Depreciation: How it Affects Closed End Lease Payments

1. Introduction to Depreciation and Closed-End Lease Payments

Depreciation is a fundamental concept in the world of finance and leasing. It refers to the decline in value of an asset over time due to wear and tear, obsolescence, or other factors. When it comes to closed-end lease payments, understanding depreciation is crucial as it plays a significant role in determining the monthly payment amount. In this section, we will delve into the intricacies of depreciation and its impact on closed-end lease payments, exploring insights from various perspectives.

1. Depreciation from the Lessee's Point of View:

From the perspective of the lessee, depreciation is a critical factor to consider when entering into a closed-end lease agreement. The lessee essentially pays for the depreciation of the leased asset over the lease term, rather than the full value of the asset. This means that the monthly lease payment is typically lower compared to purchasing the asset outright. For example, if a car has a market value of $30,000 and is expected to have a residual value of $15,000 at the end of a three-year lease term, the lessee will only be responsible for paying the difference of $15,000 ($30,000 - $15,000) over the lease period.

2. Depreciation from the Lessor's Point of View:

On the other hand, lessors play a significant role in assessing and estimating the depreciation of the leased asset. They consider various factors such as the expected usage, market conditions, and the asset's residual value at the end of the lease term. Accurate depreciation estimation is crucial for lessors as it directly impacts their ability to set appropriate lease rates and ensure profitability. For instance, if a lessor underestimates the depreciation of an asset, they may end up with lower lease payments that do not cover the full depreciation, resulting in financial losses.

3. Factors Influencing Depreciation:

Several factors influence the rate of depreciation for leased assets. Understanding these factors can help both lessees and lessors make informed decisions. Some key factors include:

A. Time: The longer the lease term, the higher the depreciation as the asset undergoes more wear and tear.

B. Usage: The more the asset is used, the faster it depreciates. For example, a car that is driven extensively will experience higher depreciation compared to a car used sparingly.

C. Market Conditions: Market demand and trends can impact the value of an asset. For instance, technological advancements may render certain assets obsolete, leading to accelerated depreciation.

D. Maintenance: Proper maintenance and care can slow down the depreciation process. Regular servicing, repairs, and adherence to usage guidelines can help preserve the value of the asset.

4. Residual Value:

Residual value, also known as the salvage value, is a crucial element in calculating depreciation and closed-end lease payments. It represents the estimated value of the asset at the end of the lease term. Lessors typically determine the residual value based on market research, historical data, and their experience in the industry. A higher residual value reduces the depreciation expense, resulting in lower monthly lease payments. Conversely, a lower residual value increases the depreciation expense and leads to higher lease payments.

5. Impact on Closed-End Lease Payments:

Depreciation directly affects closed-end lease payments, as the lessee is essentially paying for the decline in value of the asset over time. A higher depreciation rate translates to higher lease payments, while a lower depreciation rate results in lower payments. Therefore, it is crucial for lessees to consider the expected depreciation of the asset when negotiating lease terms and assessing affordability. Additionally, lessors must accurately estimate depreciation to ensure that lease rates cover the full decline in value while remaining competitive in the market.

Depreciation is an integral aspect of closed-end lease payments. Understanding the concept from both the lessee's and lessor's perspectives allows for informed decision-making and negotiation. By considering factors influencing depreciation, such as time, usage, market conditions, and maintenance, both parties can better assess the value of the leased asset and determine appropriate lease rates. The accurate estimation of residual value further contributes to setting realistic lease payments.

2. Understanding Depreciation in the Context of Vehicle Leasing

Depreciation is a concept that often takes center stage in the world of vehicle leasing, particularly in the context of closed-end lease agreements. Understanding depreciation is crucial for anyone considering leasing a vehicle, as it directly affects lease payments and the overall cost of the lease. In this section, we'll delve deep into the intricacies of depreciation and how it influences closed-end lease payments. We'll explore this multifaceted topic from various perspectives to give you a comprehensive understanding of its implications.

1. Depreciation Basics: At its core, depreciation refers to the decrease in the value of an asset over time. In the context of vehicle leasing, it's the reduction in the car's value during the lease term. Several factors contribute to a vehicle's depreciation, including its make and model, mileage, wear and tear, and market demand. A vehicle's depreciation can be substantial, and this is the primary driver of leasing costs.

2. Residual Value: Residual value is a critical component in the calculation of lease payments. It represents the estimated value of the vehicle at the end of the lease term. The higher the residual value, the lower your monthly payments will be. This is because you're essentially paying for the vehicle's depreciation during the lease term, and a higher residual value means less depreciation to cover.

Example: Let's say you lease a car with a $30,000 initial value and a residual value of $15,000 after a 3-year lease. The depreciation you'll be responsible for is $15,000 ($30,000 - $15,000). This depreciation amount is spread across your lease term.

3. Factors Affecting Depreciation: Several factors influence a vehicle's depreciation rate. These include make and model, brand reputation, market trends, and condition. Luxury vehicles often depreciate more slowly than economy cars due to brand prestige. Moreover, fuel-efficient models might retain their value better as consumers seek eco-friendly options.

4. Mileage Restrictions: Lease agreements typically come with mileage restrictions. Exceeding the agreed-upon mileage can lead to extra charges at the end of the lease. This is directly related to depreciation because higher mileage generally accelerates a vehicle's depreciation rate. The more you drive, the more the car's value decreases.

Example: If your lease allows for 12,000 miles per year, and you drive 15,000 miles a year, you'll likely face excess mileage charges. These charges compensate for the additional depreciation incurred due to the extra miles.

5. wear and tear: Wear and tear on the vehicle also contribute to its depreciation. Scratches, dents, and other damage decrease the car's value. Lease agreements typically outline acceptable wear and tear limits, and any damages beyond those limits may incur extra charges when you return the vehicle.

6. Market Conditions: The broader economic and automotive market also play a role in depreciation. Factors such as gas prices, consumer preferences, and the introduction of new models can impact how quickly a vehicle loses value. For instance, the rising popularity of electric vehicles might affect the depreciation of traditional gasoline-powered cars.

7. Lease Length: The length of your lease term affects how much depreciation you'll be responsible for. A shorter lease term will generally result in lower depreciation, as the vehicle has less time to lose value. However, shorter terms often come with higher monthly payments.

Example: If you lease a vehicle for 24 months, it will likely have a higher residual value compared to a 48-month lease for the same car. This means you'll be responsible for less depreciation over the shorter lease term.

8. lease-End options: When your lease ends, you typically have several options, including purchasing the vehicle at its predetermined residual value, trading it in for a new lease, or simply returning it. Your decision here can further impact how depreciation affects your overall financial situation.

Depreciation is a complex but essential factor to consider when leasing a vehicle. It directly influences your monthly payments and the overall cost of the lease. By understanding the various facets of depreciation and how they relate to your lease agreement, you can make informed decisions that align with your financial goals and preferences.

3. Factors Influencing Depreciation Rates in Closed-End Lease Agreements

One of the most important factors that affect the monthly payments of a closed-end lease is the depreciation rate of the leased vehicle. Depreciation is the loss of value that occurs when a vehicle is used over time. The depreciation rate determines how much the vehicle's value will decrease during the lease term, and therefore how much the lessee will have to pay to cover that loss. Different vehicles have different depreciation rates, depending on various factors such as:

1. Brand and model: Some brands and models are more popular and reliable than others, and therefore retain their value better over time. For example, a Toyota Camry is likely to depreciate less than a Ford Fiesta, because Toyota has a reputation for quality and durability, and Camry is one of the best-selling cars in the US.

2. Age and mileage: The older and more driven a vehicle is, the more it depreciates. This is because older vehicles tend to have more wear and tear, mechanical problems, and outdated features. For example, a 2020 Honda Civic with 10,000 miles on it will depreciate less than a 2018 Honda Civic with 30,000 miles on it, because the former is newer and has less usage.

3. Condition and maintenance: The physical and mechanical condition of a vehicle also affects its depreciation rate. A vehicle that is well-maintained, clean, and free of damage will depreciate less than a vehicle that is poorly-maintained, dirty, and has dents or scratches. For example, a 2019 Chevrolet Malibu that is regularly serviced, washed, and waxed will depreciate less than a 2019 Chevrolet Malibu that is neglected, stained, and rusted.

4. Supply and demand: The market forces of supply and demand also influence the depreciation rate of a vehicle. A vehicle that is in high demand and low supply will depreciate less than a vehicle that is in low demand and high supply. For example, a 2021 Tesla Model 3 will depreciate less than a 2021 Nissan Leaf, because Tesla has a loyal fan base and limited production capacity, while Nissan has a saturated market and excess inventory.

5. Economic factors: The overall state of the economy also affects the depreciation rate of a vehicle. A vehicle that is more fuel-efficient, eco-friendly, and affordable will depreciate less than a vehicle that is less fuel-efficient, eco-unfriendly, and expensive. For example, a 2022 Hyundai Sonata Hybrid will depreciate less than a 2022 Cadillac Escalade, because Hyundai offers better gas mileage, lower emissions, and lower price tag than Cadillac.

These factors are not mutually exclusive, and they may interact with each other in complex ways. For example, a brand that is popular in one region may not be popular in another region, or a model that is in high demand in one season may not be in high demand in another season. Therefore, it is important for lessees to do their research before signing a closed-end lease agreement, and to compare different vehicles based on their depreciation rates. By choosing a vehicle that depreciates less, lessees can save money on their monthly payments and enjoy their lease experience more.

4. The Impact of Vehicle Make and Model on Depreciation and Lease Payments

When it comes to leasing a vehicle, one of the most critical factors that can influence your monthly payments is depreciation. Depreciation is the decrease in a vehicle's value over time, and it plays a significant role in determining how much you'll pay for a closed-end lease. However, it's essential to understand that not all vehicles depreciate at the same rate. The make and model of the vehicle you choose can have a profound impact on both the depreciation rate and, consequently, your lease payments. In this section, we'll delve into the various ways in which the make and model of your chosen vehicle can affect depreciation and, by extension, your closed-end lease payments. We'll explore this topic from multiple perspectives and provide you with valuable insights and examples to help you make informed decisions when it comes to leasing a vehicle.

1. Brand Reputation and Resale Value:

One of the most obvious ways that the make and model of a vehicle affects depreciation is through brand reputation and resale value. Some brands have a reputation for producing vehicles that hold their value well, while others may not fare as favorably. For example, a luxury car from a prestigious brand like Mercedes-Benz or BMW tends to retain its value better than a budget-friendly vehicle from a less renowned manufacturer. This means that if you lease a Mercedes-Benz, you can expect your monthly payments to be more competitive compared to a budget brand vehicle.

2. Market Demand:

The market demand for a specific make and model also plays a crucial role in depreciation. If a particular vehicle is highly sought after, it's likely to depreciate at a slower rate. On the other hand, if there's less demand for a vehicle, it may depreciate more rapidly. For instance, electric vehicles (EVs) have been in high demand due to their eco-friendly features and government incentives. As a result, EVs like the Tesla Model 3 have exhibited slower depreciation, making them attractive options for lease deals.

3. Model Year and Technology:

The age of the vehicle and its technological features significantly impact depreciation. Newer models often have advanced technology, improved safety features, and better fuel efficiency, which can help slow down depreciation. Consider a scenario where you have the choice between leasing a 2023 model with the latest autonomous driving capabilities and a 2020 model without those features. The 2020 model is likely to depreciate faster because it lacks the cutting-edge technology that many consumers desire.

4. Body Style and Vehicle Type:

The body style and type of vehicle can also influence depreciation rates. SUVs, for example, have gained popularity over the years, and their demand has remained strong. If you opt for a compact SUV, it may depreciate more slowly than a traditional sedan, as consumer preferences have shifted towards SUVs. The design and aesthetics of a vehicle also matter, with sportier and more stylish models often retaining their value better.

5. Mileage and Usage:

While the make and model are important, how you use the vehicle can significantly affect depreciation. High mileage, rough usage, and lack of proper maintenance can accelerate depreciation. To minimize depreciation, ensure that you stick to your lease mileage limits and maintain the vehicle according to the manufacturer's recommendations.

6. Special Editions and Limited Production Models:

Special edition or limited production models often maintain their value better than standard versions. These unique models can become collector's items, making them less susceptible to rapid depreciation. For example, a limited-edition sports car like the Porsche 911 GT3 RS may depreciate much more slowly than a standard Porsche 911.

7. Regional Variations:

It's important to note that the impact of make and model on depreciation can vary by region. Some vehicles may depreciate faster in one area due to local preferences and market conditions, while they may hold their value better in another region. Be sure to consider regional factors when choosing a vehicle for a closed-end lease.

8. Safety and Reliability:

A vehicle's safety and reliability ratings can also affect depreciation. A vehicle known for its top-notch safety features and dependability is likely to maintain its value better. For example, a Toyota Camry, known for its reliability, is likely to depreciate more slowly than a less reliable competitor.

The make and model of the vehicle you choose for a closed-end lease can have a profound impact on depreciation and lease payments. By considering brand reputation, market demand, model year, body style, mileage, special editions, regional variations, safety, and reliability, you can make a more informed decision and potentially secure a more favorable lease deal. Remember that it's essential to evaluate your individual needs and preferences to find the right balance between a vehicle you love and one that fits your budget.

5. How Mileage and Usage Affect Depreciation and Lease Costs?

One of the factors that affects the depreciation of a vehicle and the lease costs is the mileage and usage. The more miles a vehicle is driven, the more wear and tear it suffers, and the lower its resale value becomes. This means that the lease payments will be higher for a vehicle that is driven more than the average mileage per year, which is usually around 12,000 to 15,000 miles. Conversely, a vehicle that is driven less than the average mileage will have a higher resale value and lower lease payments. However, there are some other aspects to consider when it comes to mileage and usage, such as:

1. Mileage allowance and penalties: A lease contract specifies the maximum mileage allowance for the lease term, which is usually between 36 and 48 months. If the lessee exceeds this limit, they will have to pay a penalty fee for every extra mile driven, which can range from $0.10 to $0.25 per mile. For example, if the lease contract allows 12,000 miles per year and the lessee drives 15,000 miles in the first year, they will have to pay $300 to $750 in penalty fees at the end of the lease term. Therefore, it is important to estimate the annual mileage before signing a lease contract and choose a mileage allowance that suits the driving habits.

2. Mileage adjustment and trade-in: A lease contract can also include a mileage adjustment clause, which allows the lessee to adjust the mileage allowance during the lease term, depending on their actual usage. This can help the lessee avoid paying penalty fees or benefit from a lower lease payment if they drive less than expected. For example, if the lessee realizes that they are driving 10,000 miles per year instead of 12,000, they can request a mileage adjustment and reduce their lease payment accordingly. However, this option may not be available for all lease contracts and may incur some fees or charges. Another option is to trade in the leased vehicle for another one before the lease term ends, which can also help the lessee avoid penalty fees or take advantage of a higher resale value. However, this option may also involve some fees or charges and may not be possible for all lease contracts.

3. Mileage and maintenance: The mileage and usage of a vehicle also affect its maintenance costs and requirements. A vehicle that is driven more frequently will need more frequent oil changes, tire rotations, brake inspections, and other routine services, which can add up to the lease costs. Moreover, a vehicle that is driven more miles will be more likely to suffer from mechanical problems or damages, which may not be covered by the warranty or the lease contract. Therefore, the lessee will have to pay for the repairs or replacements out of their own pocket, which can also increase the lease costs. Therefore, it is advisable to follow the manufacturer's recommended maintenance schedule and keep the vehicle in good condition throughout the lease term.

6. The Role of Residual Value in Determining Lease Payments

One of the factors that affects the monthly payments of a closed-end lease is the residual value of the vehicle. The residual value is the estimated value of the vehicle at the end of the lease term, based on factors such as depreciation, mileage, condition, and market demand. The residual value is determined by the leasing company at the beginning of the lease and is usually expressed as a percentage of the manufacturer's suggested retail price (MSRP) of the vehicle. The higher the residual value, the lower the monthly payments, and vice versa.

The role of residual value in determining lease payments can be explained as follows:

1. The lease payments are calculated by subtracting the residual value from the capitalized cost (the negotiated price of the vehicle) and dividing the result by the number of months in the lease term. For example, if the capitalized cost of a vehicle is $30,000, the residual value is 50% of the MSRP of $40,000, which is $20,000, and the lease term is 36 months, the monthly payment is ($30,000 - $20,000) / 36 = $277.78.

2. The residual value also affects the amount of depreciation that the lessee pays for during the lease term. Depreciation is the difference between the capitalized cost and the residual value, and it represents the loss of value of the vehicle due to wear and tear, age, and mileage. The lower the residual value, the higher the depreciation, and the higher the monthly payments. For example, if the residual value of the vehicle in the previous example is 40% of the MSRP, which is $16,000, the depreciation is $30,000 - $16,000 = $14,000, and the monthly payment is $388.89.

3. The residual value also determines the amount of equity that the lessee has in the vehicle at the end of the lease term. Equity is the difference between the residual value and the actual market value of the vehicle at the end of the lease. If the market value is higher than the residual value, the lessee has positive equity, which means that the vehicle is worth more than what the leasing company expected. The lessee can then buy the vehicle at the residual value, sell it at the market value, and pocket the difference, or trade it in for another vehicle and use the equity as a down payment. If the market value is lower than the residual value, the lessee has negative equity, which means that the vehicle is worth less than what the leasing company expected. The lessee can then return the vehicle to the leasing company and walk away, or pay the difference between the residual value and the market value if they want to buy or trade the vehicle.

The residual value is an important factor to consider when leasing a vehicle, as it affects the monthly payments, the depreciation, and the equity. The lessee should compare the residual values of different vehicles and leasing companies, and choose the one that offers the best value for their needs and preferences.

7. Strategies for Minimizing Depreciation and Lowering Lease Expenses

One of the factors that affect the monthly payments of a closed-end lease is the depreciation of the vehicle. Depreciation is the difference between the vehicle's residual value and its capitalized cost. The residual value is the estimated value of the vehicle at the end of the lease term, while the capitalized cost is the negotiated price of the vehicle plus any fees and taxes. The higher the depreciation, the higher the monthly payments. Therefore, minimizing depreciation and lowering lease expenses can help you save money and get the best deal on your lease. Here are some strategies for doing so:

1. Choose a vehicle that has a high residual value. Some vehicles retain their value better than others, depending on factors such as brand, model, demand, supply, features, and reliability. Generally, vehicles that have a high demand, low supply, and good reputation will have a higher residual value than those that have a low demand, high supply, and poor reputation. You can research the residual values of different vehicles online or ask the dealer for their estimates. For example, according to Edmunds, the 2023 Toyota Camry has a residual value of 56% after three years, while the 2023 Ford Fusion has a residual value of 39% after three years. This means that the Camry will depreciate less and have lower monthly payments than the Fusion.

2. Negotiate a lower capitalized cost. The capitalized cost is the price of the vehicle that you agree to pay at the beginning of the lease. The lower the capitalized cost, the lower the depreciation and the monthly payments. You can negotiate the capitalized cost by comparing prices from different dealers, asking for discounts and incentives, trading in your old vehicle, or making a down payment. However, be careful not to pay too much upfront, as you may lose money if the vehicle is totaled or stolen during the lease term. For example, if you lease a 2023 Honda Civic for $20,000 with a residual value of 50%, your depreciation will be $10,000. If you make a down payment of $2,000, your capitalized cost will be $18,000 and your depreciation will be $8,000. This will lower your monthly payments by about $55, assuming a 36-month lease and a 5% interest rate. However, if the Civic is totaled or stolen, you will lose the $2,000 that you paid upfront, as the insurance company will only pay the market value of the vehicle, which may be less than the residual value.

3. Avoid excess mileage and wear and tear charges. Another way to minimize depreciation and lower lease expenses is to avoid driving more than the allowed mileage and causing damage to the vehicle. Excess mileage and wear and tear charges are fees that the leasing company will charge you at the end of the lease term if you exceed the mileage limit or return the vehicle in poor condition. These fees can add up to hundreds or thousands of dollars, depending on the extent of the overage or damage. To avoid these fees, you should keep track of your mileage, follow the maintenance schedule, and repair any minor damages before returning the vehicle. For example, if you lease a 2023 Nissan Rogue for $25,000 with a residual value of 45% and a mileage limit of 12,000 miles per year, your depreciation will be $13,750. If you drive 15,000 miles per year, you will exceed the mileage limit by 9,000 miles over the 36-month lease term. Assuming a charge of 25 cents per mile, you will have to pay $2,250 in excess mileage fees at the end of the lease. This will increase your effective depreciation to $16,000 and your monthly payments by about $62, assuming a 5% interest rate.

8. The Importance of Regular Maintenance and Care in Reducing Depreciation

One of the factors that affects the depreciation of a vehicle is the condition of the vehicle at the end of the lease term. The lessor will inspect the vehicle for any damages, excessive wear and tear, or modifications that are not covered by the lease agreement. The lessee will be responsible for paying any fees or charges for repairing or restoring the vehicle to its original state. Therefore, regular maintenance and care of the vehicle can help reduce the depreciation and lower the lease payments. Here are some tips on how to maintain and care for your leased vehicle:

1. Follow the manufacturer's recommended service schedule. This will ensure that your vehicle is running smoothly and efficiently, and prevent any major problems from developing. You can find the service schedule in your owner's manual or on the manufacturer's website. Some lease agreements may require you to follow a specific service plan, so check your contract before you schedule any service appointments.

2. Keep records of all the service and maintenance you perform on your vehicle. This will help you prove that you have complied with the lease terms and that you have taken good care of your vehicle. You can use receipts, invoices, or online service history reports as evidence. You may also want to keep a log book of your mileage, fuel consumption, and any repairs or replacements you make.

3. Avoid any modifications or alterations that are not approved by the lessor. This includes adding any accessories, parts, or features that are not original to the vehicle, such as spoilers, decals, tinted windows, or custom wheels. These modifications may affect the performance, safety, or value of the vehicle, and may void the warranty or the lease agreement. If you want to personalize your vehicle, you should consult with your lessor first and get their written consent.

4. Keep your vehicle clean and tidy. This will not only make your driving experience more pleasant, but also prevent any stains, odors, or damages to the interior and exterior of the vehicle. You should wash your vehicle regularly, especially after driving in harsh weather conditions, and wax it occasionally to protect the paint. You should also vacuum the seats and carpets, wipe the dashboard and windows, and remove any trash or clutter from the vehicle.

5. Drive your vehicle carefully and responsibly. This will reduce the risk of accidents, injuries, or violations that may result in fines, penalties, or legal actions. You should obey the traffic laws, follow the speed limits, and avoid any aggressive or reckless driving behaviors. You should also avoid driving on rough or unpaved roads, or in areas that are prone to flooding, snow, or ice. You should also park your vehicle in a safe and secure location, and avoid leaving it unattended for long periods of time.

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9. The Significance of Depreciation in Closed-End Lease Payments

Depreciation is one of the most important factors that affect the monthly payments of a closed-end lease. A closed-end lease is a type of lease where the lessee pays a fixed amount every month and returns the vehicle to the lessor at the end of the lease term. The lessee is not responsible for the residual value of the vehicle, which is the estimated value of the vehicle at the end of the lease term. The lessor, on the other hand, bears the risk of the residual value and has to sell the vehicle in the market to recover the cost.

The monthly payments of a closed-end lease are calculated based on the difference between the capitalized cost and the residual value of the vehicle, divided by the number of months in the lease term. The capitalized cost is the negotiated price of the vehicle plus any fees and taxes. The residual value is determined by the lessor based on the expected depreciation of the vehicle over the lease term. Depreciation is the loss of value of the vehicle due to factors such as age, mileage, wear and tear, and market demand.

The significance of depreciation in closed-end lease payments can be understood from different perspectives, such as:

1. The lessee's perspective: The lessee benefits from a lower depreciation rate, as it means a higher residual value and lower monthly payments. The lessee can also avoid the hassle of selling or trading in the vehicle at the end of the lease term, as the lessor takes care of it. However, the lessee has to abide by the mileage and condition restrictions imposed by the lessor, as exceeding them can result in additional charges. The lessee also has to pay for any repairs or maintenance that are not covered by the warranty or the lease agreement.

2. The lessor's perspective: The lessor benefits from a higher depreciation rate, as it means a lower residual value and higher monthly payments. The lessor can also make a profit by selling the vehicle at a higher price than the residual value at the end of the lease term. However, the lessor has to bear the risk of the residual value and the market demand for the vehicle. The lessor also has to incur the cost of reconditioning and remarketing the vehicle after the lease term.

3. The manufacturer's perspective: The manufacturer benefits from a lower depreciation rate, as it means a higher demand and resale value for its vehicles. The manufacturer can also offer incentives and subsidies to the lessor and the lessee to promote its vehicles and increase its market share. However, the manufacturer has to ensure the quality and reliability of its vehicles, as any defects or recalls can affect the reputation and the residual value of its vehicles.

As an example, let us compare the monthly payments of a closed-end lease for two vehicles with different depreciation rates. Assume that both vehicles have a capitalized cost of $30,000, a lease term of 36 months, and an interest rate of 5%. The first vehicle has a depreciation rate of 15% per year, which means its residual value after 36 months is $15,075. The second vehicle has a depreciation rate of 25% per year, which means its residual value after 36 months is $9,843.75. The monthly payments of the closed-end lease for the first vehicle are $416.25, while the monthly payments of the closed-end lease for the second vehicle are $559.38. Therefore, the lower depreciation rate of the first vehicle results in lower monthly payments for the lessee and higher residual value for the lessor.