The car leasing industry is one of the most important subsets of the global auto market. We lease a considerable percentage of new cars, which explains the continual growth and viability of the industry.
A lot of times when we talk about leasing, it’s almost always about how convenient or cost-effective it is for lessees.
The often overlooked question is “What’s in it for the car leasing companies and how do they make money?”
This article aims to tackle that question and explain exactly how car leasing companies rack up their revenues.
How Do Companies Make Money On Car Leases?
Car leasing companies can make money through profits from leasing fees, including interest rates, capitalized costs, acquisition fees, amongst others.
Truth is, from the perspectives of car leasing companies, leasing a car doesn’t get you as much money at once as selling outright. However, profits accrued from leasing are gradual and massive.
The simple answer is, lease deals require customers to pay a certain amount monthly over several years.
After the duration expires, the car would revert to the leasing company and they have the chance to still sell it at a great price.
That, plus the thousands of dollars they have already racked up from the monthly lease payments, is exactly how they make money, in a simple sense.
In a stricter and more organized sense, below are the different ways car leasing companies make money:
Capitalized Costs and Residual Value
Now, to increase their profits, car leasing companies often rely on the capitalized cost and residual value. One of the major things a customer pays for during a lease is the total amount of depreciation across the duration of the lease.
The standard method of determining this in the industry is calculating the difference between the capitalized cost and residual value. It often boils down to negotiation, and the higher the capitalized costs, the more money lease companies will make.
In the same breath, the lower the residual value, the more money the leasing company stands to make. So, the companies will often mark up these fees and once they successfully prevail on the customer to agree, that’s a lot of profit for them.
Just as interest rates apply to car sales, the “money factor” applies to car lease deals. The money factor is essentially the interest rates on the lease payments and is often set at the discretion of the leasing company.
The juicy part for the leasing companies is they are not obligated to disclose the money factor if the customer does not ask for it. So, what they do is set the interest rate at a profitable percentage and rack up profits.
In some cases, customers may approach car leasing companies for a deal to trade in their old cars. Car leasing companies are often in a great position to get the cheapest prices off these old cars since the customer apparently doesn’t want them anymore.
Basically, what happens is, the leasing companies find out the actual resale value of said car and negotiate a lower price. A successful negotiation means more profit for the company in the long run.
Car leasing companies can also make money by offering some add-ons like warranties, gap insurance, navigation system, etc. They add a markup to all these items and make more money over the course of the lease.
Do Car Leasing Companies Own Their Fleet of Cars?
Car leasing companies actually own their fleet of cars, which is why they can lease them in the first place.
They often buy the cars from dealerships through a loan, after which they make the cars available for lease.
So, when a person leases a car, they don’t actually own the car, the leasing company or dealership does.
How Do 3rd Party Leasing Companies Make Money?
3rd party leasing companies deal directly with the public on behalf of dealerships or manufacturers by advertising lease deals having negotiated profits with the dealership or company.
They make money from profits agreed with the actual leasing company or dealership. So, within all the fees and markups, there are profits for the 3rd party companies for the work they have contributed to the process.
How Big Is the Financial Risk of Running a Car Leasing Company?
Truth is, every business in the automotive industry, and every other sector has their risks. That’s like a given for businesses.
With car leasing companies, there are risks, but these risks are manageable as long as adequate structures are in place. Below are different methods by which car leasing companies manage financial risks:
- Prioritizing customers with excellent credit scores
- Demanding strict adherence to lease terms through legally binding agreements
- Sticking to industry-standard and well-advised residual values
- Taking “security deposits” to cover repair costs caused by the lessee’s negligence
- Penalizing lessees for late payments
- Using annual mileage restrictions and charging extra costs for mileage extensions
- Collecting extra costs for early termination
How Lucrative Is the Car Leasing Industry?
The car leasing industry is one of the most lucrative industries in the world.
As of 2021, experts estimate a $75 billion valuation for the global car leasing industry. Not to mention expert projections that set the expected value for the industry by 2027 at about $120 billion.
It is a lucrative industry by all standards and it will get even more profitable with every passing year, as the estimations show.
How Much Do Auto Leasing Agents Make?
Much like third party leasing companies, there are auto leasing agents that stand as middlemen in leasing deals.
According to PayScale, the average hourly rate for an auto leasing agent is $12.19. Data from the platform also shows that commission ranges from as low as $587 to as high as $26,000.
Comparably also estimates an annual average salary of $48,573 for auto leasing agents in the United States, although location, experience, employer, and specific job duties and responsibilities can affect their earnings.