What Is Net Advantage to Leasing (NAL)?
Net advantage to leasing (NAL) refers to the total monetary savings that would potentially result from a person or a business choosing to lease an asset as opposed to purchasing it outright. The benefits of leasing are usually determined by comparing the net present value of purchasing the asset outright to the net present value of leasing it. Friction cost analysis may also be used to measure both the direct and indirect costs which can vary by the buyer.
How Net Advantage to Leasing Works
Net advantage to leasing is a measure that can be used by both individuals and businesses when calculating the difference in the cost of buying versus leasing. Generally users may choose leasing over buying because of the potential cost savings, added benefits and lower monthly expenses. Leasing versus buying will have a variety of direct and indirect costs that can be analyzed both through net present value calculations and friction cost analysis.
Even if the NPV of a lease appears favorable to a purchase, certain rights that come with ownership - such as the right to alter or re-sell an item - are not present with leased items as they are still owned by the lessor.
- Net advantage to leasing (NAL) is the calculus involved in deciding whether it is more cost effective to purchase or lease some asset or property.
- NAL is arrived at by comparing the net present value (NPV) of each option and choosing the more favorable option.
- Friction cost analysis is often used in conjunction with NPV to account for both direct and indirect costs that may arise from either a lease or purchase.
Net Present Value
A net present value calculation is a good way to identify the direct cost comparison of leasing and buying. To obtain an accurate net present value calculation, buyers must determine an estimated timeframe for the comparison. This timeframe is usually based on the standard lifecycle of the purchased vehicle and will include the purchased vehicle’s terminal salvage value.
Considerations for net present value from the ownership perspective will focus on the payments for an auto loan, the expected interest rate and the number of payments required for the loan. Interest rates will vary by a borrower’s credit quality with 5% often used as a standard borrowing rate in a secured auto loan. On the leasing side, net present value calculations will include the contracted monthly payment and leasing timeframe which can be approximately one to two years.
A net present value calculation will provide a buyer with a net present value of their investment over the full lifecycle and a comparison of the average annual cost. Generally, all things equal, leasing will typically have a lower cost if an auto loan is required.
Friction Cost Analysis
Friction cost analysis allows an individual to integrate both direct and indirect costs into net advantage of leasing calculations. Friction cost analysis can be derived from base net present value calculations. Investors can adjust the value based on assigned measures of indirect costs such as the advantage to trading for a new car after the lease versus the costs of holding a car through its full lifecycle.