When you lease a car you are paying for using the car for the length of time for which you lease it rather than paying for the full price of the car. Leasing is an idea choice for people who have no particular desire to own their own car and enjoy the chance to change their car for a new one on a regular basis so that they can keep up with the latest models and improvements.
The whole process of car leasing has been developed around the fact that a car depreciates in value at a more or less predictable rate (though of course it is not always predictable and can change due to external and uncontrollable factors). Effectively, the leasing price includes the cost of depreciation plus a profit for the dealer. Once the car is returned after the end of the lease the dealer will sell it on in order to recoup the rest of its residual value.
Depreciation estimates vary, but it is commonly accepted that the peak rate of depreciation occurs in the first year of a car’s life. In fact as soon as the car is taken from the showroom there is a considerable drop in its perceived value. Depreciation also varies between car models and makes of car, so a Ford leasing deal will be different to a Volvo one. For instance, a Subaru Outback will depreciate at a higher rate than a Ford Mondeo, and these rates of depreciation would be dwarfed by that of a Volvo D5.
Looking at some specific models, a typical 2 litre Ford Mondeo would cost around £18,500 new but after one year its price would be just a little over £10,000 though over the next year it might lose only an additional £2,000. Thus it loses £12,000 over two years which is a depreciation rate of 64%. It is generally possible to negotiate a reduction on the forecourt price, so the new price could come down to say £17,000 which would give a depreciation rate of 61%.
Calculating the depreciation of a car gives only a rough guide to the costs of leasing. The best way to find out the actual cost of leasing a car is to have a few car options in mind and to talk to a dealer directly.
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