What is ‘Walk-Away Lease’
A common type of car lease in which the lessee returns the car at the end of the lease period, ending the lease agreement. The lessee bears very little risk under this type of lease agreement because the total costs of ownership (minus maintenance and repair costs) are known in advance. In other words, the lessee does not bear the risk of selling the vehicle at the current market price when the lease is over.
Explaining ‘Walk-Away Lease’
On a walk-away lease, the lender assumes the risk of predicting what the residual value of the car will be at the end of the lease period. The predicted residual value is not only an important consideration in establishing an appropriate amount to charge for lease payments, it ultimately determines how much profit the lender earns on the lease of a vehicle. Ideally, the total value of all lease payments in conjunction with the vehicle’s residual value should be greater than the cost paid for the vehicle.
Further Reading
- FAS No. 8–Does it distort financial statements? – search.proquest.com [PDF]
- Economics of automobile leasing: The call option value – onlinelibrary.wiley.com [PDF]
- Rationales for real estate leasing versus owning – www.aresjournals.org [PDF]
- Taxation and corporate financial policy – www.sciencedirect.com [PDF]
- Income Tax-Three-Party Sale-Leasebacks-True Leases or Financing Techniques – heinonline.org [PDF]
- Vehicle acquisitions: leasing or financing? – onlinelibrary.wiley.com [PDF]
- Lease or purchase? A spreadsheet analysis – search.proquest.com [PDF]
- Investigation of Leasing In Asset Financing: A Case Study of Investment Companies Listed At Nairobi Securities Exchange – erepo.usiu.ac.ke [PDF]
