Subvented Lease

DEFINITION of 'Subvented Lease'

A type of lease where manufacturers will reduce the cost of the lease through a subsidy, usually through the increase of the residual value or the decrease of the interest rate. These subsidies reduce the monthly payments that the lessee is required to pay over the life of the lease. Auto manufacturers often will offer a subvented lease on vehicle models that are not selling well.

BREAKING DOWN 'Subvented Lease'

For example, imagine that you were going to lease a car that is worth $20,000 and has a residual value of $5,000 after four years. Over the four-year period the car is expected to depreciate by $15,000, which would make your monthly payments $312.50 ($15,000/48) - we assume no cost of borrowing for simplicity sake. The car manufacturer could offer a subvented lease on the car by increasing the residual value to $7,500, which would decrease your monthly payment to $260.42 ($12,500/48).

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