What is a 'Subvented Lease'

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

BREAKING DOWN 'Subvented Lease'

A subvented lease offers a leasor 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 leasor chooses to rent an asset from a property owner 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. An upfront rebate can be used by the leasor 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.

For an 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, this would decrease the monthly payment to $260.42 ($12,500/48).

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