Subvented Lease

By

Julia Kagan

Updated January 10, 2023

Reviewed by

Thomas Brock

Fact checked by

Michael Logan

A subvented lease is a type of lease in which the entity offering the lease reduces the cost through some subsidy. Subvented leases are commonly offered in car leasing contracts.

Key Takeaways

A subvented lease offers a lessee the opportunity to rent an asset that has been made more affordable via a subsidy.
A common marketing tactic in the car leasing industry is to offer a subvented lease as a way to entice new customers.
Subvented car leases often include provisions for upfront rebates and increased residual values.

Understanding Subvented Leases

A subvented lease offers a lessee the opportunity to rent an asset at a reduced cost. The cost of the lease is reduced by a subsidy which can be created from various factors.

In a leasing agreement, a lessee chooses to rent an asset from a lessor rather than buying the asset. Leasing is often used for renting real estate or cars.

Subvented Car Leases

Subvented leases are commonly offered as a marketing tactic in car leasing. Leasing agents may offer reduced leasing payments to obtain new customers.

In a car leasing agreement, the individual leasing the car makes monthly payments based on a value that is associated with the duration of the car's use. The entity offering the lease determines the leasing value by subtracting the expected resale value of the vehicle at the end of the lease by its current value.

The structuring of vehicle leasing agreements makes them attractive for subvented lease discounts as subsidies can be applied in multiple ways. Leasing agents may also seek to offer subvented leases on older car models, which are in less demand.

The two most common provisions a leasing agent may include in a subvented lease deal are upfront rebates and increased residual values. The lessee can use an upfront rebate as part of a down payment, to reduce the car's carrying cost or as a subsidy towards monthly payments. Increasing the residual value is another form of subsidy that will reduce an individual's monthly payments. The residual value is the estimated value of the vehicle at the end of the lease and is assigned by the leasing agent. Increasing this value decreases the total cost of leasing over the rental period's duration.

Examples of Subvented Leases

For example, imagine 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)—for the sake of simplicity, we assume no borrowing costs. The car manufacturer could offer a subvented lease on the car by increasing the residual value to $7,500, and this would decrease the monthly payment to $260.42 ($12,500 ÷ 48).

Discounting the manufacturer's suggested retail price (MSRP) is another way to offer a subverted lease. By lowering the price through discounts or manufacturers' rebates, the total lease amount is more affordable.

What is a subvented lease?

A subvented, or subsidized, lease is a type of lease offered by a manufacturer, which features special incentives to make it more enticing to consumers. These incentives can include lower base interest rates, higher residual values, and manufacturer discounts.

What happens to cars that aren't purchased?

For newer models, a car will typically remain in a dealership until it's sold, with the price often being regularly reduced until someone eventually purchases it. Used cars, conversely, are typically only held by a dealership for 60 days. After that point, dealers can participate in a wholesale auction to try and sell the vehicle, or it might be sent to a salvage yard for recycling.

What happens if you return a car you can't afford?

If you're unable to afford your car payments, it's entirely possible to return your car to your lender in what is called a voluntary surrender or voluntary repossession. While this can have a substantially negative impact on your credit scores, a voluntary repossession is typically viewed more favorably by future lenders than an involuntary repossession, since you were able to work with your prior lender to resolve the debt.

The Bottom Line

If you're considering taking out a loan to purchase a vehicle instead of leasing it, then you might want to first use an auto loan calculator to determine what kind of loan term and interest rate you'll likely be faced with based on the price of the car. If leasing is the right choice, look for rebates and increased residual value to lower your monthly payment.

Article Sources

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Auto Financial Group Canada. "Glossary of Terms."
Marketplace. "What Happens to Unsold Cars?"
Experian. "What Happens if I Return My Car to the Lender Before I Finish Paying It Off?"