What is Net Advantage to Leasing (NAL)
Net advantage to leasing (NAL) refers to the total monetary savings that would result from a person or a business choosing to lease an asset, as opposed to purchase 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.
BREAKING DOWN Net Advantage to Leasing (NAL)
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.
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.