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How do car companies make money on leased cars? How do car companies make money on leased cars?
I get that dealers make a commission on selling a car, but what about when they lease a car? Asking for a friend.
Rachel Juillerat · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Car companies have found ways to make a profit in a lot of different ways, and leases are no exception. Dealers can make money off of leased vehicles through vehicle depreciation, charging interest, selling add ons, and selling the vehicle after it’s leased.
That’s a lot of ways to make money!
The biggest sources of revenue on a leased vehicle are from the capitalized cost and residual value. These are fancy words to describe the agreed-upon
value of the leased vehicle
. The dealer and the buyer negotiate the value of the car before the lease is signed (known as capitalized cost). The higher the number, the better for the dealer. At the end of the lease, the dealer and buyer negotiate the value of the car again (aka, residual cost). A lower means the buyer ends up paying more to cover the difference between the capitalized cost and the residual value.
Dealers also make money from the interest rate, but it works differently than the interest rate on a traditional
car loan
. During a lease, the lender holds the loan for the vehicle (rather than the buyer financing the car). Dealers have an interest rate on the car loan and will charge customers higher interest on a lease than what the interest rate on the loan is so they can make money. Dealers are not required to disclose this number unless a customer asks, but it is a negotiable number.Dealers can make money from various add-ons, like selling
gap insurance
or warranties. They can also make money from selling the vehicle after the lease ends (this is where many certified pre-owned vehicles come from).Whether you lease or buy a car, a dealership will require
proof of insurance
before you can drive the car off the lot. To help you find the lowest rates on car insurance, try using Jerry
, the number-one-rated car insurance app. Jerry compares personalized rates from more than 50 top providers and delivers the best deals to your phone in minutes for free.View full answer
- Gregory R.
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