Since a true lease pays the interest charges and depreciation charge in equal amounts each month, a level-yield payoff is established.
A monthly lease payment is comprised of three parts:
True-Lease:
Depreciation
Interest
Use Tax
Total
$191.48
$ 84.91
$ 19.35
$295.74
Example Payoff Amounts:
12 mo. Payoff: $17,741.29
19 mo. Payoff: $16,400.95
27 mo. Payoff: $14,869.14
36 mo. Payoff: $13,145.86
We can predict the payoff for any month going forward and remaining interest charges and tax payments are removed*. The principal balance of the lease above is depreciated by $191.48 each month. That should align with the depreciation suffered by the vehicle each month.
Of course, it is impossible to predict the actual value of the vehicle in the future at any given month, but the true lease offers the safest and most economical plan for early termination. If you terminate early, not using an assumption, only three things can happen; 1) the payoff is equal to the vehicle value and we shake hands on that deal, 2) the vehicle is worth more than the payoff and you receive an equity check, or 3) The vehicle is worth less than the payoff and there is a deficit to deal with.
If there is a deficit you have three choices; 1) you can pay it if it is small, 2) You can roll it into your next lease and pay it out by the month, or 3) You can put your car up for adoption to be assumed by another qualified driver seeking a short term, low payment lease on that model.
Assumptions are rarely used to terminate early because equity is usually established in a true lease. You wouldn’t want to pass your equity to a new driver.
The actual depreciation suffered is usually less than planned in a true lease on a pre-owned vehicle… creating equity. Why: A previously titled vehicle has suffered its first and biggest year of depreciation (about 27%). Your lease starts when the depreciation is only 7% – 8% per year for the remainder of its useful life.
Plus, residual values on bank true leases are set low by ALG, Inc., thus increasing the depreciation payment. Why: The Federal Security Exchange Commission mandates that DDA (direct deposit account – checking, trusts & savings, etc.) funds can only be invested if the investment is secure.
That forces lending banks to purchase residual value insurance on each true lease that they write. The cost of the insurance is extremely low, but the only company that the insurance companies will write a lease for is ALG (Automotive Lease Guide), the lowest in the industry.