What Is Net Advantage to Leasing (NAL)?
Net advantage to leasing (NAL) refers to the total monetary savings that would potentially result from a person or a business choosing to lease an asset as opposed to purchasing it outright. The benefits of leasing are usually determined by comparing the net present value of purchasing the asset outright to the net present value of leasing it. A method called the friction cost analysis may also be used to measure both the direct and indirect costs; friction costs vary by the buyer.
How Net Advantage to Leasing (NAL) Works
Net advantage to leasing is a measure that can be used by both individuals and businesses when calculating the differences in the cost of buying versus leasing. Both leasing and buying have a variety of direct and indirect costs. These costs can be analyzed and understood through net present value calculations and a friction cost analysis.
- Net advantage to leasing (NAL) refers to the total monetary savings that would potentially result from a person or a business choosing to lease an asset as opposed to purchasing it outright.
- Net advantage to leasing (NAL) is arrived at by comparing the net present value of each option and choosing the more favorable option.
- Friction cost analysis is often used in conjunction with net present value to account for both direct and indirect costs that may arise from either a lease or purchase.
A net present value calculation is a good way to identify the direct cost comparison of leasing versus buying a car, for example. To obtain an accurate net present value calculation, buyers must determine an estimated timeframe for the comparison. If the asset under consideration is a car, this timeframe would be based on the standard lifecycle of the purchased vehicle. The calculation would also include the purchased vehicle’s terminal salvage value.
From the ownership perspective, net present value calculations will include the payments for an auto loan, the expected interest rate, and the number of payments required for the loan. (Interest rates will vary based on a borrower’s credit quality.)
From the leasing perspective, net present value calculations will include the contracted monthly payment and the leasing timeframe, which typically ranges from one to three years.
With a net present value calculation, buyers can calculate the net present value of their investment over the full lifecycle and compare the average annual cost. Generally, all things equal, leasing will typically have a lower cost (assuming an auto loan would be required to purchase the vehicle).
A friction cost analysis allows an individual to integrate both direct and indirect costs into the net advantage of leasing calculations. Friction cost analysis can be derived from the base net present value calculations. An individual can adjust the value of an asset based on certain assigned measures of indirect costs, including the advantage of trading for a new car after the lease or the costs of holding a car through its full lifecycle.
Generally, if a consumer opts for leasing over buying, this choice is made on the basis of the potential cost savings, added benefits, and lower monthly expenses.
However, even if the net present value calculations of a lease appear favorable to a purchase, certain rights that come with ownership–such as the right to alter or re-sell an item–are not present with leased items (because leased items are still owned by the lessor).