Car Lease and Customer Preference

CHAPTER 1

Car Lease Selection with respect to Customer Preferences in Islamabad

1.1

INTRODUCTION

2


1.1. INTRODUCTION

A lease is a private contract between the leaseholder and the landlord. When a

car changes hands, the seller assigns all the rights and responsibilities of the lease to

the purchaser, including any future service charges that have not yet been identified. It

is an important document and leaseholders must ensure that they have a copy and that

they understand it. The wording of leases is usually in legal language and can vary

from asset to asset. Leaseholders who cannot understand their lease should get advice.

Technically, a lease is a legal agreement between two parties that specifies the

terms and conditions for the rental of an asset, which, in this case is a car. In general,

the agreement is not between you and the car dealer, rather it is between you and a

leasing company chosen by the dealer. In other words, the car is actually sold to the

leasing company who, in turn, rents the car to you. The dealer simply acts as an agent

for the leasing company and negotiates the terms under which you will rent the car

from the leasing company.

When you lease, you pay a significant amount of interest on the transaction.

And there are tax and license fees. And all cars don't depreciate evenly. But still, the

basic concept of leasing is that you pay for the depreciation of the car (Edgerton,

2001).

Signing a leasing contract means that “you agree to make regular monthly

payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and

take good care of the vehicle” (Kay, 1997). Further, you agree that you'll keep the car

for a specified number of months and you're expected to stick it out to the end.

3


The lease sets out the contractual obligations of the two parties, what the

leaseholder has contracted to do, and what the landlord is bound to do. Leaseholders

are not necessarily entirely free to do whatever they want in or with the car.

The first thing to understand is that leasing is not renting. When you lease a

car, you are arranging for the vehicle to be sold to a leasing company, usually an arm

of the manufacturer. The leasing company then lets you use it for a monthly fee over a

set period of time. When the term of the lease is up, you have the option that is you

can return the car to the dealer and walk away without paying anything else. Or you

can buy the car for a prearranged lump sum, which is known as the vehicle's "residual

value." the number of factors that go into calculating the monthly payment is very

complicated. When you lease a car, what you are paying for is the car's depreciation

over the term of the contract, plus interest, taxes and fees (Sutton, 2001).

Depreciation is the difference between the car's value today (the price) and what it

will be worth at the end of the lease i.e., the prearranged residual value (Edgerton,

2001). As in a sale, the price (i.e., capitalized cost) is negotiable. It can be cut

automatically with a down payment or a trade-in. You can also negotiate the upfront

costs, such as the acquisition fee and security deposit, to get a better deal.

Leasing a car is a great way to drive a new model car and be able to switch to

a newer one every couple of years without the hassle of trying to sell your old car or

trade it in. Leasing has become more popular lately and seems to continue growing in

popularity. The lack of commitment to one car entices many people. Leasing also has

the benefits of lower monthly payments than buying a car, a low up front cost, and a

solid warranty that will cover you for the entire term of your lease. This will cut back

4


on your maintenance costs. Even though leasing may have its benefits, it may not be

for everyone.

At the end of the lease you're expected to return your vehicle to the leasing

company with no more than normal wear and tear. You'll have to pay for any damage

or extra mileage over and above your contract-specified limits.

You may have an option to purchase your vehicle at lease-end for a specified

price, if you choose. Or you may be able to use the car as a trade-in on a new car.

Otherwise, you can simply return the vehicle to the leasing company and walk away.

However, because you might just have equity value in your vehicle that you don't

want to simply give back to the leasing company.

Leasing can be a tricky business. That’s why you need professional advice on

the topic. The information in this section can be used by banks, dealerships and

leasing companies to train their sales personnel and most importantly the customers,

whether you’ve leased before or are new to the arena.

Whether you are trying to analyze and compare leases or simply deciding

whether to lease at all, going into the process without a fundamental grasp of the

concepts will end up costing you money. Surprisingly few individuals who will either

lease or seriously consider leasing, will enter into their transaction with a rock-solid

understanding of how leasing works and whether it best suits their driving habits and

financial preferences. Consumers may, of course, rely on the dealer to tell them that

they really got a good deal. But, today with more educated shoppers especially

Internet shoppers most would rather make that judgment themselves. In order to do

so, we must begin with an understanding of the idea behind leasing.

5


A company generally has three options in financing capital assets: Leasing,

Financing and Paying Cash (Aghili, 1998).In this study we will focus on what factors

to consider while leasing and the benefits and disadvantages of leasing.

6


1.2RESEARCH QUESTIONS

7


1.2. RESEARCH QUESTIONS

This research is devoted to analyzing the importance of factors for determining

customer’s preferences in selection of car leasing. In the process of this study, the

following questions are actively tackled:

1. Is there an importance of the following factors in customer buying behavior with

respect to their purchasing power:

1.1. Monthly Payments

1.2. Projected Value

1.3. Service Provided

1.4. Tenure of Lease

1.5. Interest Rate

2. Does depreciation of the vehicle have an impact on customer’s decision making

on leasing a new or a used car?

3. How does customer purchasing power influence customer’s decision in buying a

capital or operating lease?

4. Does the knowledge of the term’s and conditions influence customer’s preference

in selection of lease?

5. Does the risk of buying second hand cars influence customer preference in an

underdeveloped country like Pakistan?

8


6. Is there an importance of the following factors in consumer’s decision making in

buying with respect to the terms of the early termination option in future:

6.1. Disposal Fee

6.2. Past Due Payments

6.3. Remaining Depreciation due

6.4. Early Termination Penalty

9


1.3OBJECTIVES

10


1.3. OBJECTIVES

The main objectives of the study are:

1. To identify the different types of car leasing options available to the customers.

2. To find out customer preferences with respect to their purchasing power.

3. To identify what factors customers need to consider while making a car leasing

decision.

4. To identify the problems some problems the customers face.

5. To help leasing customers in making a buying decision.

6. To make customers aware that lease is negotiable.

7. To find out different customer’s preference reasons e.g. their purchasing power’s

influence on the lease factors.

8. To find out how much the customers are willing to spend and how this influences

their decision for interest rates, down payments, installments, conditions for

different time period and their requirements.

9. To help organization find out their customer preferences so they can give the best

out of them, since customer is the main aspect of an organization.

10. To help firms by making them aware of what their customers want and what

combination they can provide to best suit their customers.

11. To find the risk of buying second hand cars and lease termination policies

affecting customer’s decision.

11


1.4SIGNIFICANCE OF THE STUDY

12


1.4. SIGNIFICANCE OF THE STUDY

This study is aimed at serving multiple purposes:

To The Customers:

The study will help customers by bringing awareness to them, about the

different kinds of lease options available to them. This will also bring them awareness

on how som-e sales people don’t show them the exact figures that they need to know

in making a favorable deal. The study also gives the customers an understanding of

buying a new or a used car and what factors need to be considered while buying a

used car, for example depreciation, early termination policies etc.

To The Leasing Organizations:

Considering that organizations devote most of their attention to the customers,

in order to make loyal customers, the organization them self need to be loyal to their

customers. This study may help organizations in knowing what their customer’s

preferences are, so they can design their packages that best suit their customers target

market.

To The Society At Large:

Societies are composed of people. When people who form societies are honest

and loyal, societies prosper. Organizations are a major chunk of a society. Thus, sales

people should be honest to the customers while making a deal with them. This will

13


help both the customers and the leasing organizations, thus helping in building a

prosperous society in the end. The study also mentions the sales person scams.

To Future Researchers:

Just as this study has benefited from the research of others, so can future

research benefit from this study. Since in Pakistan the concept of leasing is new, not

much research has been done on it. Thus, this study will provide sufficient

groundwork for future researchers.

This study can also highlight one extremely important dimension to future

researchers, i.e. after realizing the significance of various factors, future focus can be

paid to devise ways to make packages that best suits their customers. The best

features of different approaches to conducting a new type of package that is more

flexible, encompassing and resourceful for their customers. Perhaps future researchers

can fine-tune the system of what is recommended in this report.

14


1.5SCOPE

15


1.5. SCOPE

The research is a case study limited to Islamabad only. This project does not

generalize to the entire population it relates to only one geographic area, which is

Islamabad in order to focus the study and find out the real perception of customers.

The research therefore targets this project only on customers in Islamabad. The

research cannot be guaranteed to customers for all geographic areas and may vary on

how different leasing terms offer different packages, it only compares customer

preferences according to their income group or purchasing power etc and a customer

behavior in general only in Islamabad due to some limitations that have been

mentioned in the project. This research can however be replicated in other geographic

areas.

16


1.6LIMITATIONS

17


1.6. LIMITATIONS

This project may have some correction error for inaccuracy, which may arise

due to the following limitation:

1. Problem arising in one geographic area i.e. Islamabad which may not be the

same for any other geographic area.

2. Lack of Primary data regarding research on leasing customer’s buying

behavior

3. Although most problems would be the same for leasing in every geographic

area, some problems of Literature Review may not be applicable to Pakistan

4. Limited sample size (population)

5. Limited resource e.g. Money, etc.

6. The time horizon within which this study was to be completed was very little.

7. Response from some customers may not meet expectation (questionnaires may

not have been filled out truly on how they actually behave)

8. Secondary data collected from sources might have some degree of

misreporting in them

9. Some respondents may be reluctant to openly discuss their income group or

purchasing power due to privacy reasons.

10. The human and financial resources required to distribute and retrieve

questionnaires were inadequate and a real test of patience.

18


CHAPTER 2

19


2. LITERATURE REVIEWA lease is a private contract between the leaseholder and the landlord. When a

car changes hands, the seller assigns all the rights and responsibilities of the lease to

the purchaser, including any future service charges that have not yet been identified. It

is an important document and leaseholders must ensure that they have a copy and that

they understand it. The wording of leases is usually in legal language and can vary

from asset to asset. Leaseholders who cannot understand their lease should get advice.

Technically, a lease is a legal agreement between two parties that specifies the

terms and conditions for the rental of an asset, which, in this case is a car. In general,

the agreement is not between you and the car dealer, rather it is between you and a

leasing company chosen by the dealer. In other words, the car is actually sold to the

leasing company who, in turn, rents the car to you. The dealer simply acts as an agent

for the leasing company and negotiates the terms under which you will rent the car

from the leasing company.

When you lease, you pay a significant amount of interest on the transaction.

And there are tax and license fees. And all cars don't depreciate evenly. But still, the

basic concept of leasing is that you pay for the depreciation of the car (Edgerton,

2001).

Signing a leasing contract means that “you agree to make regular monthly

payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and

take good care of the vehicle” (Kay, 1997). Further, you agree that you'll keep the car

for a specified number of months and you're expected to stick it out to the end.

20


The lease sets out the contractual obligations of the two parties, what the

leaseholder has contracted to do, and what the landlord is bound to do. Leaseholders

are not necessarily entirely free to do whatever they want in or with the car.

The first thing to understand is that leasing is not renting. When you lease a

car, you are arranging for the vehicle to be sold to a leasing company, usually an arm

of the manufacturer. The leasing company then lets you use it for a monthly fee over a

set period of time. When the term of the lease is up, you have two options, you can

either return the car to the dealer and walk away without paying anything else, or you

can buy the car for a prearranged lump sum, which is known as the vehicle's "residual

value." the number of factors that go into calculating the monthly payment is very

complicated. When you lease a car, what you are paying for is the car's depreciation

over the term of the contract, plus interest, taxes and fees (Sutton, 2001).

Depreciation is the difference between the car's value today (the price) and what it

will be worth at the end of the lease i.e., the prearranged residual value (Edgerton,

2001). As in a sale, the price (i.e., capitalized cost) is negotiable. It can be cut

automatically with a down payment or a trade-in. You can also negotiate the upfront

costs, such as the acquisition fee and security deposit, to get a better deal.

Leasing a car is a great way to drive a new model car and be able to switch to

a newer one every couple of years without the hassle of trying to sell your old car or

trade it in. Leasing has become more popular lately and seems to continue growing in

popularity. The lack of commitment to one car entices many people. Leasing also has

the benefits of lower monthly payments than buying a car, a low up front cost, and a

solid warranty that will cover you for the entire term of your lease. This will cut back

21


on your maintenance costs. Even though leasing may have its benefits, it may not be

for everyone.

At the end of the lease you're expected to return your vehicle to the leasing

company with no more than normal wear and tear. You'll have to pay for any damage

or extra mileage over and above your contract-specified limits.

You may have an option to purchase your vehicle at lease-end for a specified

price, if you choose. Or you may be able to use the car as a trade-in on a new car.

Otherwise, you can simply return the vehicle to the leasing company and walk away.

However, because you might just have equity value in your vehicle that you don't

want to simply give back to the leasing company.

Leasing can be a tricky business. That’s why you need professional advice on

the topic. The information in this section can be used by banks, dealerships and

leasing companies to train their sales personnel and most importantly the customers,

whether you’ve leased before or are new to the arena.

Whether you are trying to analyze and compare leases or simply deciding

whether to lease at all, going into the process without a fundamental grasp of the

concepts will end up costing you money. Surprisingly few individuals who will either

lease or seriously consider leasing, will enter into their transaction with a rock-solid

understanding of how leasing works and whether it best suits their driving habits and

financial preferences. Consumers may, of course, rely on the dealer to tell them that

they really got a good deal. But, today with more educated shoppers most would

rather make that judgment themselves. In order to do so, we must begin with an

understanding of the idea behind leasing.

22


A company generally has three options in financing capital assets: Leasing,

Financing and Paying Cash (Aghili, 1998).In this study we will focus on what factors

to consider while leasing and the benefits and disadvantages of leasing.

Leasing may be the best long-term financing solution. By leasing, instead of

paying cash up front, a company can free-up its capital for other purposes. For

example, a company may need databases and high-speed on-line connections to

manage information files on customer preferences, monitor the competition and

emerging markets, and communicate with customers in an instant. Perhaps attractive

new furnishings and functional equipments are required. All of this takes capital, and

more of it will be affordable if lease financing is utilized.

There may also be reductions in repair and maintenance expenses that come

with newer equipment, plus the operational efficiencies that accrue when technology

resources are acquired through a planned, rather than haphazard, program.

Leasing may also reward you with Off-balance sheet financing, Payment

amounts that are determined up front, Fully expensed lease payments, Potential tax

benefits, Seasonal payment structures and Fixed-rate financing (Aghili, 1998).

Bank financing preserves capital at the outset. But a company is still subject to

the risk of technology and equipment obsolescence that comes with ownership plus a

mountain of paperwork. Banks may also impose additional requirements or other

covenants that narrow a company's financial options.

Banks may be limited in what they can offer a company in the way of leasing

if a company already has additional credit lines with them. Moreover, banks often

23


require compensating balances, availability charges, non-usage fees, lien search fees

and documentation fees.

On the practical side, banks can't help a company when it runs into

technological obsolescence, nor will they take existing equipment off your hands

when you decide to upgrade. For a company to grow and prosper, it can't afford to be

stuck with older equipment and technology. To maintain that competitive edge, a

company needs the best that's available.

Finally, consider that banks also shy away from some of the most important

investments like licensed software, installation, training, maintenance and other "soft"

costs.

Paying cash, however, depletes a company's precious capital reserves,

preventing it from allocating them to more important uses. And by paying cash in full

at the outset, a company can only depreciate and write off a small percentage of the

original cost each year. With something that changes as quickly as computer

technology, a company may be saddled with outdated high technology assets before

they're fully depreciated, potentially resulting in a book loss and a negative impact on

profits.

Leasing has many advantages. A new car every time may seem more fun than

waiting for so many years.

Leasing is a newer method of financing, where the "down payment" (Raisglid

and Turner, 1998) is put at the back of the transaction. If you decide to keep the car,

24


you must pay the residual value at the end. You are also charged sales tax and license

on the residual amount.

If you like the vehicle, you can refinance the residual, provided you have paid

your account well and that your account is in good standing. You also need to have

the ability to make payments if you elect to refinance the car at the end of the

lease. People who benefit from leasing drive a reasonable number of miles per year.

High-mileage drivers destroy the value of their vehicle faster than they can pay for it

on a lease program. These motorists are generally better off purchasing the car.

However, many people find they want a new car about 3 years after they

acquire one. These people are ideally suited to leasing. Also, the warranty on the car

will probably be close to the same length of time the lease is written for, giving you

peace of mind.

Leasing offers numerous advantages over other financing methods: (Raisglid

and Turner, 1998)

Tax treatment. An operating lease is not considered to be a purchase, but rather a

tax-deductible overhead expense. Therefore, you can deduct the lease payments

from your corporate income.

Balance sheet management. Because an operating lease is not considered a long-

term debt or liability, it does not appear as debt on your financial statement, thus

making you more attractive to traditional lenders when you need them.

100 percent financing. With leasing, there is very little money down - perhaps

only the first and last month's payment are due at the time of the lease. Since a

lease does not require a down payment, it is equivalent to 100 percent financing.

25


That means that you will have more money to invest in revenue-generating

activities.

Immediate write-off of the dollars spent. Leasing payments are treated as expenses

on a company's balance sheet; therefore, equipment does not have to be

depreciated over five to seven years.

Flexibility. As your business grows and your needs change, you can add or

upgrade at any point during the lease term through add-on or master leases. If you

anticipate growth, be sure to negotiate that option when you structure your lease

program. You also have the option to include installation, maintenance and other

services, if needed.

Customized solutions. A variety of leasing products is available, allowing you to

tailor a program to fit your or year-to-year cash flow needs. You are able to

customize a program to address your needs and requirements - cash flow, budget,

transaction structure, cyclical fluctuations, etc. Some leases allow you, for

example, to miss one or more payment without a penalty, an important feature for

seasonal businesses.

Asset management. A lease provides the use of equipment for specific periods of

time at fixed payments. The lessor assumes and manages the risk of equipment

ownership. At the end of the lease, the lessor is responsible for the disposition of

the asset.

Upgraded technology. If the nature of your industry demands that you have the

latest technology, a short-term operating lease can help you get the equipment and

keep your cash. Lease equipment that you expect to depreciate quickly. Your risk

of getting caught with obsolete equipment is lower because you can upgrade or

add equipment to meet your ever-changing needs.

26


Speed. Leasing can allow you to respond quickly to new opportunities with

minimal documentation. Many leasing companies can approve your application

within one or two days and you can have your equipment very quickly.

Improved cash forecasting. By leasing equipment you know the amount and

number of lease payments over the life of the leasing period, so you can

accurately forecast cash requirements for your equipment.

Flexible end of term options. There are several options for disposing of equipment

after the lease term ends including returning the equipment, renewing the lease or

purchasing the equipment.

Tax benefits. Lessors often pass the tax benefits of ownership on to the lessee in

the form of lower monthly payments.

Improved earnings. Operating lease accounting provides a lower cost than a

capital lease in the early years of a lease.

Pros and cons of leasing versus buying: (MacPherson, 2001)

Advantages of Leasing

Lower monthly payments

Lower down payment

You can drive a better car for less money each month

At the end of the lease you can buy the car or just give it back, you decide.

Lower repair costs (with a three-year lease, the factory warranty covers most

repairs)

You can drive a new car every two or three years

No long time commitment worries.

Warranties are for the span of time you have the care normally.

No trade-in hassles at the end of the lease

27


You pay sales tax only on the portion of the car you finance

Disadvantages of Leasing

You don't own the car at the end of the lease

Your mileage is limited to a set amount, typically 10,000 to15, 000 a year

Lease contracts are confusing, so it makes it difficult to ensure you're getting a fair

deal

Leasing is more expensive in the long run

You cannot alter the car. It cannot be modified or changed.

Depreciating values of the car can end up costing you money

Wear-and-tear charges can add up

It's hard to terminate a lease early if your driving needs change

Advantages of Buying

Pride of ownership — you can do with your car as you please

Car buying is more economical in the long run

No mileage penalty

Increased flexibility — you can sell the car whenever you want

Disadvantages of Buying:

Higher down payment

Higher monthly payments

You're responsible for maintenance costs once the warranty expires (or have to

buy an extended warranty)

Trade-in or selling hassles

Your money is tied up in a car, which depreciates, rather than an investment that

appreciates.

28


When you lease a vehicle, you have the right to:

Use it for an agreed-upon number of months and miles.

Turn it in at lease end, pay any end-of-lease fees and charges, and "walk

away"(Flinn, 1990).

Buy the vehicle if you have a purchase option.

Take advantage of any warranties, recalls, or other services that apply to the

vehicle.

You may be responsible for:

Excess mileage charges when you return the vehicle. Your lease agreement will

tell you how many miles you can drive before you must pay for extra miles and

how much the per-mile charge will be.

Excess wear and tear when you return the vehicle. The standards for excess wear,

such as for body damage or worn tires, are in your lease agreement.

Substantial payments if you end the lease early. The earlier you end the lease, the

greater these charges are likely to be.

Leasing Terms:

Considering leasing one should be familiar with all the Leasing Terms such as,

Money Factor, Residual, Cap Cost, Acquisition Fee, Disposition Fee and Monthly

Depreciation Fee etc. (Bragg, 1999)

29


1. Money Factor:

Money factor is a number that determines the monthly finance cost of a lease.

In other words, it determines how much you pay for the "right" to lease this vehicle.

Money factors are constant within a lease company, but playing off one leasing firm

against another can negotiate them.

2. Residual Value:

Residual value is a predetermined value of the lease vehicle at the end of the

lease term. Again, this is a negotiable item, sometimes not within one leasing

company, but between leasing concerns.

3. Capitalization Cost, Cap Cost:

Cap Cost is the price at which the vehicle would be sold if the deal were for

cash. A finance/leasing company purchases the car from the dealer for this price. It is

negotiable and should always be fully negotiated. It should be clearly stated on the

lease agreement and should be identical to what was negotiated before you mentioned

that you wanted to lease.

4. Acquisition Fee:

You would have heard the commercials saying "No Money Down just a

monthly payment of a given low amount" Of course they don't tell you that you'll owe

the first month and a security deposit when you sign the lease and you'll be obligated

to pay an acquisition fee.

Acquisition fee from time to time is folded into the cap cost of the vehicle, so

you pay it as part of your monthly rental.

5. Disposition Fee:

When you pay a disposition fee, you're paying the dealer to take your lease car

away from you and "dispose" it off so they can take full advantage of the next

uninformed consumer who walks in. Negotiate this out of your contract if at all

30


possible. If not, at least be aware of this cost at lease signing. It's nothing more than a

common lease ploy. The state attorneys general have exposed a lot of the fraud in the

leasing end of the business, and have forced the manufacturers to list "out of pocket

costs at signing" in advertising. It is perhaps for this reason that a lot of leasing

contracts have eliminated the acquisition fee, and substituted this one, which doesn't

show up until the end of the lease.

6. Depreciation fees:

The wear and tear you inflict on the car while it is in your possession.

Mathematically, it is the difference between the capitalized cost and the car's value at

the end of the lease.

7. Down stroke - Everything you have to pay the day you sign the lease, including

any down payment, fees and taxes.

8. Gap Coverage - Extra insurance the leasing company provides to cover you if

your car is ever wrecked or stolen. The gap is the difference between how much it

would cost to replace your car and the amount you would have to pay the leasing

company to get out of your lease.

9. Invoice Price (Factory Invoice) - This is roughly what the dealer paid for the car.

Use this number as a benchmark to figure out how much you should pay.

10. Manufacturer's Suggested Retail Price (MSRP). This is the sticker price. Nobody

should pay even close to this much for a car.

11. Subsidies - Incentives or guarantees given to dealers, usually in order to boost a

car's residual value and/or cut interest rates (and thus reduce your monthly

payments). A lease with subsidies is also called a "sub vented" lease.

12. Walk Up - A classic sales strategy wherein a salesperson lures you with a low

base price and then "walks up" the dealership's profit by selling you a lot of

options.

31


Types of Leases:

Automobile leases come in two varieties: closed-end and open-end. There's a

big difference between the two types and. Federal regulations require that the type of

lease be clearly indicated on all lease contracts. (Brigham and Gapenski, 1997)

1. Closed-end leases

Sometimes called "walk-away" (Bragg, 1999) leases, are most common for

consumer leases today. This type of lease allows you to simply return your vehicle at

the end of the lease and have no other responsibilities.

At the time you lease, the leasing company estimates the vehicle's lease-end residual

value and, if the vehicle is actually worth less than the residual when you turn it in,

the leasing company takes the hit, not you. On the other hand, if the vehicle is worth

more than the residual, and you have the option to purchase, you may want to buy it,

then sell it and make a profit. This happens frequently.

2. Open-end leases:

Open-end leases are used primarily for commercial business leasing. In this

case the customer, take all the risks. You are responsible for paying any difference

between the estimated lease-end value and the actual market value at the end of the

lease. This could amount to a significant sum of money if the market value of your

vehicle has dropped.

It is recommended that you only agree to a closed-end consumer lease. Even

though in most non-business leases your encounter will be of this type, read your

contract closely just to be certain.

32


Even if you hate math, you owe it to yourself to become intimately familiar

with the method of calculating and analyzing monthly lease payments. The ability to

understand and manipulate the numbers that make up your lease quote may be the

most powerful tool in your bargaining arsenal. After all, you will never know if you

have truly obtained the best deal possible if you know nothing about how the dealer

arrived at the monthly payment he quoted. In this arena, knowledge is cash.

Whichever method of calculation you choose, become acquainted with the four basic

components of all vehicle lease payments (Bragg, 1999).

Adjusted Capitalized Cost

Residual Value (Get ALG residual values)

Rent Charge or Money Factor (Get market money factors)

Lease Term

These items must be disclosed to you prior to lease signing. The trick is to ask

for the disclosures well before you sit down to sign the lease. Bring the dealer’s

disclosure sheet home and crank through the numbers to determine whether the offer

proposed is satisfactory to you and whether he gave you all of the terms you thought

you had bargained for during your visit.

The residual value of a leased vehicle is the lessor's estimate of what the

vehicle will be worth at the end of your lease term. Sometimes referred to as the

lease-end value, the residual value is an important number to know for a couple of

reasons. Your monthly lease payment is based on the difference between the adjusted

capitalized cost and the residual value of the vehicle. For that reason, knowing your

residual value is essential in determining your repayment liability. In addition, the

residual value represents the minimum you should expect to pay if you elect to

33


exercise your purchase option at lease end in a closed end lease. In an open-end lease,

the residual value takes on even greater importance.

Residual values will vary depending upon the particular model you choose,

the lessor (i.e. bank, captive finance company or independent leasing company), the

amount of miles you anticipate driving, and particular promotions being offered on

that model. In all cases, the lessor sets the residual value. So, the best you can do is

shop among different lessors for the most competitive number. You can expect

variations among values offered by the captive finance companies, independent

leasing companies, and banks. One way to shop residuals is to simply quiz the

dealer’s finance manager to find out which lenders are offering aggressive residual

values along with competitive rates

There are times when you might not wish to have a high residual value. If you

are planning to enter into an open-end lease, for example, you will be safer with a less

aggressive residual value. In an open-end lease, you are liable for the difference

between the predicted residual value and the actual amount received by the lessor on

the sale or auction of your vehicle at lease end. If the open-end residual value is

artificially inflated to reduce the monthly payments, the shark will show up at lease

end when the actual market value of the vehicle is lower and you owe the difference.

If you are seriously considering a lease-end purchase, you may also be a candidate for

a lower residual value because that is typically the amount you will be expected to

pay for the vehicle. Of course, you must balance that possible saving against higher

monthly payments. A low residual value also makes good sense if you are leasing a

vehicle for business purposes and you have the opportunity to purchase it for personal

use at lease end. Provided the vehicle is actually being used for business, the higher

monthly payments may be deducted as a business expense during the course of the

34


lease, leaving a reasonable purchase option amount for you at lease end. Unless you

fit into one of those categories, however, you will likely find yourself shopping for a

high residual value in order to obtain the lowest monthly payment. Manufacturers are

aware of this and often "push" the residual value in order to advertise and deliver

lower monthly payments (Neard, 1996). High residual values offered by captive

finance companies are often accompanied by low money factors.

As taxing as it may be to your psyche, a discussion of taxes is just as

important as other aspects of leasing (Jack R. Nerad and Jack Neard, 1996). There are

essentially two methods of assessing sales tax in a lease transaction. The most popular

method is to assess tax on the payments due under the lease (Neard, 1996). The

second method imposes a tax on the entire capitalized cost of the vehicle, even though

the lessee does not own the vehicle (Drenth, 2002).

In theory, calculating your tax under either of these methods should not be

difficult. Of course, in reality, this proves less than true. Each state has not only its

own general method of calculating sales tax, but also a list of taxable and nontaxable

components of a lease. For now, we will explore the fundamental methods of

taxation.

Most states use the “stream of payments” method to calculate sales tax under a

lease. To figure out your tax liability under this method, just multiply your monthly

payment by one plus the tax rate (Howell and Macmillan, 1998).

In addition to tax on the monthly payment, you must also pay tax on any cash down

payment made because this is effectively a “purchase down” (Howell and Macmillan,

1998) of the price of the vehicle and would not be captured in the monthly payment

35


calculation. In some states you must also pay tax on any trade-in equity, which

reduces your cap cost. Under the stream method you do pay tax on the rent charge

portion of your monthly payment.

With the stream of payments method, you actually pay less tax than does

someone who leases the same vehicle in a state which taxes the full capitalized cost of

the vehicle assuming you do not purchase the vehicle at lease end. Essentially, you

are paying tax only on what you are using.

Under the capitalized cost method of taxation, the lessee pays tax on the

capitalized cost of the vehicle. In cap cost states the total tax is often due at the

commencement of the lease, meaning the lessor must pay it and either collect it from

you up front or roll it into your lease.

In addition to your total purchase price or cash down payment and monthly

lease payment, there are other taxable elements of your vehicle transaction. In some

states, you will be taxed on the equity in your trade-in vehicle. On the other hand,

there are several states that will not tax trade-ins provided that the parties agree to the

value of the vehicle being traded. Other typical lease items subject to taxation

include: (Neard, 1996)

Acquisition Fees

License Fees

Excess Mileage Charges

Excess Wear and Tear Charges

Termination Fees

Disposition Fees

36


Collection and Repossession Fees

Federal Luxury Tax

If you understand early termination going in, you are more likely to plan a

more sensible lease term and certainly less likely to be surprised if you change your

mind later on.

If you terminate early, at the very least you should expect to pay: (Bragg,

1999)

a disposal fee if you return the car,

any past-due payments,

the remaining depreciation due under the lease (without interest), and

An early termination penalty (in some leases).

Against these charges, you should receive credit for any amount by which the

actual or estimated wholesale value of the vehicle exceeds the residual value stated in

your contract.

Hidden Cost on Early Termination:

The description above is useful for illustrating how early termination works

if the value of your vehicle at termination is equal to or greater than its predicted

residual value. It does not illustrate, however, the risk you bear on early termination

if the value of your vehicle has dipped below the estimated residual value.

Leasing can be a more comfortable experience when buyers have a more in

depth knowledge of terms and conditions.

Beginning, Middle, and End-Of-Lease Costs:

37


At the beginning of the lease, you may have to pay your first monthly payment; a

refundable security deposit or your last monthly payment; other fees for licenses,

registration, and title; a capitalized cost reduction (like a down payment); an

acquisition fee (also called a processing or assignment fee); freight or destination

charges; and state or local taxes.

During the lease, you will have to pay your monthly payment; any additional taxes

not included in the payment such as sales, use, and personal property taxes;

insurance premiums; ongoing maintenance costs; and any fees for late payment.

You will also have to pay for safety and emissions inspections and any traffic

tickets. If you end your lease early, you may have to pay substantial early

termination charges.

At the end of the lease, if you do not buy the vehicle, you may have to pay a

disposition fee and charges for excess miles and excess wear.

Also, be aware that "Lease rates" (Sutton, 2001) or "money factors" (Sutton,

2001) do not have standardized definitions and are not equivalent to an APR. Unlike

when you finance a car and the finance charge must be stated as an Annual

Percentage Rate (APR), there is no similar requirement for disclosing the cost of

leases.

Dealers will always try to focus you on the monthly payment. There's a simple

reason for this, if they can get you comfortable with a set, cheap-sounding number,

they can manipulate the other variables i.e., the price, the interest rate, the residual

value, or the term to boost their profit while keeping the payment where it is.

38


As the purchaser, or owner, of a leasehold car, it is in your own interest to understand

the legal nature of the ownership. What exactly do you own and what are the

associated rights and liabilities. You need to understand what residential leasehold is,

be clear on your rights, and appreciate what your responsibilities are.

Car Buying Strategic Defense Initiatives are explained in three steps: (Sutton,

2001)

Step 1: Negotiate the price of the new car

Step 2: Value the trade-in vehicle

Step 3: Arrange financing/leasing

If you take a “deal” without doing the three distinct parts, then the lessor has

succeeded in confusing you.

You should be able to hold your own when calculating leases against the

dealer's supercomputer. It lets the dealer handle the messy financing stuff for you. It is

the most simplistic approach, and it will get the financing arrangement job done in

short order. However, dealer-arranged financing is probably not in your best interest.

Dealerships make a great deal of their money on what is known as Back End business.

A portion of back end profit comes from arranging the financing for the vehicles that

customers have purchased. Dealer agreements with financing institutions are often

structured so that the higher interest rate a dealer can get you to accept, the more

money they make off the deal. This portion of a dealer's business is summed up in just

one word “lucrative”.

After performing a little due diligence on the financing of your purchase,

decide on one source. Negotiate the particulars down to the last detail, but don't

39


commit. Another financial preparation many consumers fail to perform is the

inevitable insurance question.

Like most shoppers, you want to lease the car of your choice for the lowest

possible price. Leasing is attractive because of low payments and the prospect of

driving a new car every two or three years.

The biggest mistake many customers make when leasing a car is to focus with

their dealer's encouragement on that seemingly low monthly finance charge to the

exclusion of all else. The monthly payment is, of course, crucial but before buying a

car you would need to know the price and interest rates. The monthly payment is built

on these crucial details.

A dealer is required to disclose most of the key variables of a lease, including

the monthly payments, the residual value and the length of the lease. It's worth noting,

however, that a dealer does not have to disclose the interest rate. But having these

numbers is really just the beginning. To figure out whether you're getting a good deal,

you need to know how each of these figures compares in the open market.

Leasing a car is complicated. It's also more expensive than it used to be. Just a

few years ago, the best deals were heavily subsidized by the manufacturers, which

made leasing downright cheap. Sadly, this practice is far less common today, which

means that to get a good deal in the current environment you'll need to be savvier than

ever. You also need to be aggressive. For example, one way to knock down your out-

of-pocket costs is to demand that the dealer waive the upfront costs such as the

acquisition fee, security deposit and processing fee etc. Most people don't realize that

40


nearly everything about a lease is negotiable. Of course, to be an effective negotiator,

you need key information about the marketplace.

Pricing Data:

Once you know what type of car you're interested in, it's crucial to have a

rough understanding of your opponent's bottom line. After all, if you don't know how

low a car dealer can go, how are you going to know when to push for a better price?

Your first step should be to find the car's invoice price. Also known as the

factory invoice, this number is essentially what the dealer paid for the car. Your lease

will be based on "the capitalized cost," a price you negotiate somewhere between the

invoice price and the MSRP. The MSRP is the "manufacturer's suggested retail

price"(PanAmSat Reports first Quarter 2000 Financial Results, 2000). In some cases

you can get a dealer to accept only a few hundred dollars above the invoice.

Sometimes cash incentives from the manufacturer even make it possible for dealers to

sell cars for less than the invoice price.

Not all car dealers are out to get you. There are many, of course, who would

just like to help you find the car you need. But you can count on your dealer trying to

squeeze as much out of you as possible is the salesperson's job. And when it comes to

leasing, aggressive sales tactics all too often range dangerously close to abuse and

fraud. Most states have laws against unfair and deceptive sales practices to protect

against such things. But that doesn't mean they don't happen.

If you understand the process and pay attention to the numbers on the

disclosure statement you can avoid many dealer scams. But here are some watch outs:

41


The most important thing to be aware of is a dealer playing with your contract

numbers after the negotiation. This will not be as easy to do with the new required

disclosure statement, but it's up to you to keep an eye on the numbers. You may have

thought you'd negotiated a great price and interest rates, in addition to an affordable

monthly payment, only to find those numbers have changed when the final contract

was drafted. The monthly payment may look the same, but other numbers have been

rigged to swing the deal in the dealer's favor. The problem is, leasing is so confusing

that most people can't do their own math.

A salesperson will sit you down in front of a blank piece of paper divided into

four quadrants. In each quadrant he'll fill in values for the price, the trade-in value, the

down payment and the monthly lease rate. The salesperson will then negotiate the

four factors separately, crossing out numbers and writing in new ones until the

customer is hopelessly confused. The problem is, each of these factors is used to build

the monthly payment. By definition, therefore, they can't be negotiated separately

from it. In the end, you think you've cut a great deal on the price and trade-in, when in

fact, all you've done is told the dealer what monthly payment you'll put up with. Pay

attention to the other numbers used in calculating the monthly payment — the

salesperson may manipulate them to jack up the car's price.

A common complaint heard into a car dealership fully intending to buy a car,

only to be switched at the last minute into a lease deal, sometimes without even

knowing it. The scam is that the dealer promises a lease payment that is the same or

somewhat lower than a monthly loan payment on the same car and the problem is

because a lessor is only paying for two or three year's use of the car, the monthly

42


payment should be much lower on a lease (Current and Archived Press

Releases, 2002).

Some leasing customers lose substantial value on their trade-ins. The dealer is

now required to disclose the capitalized cost reduction used in calculating your

monthly payment. That includes credit for a rebate or trade-in and down payment.

Ask your dealer to break down the number for you so you can see how much you're

getting for your old car. Keep in mind that you will usually get a better price if you

separate the sale of your old car from the lease deal.

This time-worn retail scam is prevalent in leasing. Car dealers run an

advertisement quoting an attractive lease rate and then try to get you into a more

expensive deal any way they can. Maybe the fine print on the deal has terms that

make it unattractive. Many dealers will claim they've already sold all the cars

described in the promotion offer and end up showing you a "slightly more expensive"

(Kay, 1997) model. This practice violates many states' laws against deceptive

advertising. Other times, the advertised car is a bare bones model onto which the

dealer tries to pack numerous options that inflate the monthly payment like a balloon.

Car dealers have always done this. They'll let pressure and anxiety build over

time to wear down a customer's resolve. After hours in a showroom, some customers

will cave in to high-pressure tactics just to be "allowed" to leave (Flinn, 1990). Some

dealers will even pretend to "lose"(Raisglid and Turner, 1998) a customer's car keys

obtained while the customer was test-driving a new car just to keep the target in the

dealership longer so the salesperson can apply more pressure.

43


If you purchase or lease a car and then discover that it has defects that

substantially affect its safety, use or value, state law may help you gain satisfaction

from the vehicle's manufacturer. While the law cannot help everyone with a "lemon"

(a problem car) (Akerlof, 1970), and some people may have to hire an attorney to get

their cases resolved, the law does create important rights for car buyers. This brochure

provides basic information about how the law helps people get their cars repaired or

replaced under warranty. (A warranty is a written guarantee that the vehicle is of

good, sound quality.)

If your vehicle is determined to be a lemon, you have the right to choose a

refund instead of a replacement vehicle. You cannot be required by the manufacturer

to accept a replacement vehicle instead of a refund. In addition, you may be able to

get a refund for repair, towing and use of a rental vehicle.

The Warranty Act also applies to used vehicles that are still under a

manufacturer's new car warranty. When a used car covered by a new car warranty is

sold, any remaining time left in the warranty protects the car's new owner. The law

covers "certified" (Akerlof, 1970) used cars (autos with quality guarantees sold by

dealers or through manufacturers' programs), resold lemons (defective vehicles that

are bought back by manufacturers or dealers and then resold) and autos covered by

extended service contracts.

Any defect or condition that substantially impairs the use, value or safety of

your vehicle under warranty, and that you have tried to have repaired by an authorized

dealer, entitles you to seek a refund or replacement under the Lemon Law, even if the

44


manufacturer continues to say it cannot find a problem. The law recognizes that if you

purchased a new or quality guaranteed vehicle, you have the right to rely on its

dependability and safety.

Just as an accused person is "presumed" (Akerlof, 1970) innocent until proven

guilty, you can presume that a new vehicle under warranty is a lemon if you can show

that there have been numerous unsuccessful attempts to repair it, or that the problem

cannot be repaired.

Concluding Advice:

The customer should check out different leasing options before joining the

lease agreement. Here is a list of negotiable items (Edgerton, 2001).

The agreed-upon value of the vehicle (A lower value can reduce your monthly

payment)

Up-front payments, including the capitalized cost reduction

The length of the lease

The monthly lease payment

Any end-of-lease fees and charges

The mileage allowed and per-mile charges for excess miles

The option to purchase either at lease end or earlier

Whether your lease includes "gap" (Sutton, 2001) coverage, which protects you if

the vehicle is stolen or destroyed in an accident.

Advertised specials and other lease offerings.

Look for sub vented lease deals. Leases that are subsidized by manufacturers are

often good bargains. High residual values are usually the hallmarks of sub vented

45


deals. Often, high residuals are accompanied by reduced money factors, making

the deal a double win for you.

Get market money factors and residuals to compare to the dealer’s offers.

Remember, the dealer will offer you one of many programs provided to him by

major lenders and captive finance companies. Arm yourself with information

about the market before you begin negotiating so you’ll know whether the dealer’s

offer is a fair market offer.

Don’t play games if you intend to lease -- tell the dealer you are interested in

leasing and open the negotiations with the cap cost. Use pricing guides to help you

in evaluating the proposed cap cost including selected options.

Add gap insurance to your lease if it is not already provided. That way, if your

vehicle is stolen or totaled before the end of your lease, you will not be stuck

paying the early termination balance (something your ordinary insurance will not

cover). The cost of gap protection should be no more than a couple hundred

dollars and often it is included in the lease rate. Read your gap insurance clause

carefully. Some contracts require your insurance company to “fully honor” your

claim before the lessor becomes liable for the “gap” (Sutton, 2001) in coverage.

You should ask your lessor what this means exactly so you don’t get left holding

the bag in the event of a total loss.

Generally, avoid making a down payment on a lease. One of the primary benefits

of a lease is that it allows you to avoid making a significant, up-front cash outlay.

If you have better uses for the money or you can invest the money and earn more

than what you save in rent charges by paying the money to the lessor, the money

is better off in your account.

If you are trading in a vehicle, make sure you are getting the proper credit for your

trade-in. Since leases are based on the difference between the negotiated purchase

46


price and the residual value (a much smaller number than the purchase price),

reductions in the cap cost from trade-in's with equity result in magnified savings

on your lease payment.

Know the basic elements of your lease: Cap cost, rent charge or money factor,

residual value and term.

Consumers should generally avoid open-end leases. If you do sign one, it means

that you, and not the lessor, will be liable for the difference between the estimated

residual value and the actual value of the vehicle at lease end. Although

Regulation M creates a presumption that any difference which exceeds three

monthly payments under the lease is unreasonable, if the difference is due to your

excessive wear or use of the vehicle, you may be liable for an amount that exceeds

the three-payment limit. Some lessors would contend that open-end leases are just

as safe for consumers as closed-end leases because you are effectively liable for

depreciation on a closed-end lease in the form of excess mileage and wear. While

this may be true, an open-end lease cannot cover you in the event of severe market

depreciation or a simple mistake on estimating residual value.

Do not be pressured into signing a lease or purchase agreement on your first visit.

Shop around and run the numbers. You will be amazed at the money you'll save.

Use pricing guides and pricing services to help you uncover invoice prices, rebate

programs and other dealer incentives which can translate into lower prices for

you.

If you expect to pile on the miles, be sure to find out how much it costs to “buy”

(MacPherson, 2001) extra miles up front. You’ll be surprised at how cheaply you

can buy extra miles. In some cases you pay less up front for extra miles than the

47


per mile depreciation actually caused by your driving those extra miles. In those

cases, you win and the lessor pays.

Know your lease-end charges like disposition and purchase option fees.

Know your early termination options. When can you terminate (if at all) and how

much will it cost you?

Generally avoid leasing a vehicle for a term that exceeds the manufacturer's

warranty unless you are prepared to pay for repairs to a vehicle you do not own. In

addition, the economics of a shorter term lease tend to be more favorable.

Know the minimum insurance coverage required by the lease and shop the

premiums.

Leases are better on vehicles that are predicted to hold their value over the term of

the lease. Remember, the higher the residual value, the lower the monthly

payment. Generally, new models have higher predicted residual values at the

beginning of their design cycle. Consult ALG residual values guide to get an idea

of what the baseline is for the model you are considering.

Take good care of your leased vehicle by following maintenance instructions in

the owner’s manual and have it cleaned and waxed regularly (even if you have to

pay someone to do it!). Your vehicle will be inspected after you return it and you

will be liable for any damage to the vehicle beyond ordinary wear and tear. If you

are worried about being tagged with an excess wear charge, take you vehicle to an

appraiser or a repair shop and find out how much it will cost to fix the damage.

You are usually better off making the repairs yourself rather than having the lessor

find the damage and charge you. Whatever you do, make sure your vehicle is

clean when you turn it in. The lessor’s appraisers are human, and a clean, freshly

waxed vehicle gives the impression that you were kind to it during the lease term,

48


which enhances the likelihood that the appraiser will "overlook" minor items that

the lessor might otherwise claim as damage beyond ordinary wear and tear. In the

end, your best bet is to treat your car like it belongs to a friend.

49


CHAPTER 3

50


3.1TYPE OF STUDY

51


3. METHODOLOGY OF STUDY

3.1. TYPE OF STUDY

This study is of descriptive type. It is undertaken to ascertain and be able to

describe the characteristics of the variables of interest in this situation. The study is

undertaken to find out the customer’s preferences of car leasing and what factors

affect their choice in making the purchase decision. The goal of the study is to

describe relevant aspects of the phenomena of interest to the researcher from an

individual’s perspective.

Descriptive study that presents the data in a meaningful form thus help to

understand the characteristics of a group in a given situation, to think systematically

about aspects in a given situation and to offer ideas for further probing to make

certain simple decisions.

52


3.2SOURCE OF

INFORMATION

53


3.2. SOURCE OF INFORMATION

The source of information included filling out questionnaires to find out the

views of customers. It also included formal/ written information from websites and

the forms as well as assistance from our professor and any concerned persons. Both

field and desk research will be conducted to compile this study. Sources of desk

research include:

Newspapers and journals

Magazines

Books

The Internet

54


3.3RESPONDENTS OF THE STUDY

55


3.3. RESPONDENTS OF THE STUDY

The respondents of the study were the present or past customers i.e. anyone

who has an experience of leasing a car. Distinctions were made among the population

on the basis of their income group and their purchasing power to find out what

income group customers prefer what type of leases.

56


3.4SAMPLING

PROCEDURE

57


3.4. SAMPLING PROCEDURE

Despite the errors associated with sampling, samples had to be created from a

colossal population of respondents. The samples were taken from the population on

the basis of simple random sampling. Needless to say, even if the intent of this study

were to examine every element of the population; time, cost and human resource

constraints had made it very hard to collect data, or test, or examine every element.

Sample Size:

The sample size was randomly taken from the population available with ease.

The sample size was approximately of 100 respondents. Out of the 100 respondents

50 questionnaires were filled by lower income group and 50 by a higher income group

of people.

Survey Questions:

The survey questions were in English for all respondents.

58


3.5TREATMENT OF

THE DATA

59


3.5. TREATMENT OF THE DATA

To facilitate this study, descriptive research instruments were utilized that

included questionnaires for the Primary Research purpose.

Questionnaires: There is one questionnaire for users of lease or anyone who is

willing to lease. The questionnaire consists of descriptive style questions. The

questionnaire contains 17 questions. The language has been kept formal and

business-like. However, jargon has been purposely avoided to ease the filling-out

process for ease of respondents in filling out the questionnaires.

60


3.6STATISTICAL

TOOLS

61


3.6. STATISTICAL TOOLS

The questionnaires contain questions of descriptive type. For all questions I

have used Nominal Scales to compute numbers and percentages of respondents for

frequency distribution in order to qualitatively distinguish the groups. This scale will

determine the percentage of respondents that have different variables involved and

any other statistical tools aimed at collecting information and profile data of

respondents like their income group or their purchasing power, and the perception of

the respondents about the purchasing power that influence their decision making in

purchasing the kind of lease that best suits them. Use of leasing as a tool for

determining customer preferences - descriptive analytical statistics such as frequency

distribution, pie charts, etc.

Overall, descriptive statistics tool has been applied to interpret the data that

will be collected through interviews and questionnaires. The questionnaires are almost

purely descriptive, and the responses have been incorporated into the analyses.

62


CHAPTER 4

63


4.1DATA FINDING

64


4.1. DATA FINDINGS

1. Income Group

Between 20,000 - 60,000 Above 60,000

2. Willingness to spend

Between 5,000 to 10,000 Above 10,000

f f % % Rank Order

f f % % Rank OrderYes No Yes No Yes No Yes No

3. Monthly Payments

44 6 88% 12% 1 22 28 44% 56% 2

4. Projected Value

38 12 76% 24% 1 44 6 88% 12% 1

5. Service Factor

16 34 32% 68% 2 44 6 88% 12% 1

6. Lease Tenure 24 26 48% 52% 2 16 34 32% 68% 27. Interest Rate 40 10 80% 20% 1 40 10 80% 20% 18. Depreciation of New Car

12 38 24% 76% 2 36 14 72% 28% 1

9. Depreciation of Used Car

12 38 24% 76% 2 10 40 20% 80% 2

10. Capital or Operating Lease decision

0 50 0% 100% 2 0 50 0% 100% 2

11.1.Capital 50 0 100% 0% 1 50 0 100% 0% 111.2.Operating 0 50 0% 100% 2 0 50 0% 100% 212. Terms & Conditions Knowledge

40 10 80% 20% 1 30 20 60% 40% 1

13. Underdeveloped country’s risk for buying 2nd hand cars

24 26 48% 52% 2 40 10 80% 20% 1

14. Disposal Fee for Early Termination

26 24 52% 48% 1 22 28 44% 56% 2

15. Past Due payments for Early Termination

16 34 32% 68% 2 20 30 40% 60% 2

16. Remaining Depreciation for Early Termination

16 34 32% 68% 2 18 32 36% 64% 2

17. Early Termination Penalty

28 22 56% 44% 1 26 24 52% 48% 1

65


4.2PIE CHARTS

66

Rs. 5000 - 10000

Rs. 10000 and Above


4.2. PIE CHARTS

4.2.1. Income Group

None of the Leasing customers lie in the Below 20,000 income group. The income group from 20,000-60,000 is classified as a lower and above 60,000 as a higher income group.

A total sample of 100 was chosen out of which 50 were lower and 50 were higher income group respondents. We observed the responses of different income group to see how it affects the customer purchase behavior with respect to their purchase power.

4.2.2. Spending Power

In the lower income group the respondents are willing to spend between 5,000 to 10,000. While in the higher income group consists of respondents willing to spend between above 10,000.

67


4.2.3. Monthly Payment’s importance with respect to purchasing power

Monthly payments has a more importance in a lower income group due to their preference of lower monthly payments that suits their income. While in the higher income group it is given some weightage but not as much as the lower income group respondents did.

4.2.4. Projected Value’s importance with respect to purchasing power

Projected value has a relatively higher weightage in higher income group, but even in the lower income group, 76% respondents considered it importance which a huge percentage of respondents who give considerable importance to the variable.

68

Income Group between 20000- 60000 Income Group Above 60000



4.2.5. Service’s importance with respect to purchasing power

Higher income group give a lot of importance to service as compared to the lower income group people. They may be willing to pay more for services. While a lower income group prefers paying a lower amount, even if they do not get better service, 32% of the respondents, however, do give importance to the service factor.

4.2.6. Lease Tenure’s importance with respect to purchasing power

Lease tenure does not seem to have too much importance. 48% of lower income and 30% of higher income group do find it important, but the variable does not seem significantly important.

69




4.2.7. Interest Rate’s importance with respect to purchasing power

Interest rate is important for both income groups. 80% respondents of both income groups consider it an important variable.

4.2.8. Depreciation’s importance in leasing a new car

Importance for depreciation of a new car does not seem very important for low income group respondents, while 70% of the higher income group respondents marked it important.

4.2.9. Depreciation’s importance in leasing a used car

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Importance for depreciation of old car is not considered very important by most respondents in either of the income group.

4.2.10. Capital or Operating Lease Decision with respect to purchase power

Purchase power does not influence the decision for capital or operating lease. It is an option that anyone can avail and is not influenced by the purchase power or income group.

4.2.11.1. Capital Lease Preference with respect to purchase power

All respondents have a preference for capital lease since they would prefer keeping the vehicle at the end of the lease period.

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4.2.11.2. Operating Lease Preference with respect to purchase power

None of the respondents wanted to let go the option for keeping the vehicle at the end of the lease.

4.2.12. Knowledge of Term’s and Condition’s influence in lease selection preference

Majority of the respondents gave importance to the influence of knowledge of terms and conditions in their purchase behavior. Although the percentage is more for the lower income group.

4.2.13. Influence of risk of buying second hand car’s in underdeveloped country on your purchase decision

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Higher income group respondent give more weightage to the underdeveloped country’s risk in Pakistan for buying second hand cars than the lower income group respondents.

4.2.14. Disposal Fee’s influence with respect to Early Termination option in future

Although the higher income group has also given weightage to the above variable, majority of the lower income group find the disposal fees important with respect to the early termination option in future.

4.2.15. Past Due Payments influence with respect to Early Termination option in future

Very few respondents in both the income groups found the past due payments influence important with respect to the Early Termination option in future.

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4.2.16. Remaining Depreciation’s influence with respect to Early Termination option in future

Remaining depreciation does not seem to be a very important variable, although 32% of the lower income and 36% of the higher income group respondents rate it important, the variable does not seem to have significant importance in either group. The percentage is almost the same for both income groups.

4.2.17 Early Termination Penalty’s influence with respect to Early Termination option in future

Most respondents of both income groups consider great influence of the early termination penalty’s on the early termination option in future.

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CHAPTER 5

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5.1CONCLUSION

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5.1 CONCLUSION

The study was conducted mainly to find out the customer preferences,

i.e., what variables they give more importance to and the importance of those

factors associated with their income groups.

Two groups of high and lower income groups were selected. The following

variables for Low Income group are given measurable importance:

Monthly Payments

Projected Value

Interest Rate

For the Higher Income group respondents, more importance was given to the

following variables:

Projected Value

Service Factor

Interest Rate

Depreciation of car does not have much importance in low income

group respondents. But the higher income group respondents give more

importance to new car’s depreciation for their decision making in purchasing a

new car.

In choosing capital or operating lease, purchase power does not have

an influence. All respondents prefer capital lease over the operating i.e., they

would all prefer to keep the vehicle at the end of the lease period by paying a

small lump sump amount.

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80% respondents of lower income group consider knowledge of terms

and condition an importance factor. While 60% of the higher income group

respondents also consider it an important factor.

Most of the higher income group respondents find the risk of buying

second hand cars in Pakistan (being an underdeveloped country) more

compared to the lower income group respondents.

With respect to the Early Termination Option in Future respondents of

both income groups ranked the factors in the same manner given below:

1. Early Termination Penalty

2. Disposal Fee

3. Past Due Payments

4. Remaining Depreciation

The purpose is to find out the importance of variable and to review the

literature of experts. This will help the leasing customers evaluate themselves

in a better way, and focus on the factors they have not given importance to.

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5.2RECOMMENDATIONS

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5.2 RECOMMENDATIONS

Based on the findings from the respondents the study concludes and

recommends the high and low income group customers of car leasing on what

variables to focus on.

The study recommends the Lower income group respondents to focus on

Monthly Payments, Projected Value and Interest Rate for their car leasing. They are

also suggested to choose Capital Lease. The lower income group customers should

also get a clear understanding of the terms and conditions of the car before they lease

the vehicle. With respect to the Early Termination Option, they customers are

recommended to focus on the Disposal Fee and the Early Termination Penalty that

would be imposed on them for terminating the lease ahead of time.

The Higher income group customers are recommended to give more

importance to the Projected Value, Service Factor and the Interest Rate factor. They

should also give importance to the Depreciation of a new car. The higher income

group customers are recommended for capital lease and to clearly understand the

terms and conditions before they lease the vehicle. They should also give measurable

importance to the risk (for an underdeveloped country) of buying second hand cars

before they lease a second hand vehicle. With respect to the Early Termination Option

the higher income group customers are recommended to focus more on the Early

Termination Penalty.

The leasing firms are also recommended to give measurable importance to the

variables based on the two income groups mentioned above.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

Report by an Organization

1. PanAmSat Reports first Quarter 2000 Financial Results, Greenwich, Conn., April

11, 2000 -- PanAmSat Corporation

Journal

1. Akerlof. G, 1970, “Market For Lemons”, Quarterly Journal of Economics 84, 3,

pp. 488-500

2. Current and Archived Press Releases, XTRA Lease Selects Pivotal for Sales and

Marketing -Vancouver, BC - August 13, 2002

Referred Books

1. Financial Statement Analysis by Lepold A. Bernstein and John J. Wild, Sixth

Edition, 2000

2. Don't Get Taken Every Time - The Ultimate Guide to Buying or Leasing a Car in

the Showroom or on the Internet-7th ed, Remar Sutton, April 2001

3. Car Buyer's and Leaser's Negotiating Bible-2nd ed, William James Bragg,

January 1999

4. What Car Dealers Won't Tell You - The Insider's Guide to Buying and Leasing a

New or Used Car, Bob Elliston, September 1996

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5. Car Shopping Made Easy - Buying or Leasing, New or Used: How to Get the Car

You Want at The Price You Want to Pay,

Jerry Edgerton, September 2001

6. The Complete Idiot's Guide to Buying or Leasing a Car, Jack R. Nerad, Jack

Neard, October 1996

7. Buying or Leasing a Car, Jim MacPherson, October 2001

8. The No-Nonsense Credit Manual - How to Repair Your Credit Profile, Manage

Personal Debts and Get the Right Home Loan or Car Lease-1st ed, Shaun Aghili,

February 1998

9. Buying and Leasing Cars on the Internet-1st ed., Ron Raisglid, Cheri Turner,

November 1998

10. Don't Get Taken Every Time: The Insider's Guide to Buying or Leasing Your

Next Car or Truck, Remar Sutton, August 1997

11. How to Save Big Money when You Lease a Car, Michael Flinn, April 1990

12. The Unofficial Guide to Buying or Leasing a Car, Donna Howell, Macmillan,

July 1998

13. Car Shopping Made Easy - Buying or Leasing, New or Used-1st ed, Jerry

Edgerton, February 1997

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14. Buying and Leasing a Car - All Steps You Need to Know to Get the Car You

Want, Tere Drenth, June 2002

15. Don't Get Taken Every Time - The Insider's Guide to Buying or Leasing Your

Next Car or Truck-3rd ed, Remar Sutton, August 1994

16. Lease Your Car for Less: A Consumer's Guide to Vehicle Leasing-3rd ed, Richard

L. Kay, April 1997

17. Financial Management by Eugene E. Brigham and Louis C. Gapenski, Eighth

Edition, 1997 – Dryden

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APPENDIX

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QUESTIONNAIRE

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Car Lease and Customer Preference

Documents

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