Monday, April 13, 2009

Damaged Goods

With GM in the news on a daily basis, I found myself considering the burdensome scenario of leasing a car expecting to be able to resell it at $x when returned (at the end of the lease period), only to find out it can only be sold at $0.5x.

Well, this possibility (or, now, eventuality) -- not unique to cars -- got me thinking about key inputs to modeling resale value. Assuming these cars are not vintage sports cars, one has to assume they depreciate over time. If they're new cars, they likely depreciate the moment you sign on the dotted line.

My natural assumption would be that new cars would depreciate faster than used cars, from a higher base price, and at a steeper rate (duration and convexity). In other words, if the car acts as collateral for the auto loan, one would assume one would achieve lower loan rates on used vehicles.

To cut a long story short, apparently I was wrong. These auto rates for 48 month car loans available in San Diego are courtesy of

P.S. One other consideration may be the credit quality or behavioral patterns of people who buy new cars versus those who buy used cars. One thought, though, is that in this economy the used car purchaser may be the more conscientious. Having said that, I've ignored the possibility that returned used cars may have seen their day (tend to zero value, quickly) whereas some value may remain in returned used cars.

P.P.S. I'm noticing that US Bank agrees with me (re new vs. used car loan rates), but aren't providing this service in San Diego.

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