Leasing vehicles for the fleet – Residual value leasing in a nutshell
Buying or leasing? A question every fleet manager is confronted with. There is no definitive answer one way or the other since it hinges on a company’s particular philosophy and the orientation of the fleet.
While leasing makes sense for a fleet that regularly exchanges or replaces vehicles for new models, for other fleets leasing can quickly turn into a money pit. What leasing has got going for it: flexibility, for one, and it’s cheaper than purchasing. The downside: leasing often involves high costs at the end of the contract. We’ll lay bare what is to be considered when it comes to residual value leasing.
What makes residual value so important?
Residual value, i.e. the value of an object at the end of a service life, is important for both the fleet manager and the leasing company, even if either side views residual value from different perspectives.
If a residual value contract is agreed on, the lessee, e.g. the fleet manager, undertakes whatever risks. If the value of the car depreciates, as a result of damage, wear and tear, unusual paintwork or optional extras and such, the lessee is required to pay the difference between the calculated residual value determined at the time of the contract signing and the actual value. This often leads to unpleasant surprises and the supposedly inexpensive leasing vehicle ends up having an expensive “after-effect”.
In some cases, however, the loss in a car’s value is minimal. At the end of the leasing period, the value of the vehicle remains much the same as at the start. No additional payment is due. In the best-case scenario, the company car is worth more than the originally calculated sum and the lessee gets back about 75% of the additional proceeds.
Can I affect the residual value of my leased company vehicle?
Yes, to a degree. Even if the residual value is determined by the lessor, fleet managers still have some room for negotiation. For one, the choice of car is decisive. Not every model has to be leased new and then used for years to make it profitable. Fleet managers can look to models from the previous year to determine which had a stable residual value.
In recent years, electric and hybrid vehicles have emerged at the top of the residual value list. Even luxury makes and outsize SUVs can see a precipitous drop in value, so that their acquisition, due to the high purchased price, must be reconciled with the company’s own car policies.
In addition to the choice of model, the outfitting and appearance of a company vehicle are also decisive: an expensive paint job and extra features may have a deleterious effect on the residual value. Before closing a leasing contract, it is vital to know which models have low depreciation and whether unnecessary optional extras can be dispensed with. This is especially true for small fleets, which usually have tight budgetary constraints.
How to determine a vehicle’s residual value
Residual value is difficult for fleet managers to determine in advance, plus it also depends on the type of leasing. As a rule of thumb, the higher the residual value, the lower the leasing rate. Conversely, a favorable leasing rate doesn’t always mean a good deal, as the lessee is subject to a high residual value at the end of the leasing period.
Fleet managers should therefore think hard whether residual value leasing is the right fit for their fleet. What is often overlooked is the purpose for which the vehicles are leased. For example, residual value leasing can be counterproductive for a small trade business. On the other hand, a car service can benefit from residual value leasing if vehicles are still in very good condition at the contracts’ end.
Tips for low-risk residual value leasing
Residual value leasing does not have to be a high-risk undertaking. With a little prep work, you can avoid unpleasant surprises that can come at the end of the lease.
Tip #1 Arm yourself with information:
To aid fleet managers, the Association of Independent Fleet Management Companies teamed up with the RWTÜV to put out a damage assessment directory for vehicle valuation. A reduced value matrix (mileage, age) calculates devaluation resulting from repair costs, so that customers are charged fairly. Defined therein are the repair costs to ensure consistency in comparable damages.
Tip #2 Call in an independent expert:
Have your vehicles examined by an independent expert before the contract expires. Bring a specialist to the appraisal and make sure to document everything.
Tip #3 The devil is in the detail:
Go over the contract carefully before you lease a company car. Huge differences may lay between the originally calculated residual value and the actual value at the contract’s end due to the work of conniving dealers.
Tip #4 Keep an eye on the market situation:
Things can change rapidly, especially in the used car sector. So, try to think as long term as possible: Does an electric vehicle with higher leasing rates make more sense over a less expensive one running on petrol? Are there other alternatives, like corporate carsharing, expanding the fleet or enhancing its efficiency at short notice?