The depreciation amount is the primary factor that determines the cost of leasing. With this in mind, it is essential to understand what it is and how it is calculated. Every year a car is in existence the value of that car drops. This is depreciation. The largest part of your leasing payment is depreciation - the cost of owning your vehicle over a fixed period of time.
When you lease a car, every year the car is worth less. Therefore the leasing company wants to make sure you pay the difference in the value of the car when you bought it from the value of the car when you turn it in. Here is an example:
Value of Vehicle
At Purchase $25,000
After Year 1 $17,500
After Year 2 $13,750
After Year 3 $10,000
Total Depreciation $15,000
As you can see, the vehicle has lost $15,000 of value over a 3 year (36 month) period. An interesting fact about depreciation is that regardless of leasing or buying, your car will still depreciate the same amount. Many salesmen will tell you that “leasing is a bad investment” – remind yourself that your car is worth the same whether you lease it or buy it. Your time may be better spent determining what vehicles are likely to depreciate the most, and opt for a vehicle that tends to hold a higher residual value.
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