I drive a lot of miles so I can’t lease because the mileage charges will kill me.

We agree that it is more expensive to lease if you drive a lot of miles because you will have to pay extra for the additional miles. However, we argue that it is also more expensive to own a vehicle if you drive additional miles. When you go to trade-in or sell your vehicle, the resale value will be lower the more miles it has on it. This just logically makes sense. Is someone going to pay the same amount for a used vehicle that has 80,000 miles on it as they will for the same vehicle with 60,000 miles? The answer to this question should be self evident.

The only real question is, when leasing companies charge the typical 12-18 cents per mile charge for excess miles are these charges just reflecting the reduction in the value of the vehicle? Or are they using this as another profit center. To find out the answer to this question, in the fall of 2003 we researched the internet and generated some data from a national auto auction company. In October 2005 we updated our data and also added data from Kelley Blue Book (www.kbb.com).

In November 2003 we looked at three popular 4-year old models, 2000 Lexus ES300, 2000 Ford Explorer, and the 2000 Honda Accord. We have chosen 4-year old vehicles to represent the typical 4-year lease. The data is from October and early November 2003. We looked at actual sales prices of the vehicles at auction with miles around 40,000; 60,000; 80,000; and 100,000; We then calculated the average selling price for each mileage range. Please note that we used different mileage ranges for the different vehicles based on how many sold at each price range. For example, there were very few Honda Accords in the 100,000 range, and we didn’t find very many Ford Explorers with 40,000 miles so we were not able to generate valid data points for these ranges.

In October 2005 we repeated the data collection procedure for these three vehicles (Lexus ES300, Ford Explorer, Honda Accord). We updated to the 2002 model. We also added two additional vehicles, 2002 Ford F150 and 2002 Dodge Caravan to add a truck and minivan to our analysis.

We also went out to Kelley Blue Book (www.kbb.com) on October 19, 2005 to get their values for these vehicles. Kelley Blue Book gives Trade-In, Private Party and Retail values for each vehicle. We ran each of the three values for each vehicle for each of our mileage ranges (40,000;60,000;80,000;100,000. We immediately noticed that Kelley Blue Book was using formulas rather than actual data. For example, for the 2002 Lexus ES300 we got this kind of data:

Whether we chose Trade-In, Private Party or Retail, the difference between 40,000 and 60,000 miles was $2,475.  We found this to be true across all vehicles and across all mileage ranges.  Since showing all three values adds nothing to the analysis, we have chosen to show only the Kelley Trade-In values in the tables.  We also thought that it would be interesting to compare Kelley Blue Book’s Trade-In values with the actual auction values (shown below). It is interesting to note that for all vehicles and all mileage ranges, Kelley Blue Book is showing lower values than the actual data from the auctions.  As a result, all of their mileage penalties appear to be on the low side.

Now let’s analyze some of the data. Look at the data on the 2002 Lexus ES300. The average price for a 2002 Lexus ES300 with 40,000 miles is $19,120. The average price for one with 60,000 is $16,597. This is a difference of $2,523. Divide this by 20,000 and it comes to 13 cents a mile. So if you owned this car and went to sell it, you would in reality be paying a “Mileage Penalty” of 13 cents a mile. When you go up to 80,000 miles you are paying an additional 10 cents per mile. Look at the mileage penalties for 2003 and they were 9 and 16 cents respectively. Tthe Kelley Blue Values table shows 8 and 7 cents per mile. So if you add all of these up, it appears that the mileage penalty is somewhere between 10 and 12 cents per mile. This is very similar to the 12 cents per mile that many leases charge for excess miles.

We won’t bore you by going through each table, but if you take a look you will see a lot of numbers in the 8 to 12 cents range. The few exceptions include the 2002 Dodge Caravan which has numbers as low as 3 to 5 cents per mile. The issue here is that the vehicle has gone down in value so much that there isn’t too much left to take away in terms of mileage penalties. If you had purchased this vehicle you would have already lost your shirt when it came to sell it, without having to factor in additional mileage penalties. If you had leased this vehicle, you could pay thousands in mileage penalties and still be ahead of the person who had purchased it and then driven extra miles.

So in reality, while it appears that the 12 to 18 cents per charges that leasing companies typically charge is slightly higher than the 10 to 12 cent per charges are data show, any excess charges you pay will not be significant for most vehicles. You can easily perform your own research on the web and look at different vehicles in different settings, such as the retail market, and we are certain that you will find data similar to what is shown here. We have come up with an easy to read chart to show you what your extra mileage charges will be for various combinations of cents per mile and extra miles driven. For example, if you have a standard 4-year lease that allows for 15,000 miles per year, and a mileage penalty of 14 cents per mile, you can easily determine your extra mileage charges. If you end up driving 20,000 miles per year you will have 20,000 excess miles and a charge of $2,800.

If you are a high mileage driver and wish to lease, there are strategies that you can use to minimize the cost of these additional miles. Many dealers offer several different funding sources that offer different mileage plans. Some funding sources will charge the same per mile penalty no matter what vehicle you lease. Others place different vehicles into different classes and charge different per mile amounts for different vehicles. For example, we have one funding source that charges 12 cents per vehicle and another that charges 12-18 cents depending on vehicle class. If you are going to drive 40,000 extra miles during your lease period, depending on your vehicle class, you could save up to $2,400 by using the lessor with the lower per mile charge. So even if their monthly payment was slightly higher, it might make sense to choose them.

For illustration purposes lets assume that you are going to sign a 4-year lease that allows 60,000 miles, but you plan on driving 80,000 during the lease period, the funding institution has a 12 cent per mile penalty, and the money factor is .00200.  You typically have two ways to pay for the extra miles:

1. You can just wait until the end of the the lease period and pay the mileage penalty.  You turn in the vehicle and receive a bill for $2,400 (20,000 * .12).
2. You can build the extra miles into the lease by lowering the residual by $2,400.  In this case, your lease payment will increase by $47.91 or a total of $2,299.68 over the 48-month term.  The reason that you pay less than $2,400 is that you are prepaying your mileage penalties and the bank is paying you interest on the extra money that you are paying in.

Many people prefer to build the cost of the extra miles right into the lease since psychologically it seems less painful than coming up with $2,400 all at once, and you do end up saving by paying $100.32 less.  The potential negative of building the excess mileage charges into the lease payment is that the lessor doesn’t refund you the difference if you drive fewer miles than you estimated.   A third alternative that most people have not considered, is to set up a reserve account on your own.  If you earn 3% on your money, you can set aside $47.13 each month and have $2,400 at the end of four years.  If you can earn 5%, the reserve only needs to be $45.27 per month.  We recommend setting up the reserve.  The amount that you place in the reserve should be slightly less than the monthly payment that you would make to the lessor, and if your actual miles are less than your anticipated miles, you can keep the excess.

Performing an analysis like this is another service that we offer to our customers.  Please give us a call at 1-800-800-5327 or send us an email.