ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: TRACs Issues

Tuesday, November 11, 2008

TRACs Issues

So we have a TRAC lease and we know whether or not its an open ended or closed ended TRAC lease . So what issues do we have to contend with? Since there is a residual and a buyout price with purchase option in this lease, most of the main issues are about the residual.

So if you wanted to know why US based automakers got out of the consumer leasing business, here is why:

ABC Auto Company leases a gas guzzling SUV to client XYZ for 36 months. The value of the car new is $35,000 and the agreed upon price in advance, even with potential for adjustment when in an open ended TRAC lease, is $20,000. So this means the car can be purchased by the client for $20,000 at the end of the 36 month term or given back to the dealer since its a purchase option and not a purchase requirement.

Fast forward 36 months to now, gas prices have come down but everyone knows there's a chance its only temporary so who wants to own an SUV under those circumstances?? No one of course so client XYZ gives the car back. Now ABC has its value on its books of $20,000+/- room for a profit at that sale price of 10-20%. However, now no one wants this car and the best they can get for it is $12,000. What happened to the remaining 8000? Not only did they not make a profit, they took a loss and their books show a loss of 8k on the sale of the car. Enough of these make ABC's books look very weak and they decide to get out of leasing.

That has happened to the big 3 US automakers and now they don't do consumer leases.

Southern Lending Solutions

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