have had a burning question that I couldn’t find an asnwer for, by the way, if I did find the answer I would have just shared it rather than posing my problem!   So here it is:

Why do Automobile Companies Lease?

Of course I checked Wikipedia, but here is all the info I found:

For the leasor, leasing generates income from a vehicle the leasor still owns and will be able to sell or lease again once the original lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer’s business model.

Considering more and more companies are shutting down leases I must be on to something!

Lets do some real life math:

For our singular control example we are going to use The Wife’s old car.  We are using it because I know the numbers for it.  Her old car was a 2006 Nissan Altima which she leased for $265/month with $2,000 down – the asking price was a bit above $25,000.  The lease was for 36 months, so technically it shouldn’t even be up, but we negotiated the hell out of a 2008 model trading it in 8 months early due to mileage concerns.  This will make my math look even better later on.  Well:

• $265 X 36 Months + $2,000 down payment = $11,540

So with a quick search I found on www.autotrader.com I could get a 2006 Nissan Alitma with about 36,000 miles (12,000 miles/yr for 3 years) for about $16,000 before negotiations from a Nissan Dealership.  So lets do some simple math:

• $11,540 + $15,000 (I can’t even pretend that I would pay asking price on a 3 year old car) = $26,540.
• The difference? $1,540

Lets put in some “speed bumps” in our calculations:

1. I am sure I can get it even lower than $15,000 in this market
2. If there was a brand new type of model then there would be an even great depreciation (think those current commercials – “The totally brand new Mazda 6” – how much did the 3 year old Mazda 6s drop?
3. Is the dealer going to have offer a new warranty?

Four Hypothesis Why the Auto Industry Leases

I do have four Hypothesis that are in order from least likely to most likely…but I would LOVE to hear other hypotheses (or an actual answer):

Hypo 1:

Try to dissuade people from returning their leased car.  When I say dissuade I mean making them jump through hoops to get rid of the car.

Hypo 2:

I am using the wrong car model –  Nissans aren’t a good example and the Wife and I are incredible negotiators and I worked the Nissan Dealership.  I hope the wife and I are this good.

Hypo 3:

The company is happy to keep the $1,540 and multiply this by hundreds of thousands of cars – YAY profits!

Hypo 4 – This is most likely the answer:

I am using the wrong numbers.  I shouldn’t be using the sticker price of $25,000 but rather the cost of the car to Nissan.  If Nissan is making $10K per car and then they are making an extra $1,500 plus the normal profit, now that makes sense.

Does anyone else know the real answer?