Tips for Leasing a Car

[firebug]

Originally Posted by Sliver

Unless I'm missing something the guy financing the car is further ahead. He's put $4944 more in than the leasing guy, but as long as he has more than $4944 equity in the car - which I think he would - he's ahead of the guy leasing.

How could he have more equity? The cars are worth the same, and the lessee has the same ability to extract equity (value - buyout) as individual B.

Here's the trick, the value of the car is independent of how it is financed. What is important, to me at least(excuse the pun), is how each individual got to that position.

Why would someone want equity in a depreciating asset?

Client A has their equity in a bank account or other investment (or at least they could).

Originally Posted by blankall

Not everyone has an extra 30k in cash laying around.

If person A uses their vehicle for work, they can write off the lease payment. Person B and C can only write off interest and depreciation of the vehicle.

You also have to factor in the opportunity cost of paying 30k upfront. If I can invest that money in an investment that pays out more than 3.9 or 2.9% I can still come out ahead of the financed guys.

Person B and C can also run the risk of a major repair once the warranty expires.

Leasing is a better option if you can write off a decent sized portion of your payments.

I would propose that leasing is a better option for most people regardless of their tax position.

Those who claim 'equity' in their vehicle is valuable are really just fans of forced savings (into a lousy financial vehicle).

Originally Posted by Dan02

Did guy A decide he was going to forgoe having a car and walk for year 5?

Nope, but 'A' get's an option that the other two do not.

In my example the cars were worth more than the lessee's buyout. What if, 40 months into their ownership the market for their vehicle became tainted (recalls, poor reliability, tastes shifting, etc.) and at 48 months the vehicles were each worth $10,000 instead.

In that circumstance clients B & C take a depreciation loss of $1,500 that A avoids. This is why the American manufacturers quit offering leases. Each person that leased often saved 1,500 - 2,500 in depreciation values that had to get eaten by the leasing companies.

Originally Posted by ken0042

No, he has paid $4944 more that "A", and has a few hundred in equity. Keep in mind he still owes around $12K for the car; and it is only worth $500.

Leasing really makes sense if you plan on getting rid of the car in 3,4, or 5 years. Because you are only financing the difference between the price of the car and the trade in value, you end up paying a lot less in interest.

One major downside of leasing; if your circumstances change it is a lot harder to get out from under your payments. I have a 2 month old vehicle which we bought; and if something happened where we couldn't afford it; I could sell it a lot easier than trying to get out of a lease.

First off, due to my error, only 6 grand or so is still owed on the financed vehicle.

Second, a 2 month old vehicle is going to be tough to get rid of without a major financial loss no matter what

[ken0042]

Originally Posted by Bring_Back_Shantz

Ahhh, I've never heard of anyone getting money back when they return a lease, that's kind of how they work.
Were you actually expecting the dealership to give you part of your down payment back?

Don't many leases require a security deposit?

If so- that is what the person should be expecting to get back.

[ken0042]

Originally Posted by firebug

Second, a 2 month old vehicle is going to be tough to get rid of without a major financial loss no matter what

Yes, I would not see any of my down payment back. I guess my thinking was that right now I could pretty much "walk away" with what I have paid gone. With a lease you also have a contract to get out from under.

[Sliver]

Originally Posted by ken0042

No, he has paid $4944 more that "A", and has a few hundred in equity. Keep in mind he still owes around $12K for the car; and it is only worth $500.

Leasing really makes sense if you plan on getting rid of the car in 3,4, or 5 years. Because you are only financing the difference between the price of the car and the trade in value, you end up paying a lot less in interest.

One major downside of leasing; if your circumstances change it is a lot harder to get out from under your payments. I have a 2 month old vehicle which we bought; and if something happened where we couldn't afford it; I could sell it a lot easier than trying to get out of a lease.

I know he still owes $12,000, but we're talking about the value he has at 4 years. Anyway, until one of us goes to the effort of researching the depreciation of a car, we're both making up numbers to suit our argument.

Another obvious fact seemingly lost on the leasing crowd is cars don't implode after 4 years. So while you'll be paying monthly leasing costs until you're 80, the financing crowd will spend a lot less - I think - over their life by owning their cars longer and paying less. It would be nice to see somebody unbiased take the time to calculate the average costs of these things over a lifetime, which is actually what matters, instead of taking a four or five-year snapshot.

Basically if we're strictly talking about the economics of driving, buying or leasing, a brand new car makes no financial sense whatsoever. It's used two minutes after you drive it off the lot, and most of the depreciation occurs in the first 2-3 years so you're much better off buying a used car.

I'm also not buying into the my wife and kids will get stranded story for needing a new car. You could easily buy a better used low-miler car for way cheaper than a new car. I mean seriously, what is a loaded Mazda3 worth (I'm using that as an example because I know a lot of people here drive that car)? I just priced one out on mazda.ca for over $30,000. For a friggin' economy car. There are four-year old used Infiniti G35xes for $8,000 less with less than 70,000 kms which is nothing for that car with twice the safety features, including AWD.

Also, you can extend the warranty on any car and you can buy an AMA membership for peanuts if you're that concerned about it. It's highly doubtful many modern cars would leave you stranded on the side of Deerfoot, however.

[Bring_Back_Shantz]

Originally Posted by ken0042

Don't many leases require a security deposit?

If so- that is what the person should be expecting to get back.

It's not a deposit, it's a down payment. Big difference.

[Sliver]

Originally Posted by firebug

How could he have more equity? The cars are worth the same, and the lessee has the same ability to extract equity (value - buyout) as individual B.

Here's the trick, the value of the car is independent of how it is financed. What is important, to me at least(excuse the pun), is how each individual got to that position.

The lessee doesn't own the car, so he can't extract any equity from it...he's been renting it. The guy financing has the potential to have equity in the car, but until one of us takes the time to track the depreciation of many cars to come up with averages it's a moot point. You're saying he wouldn't have any equity, I'm saying he might have some.

[bizaro86]

Originally Posted by Sliver

The lessee doesn't own the car, so he can't extract any equity from it...he's been renting it. The guy financing has the potential to have equity in the car, but until one of us takes the time to track the depreciation of many cars to come up with averages it's a moot point. You're saying he wouldn't have any equity, I'm saying he might have some.

But he has the OPTION to buy it. If his option to buy price is similar to what the total cost of financing is, then he's better off, since he can decide whether it's worth buying at that point or not.

If the car was worth 15k for some reason, he could do the buyout at 12 and be 3k ahead. If it was only worth 9k, he could give it back, and go buy a used one for 9k if he still wanted a similar vehicle.

[ken0042]

Originally Posted by Bring_Back_Shantz

It's not a deposit, it's a down payment. Big difference.

I think there is both on some vehicles:
http://www.leaseguide.com/lease09.htm

[TylerSVT]

Originally Posted by DementedReality

i dont believe this and the proof is pretty obvious.

if leasing was indeed fleecing, why did American car companies STOP leasing cars right about the same time they hit financial hardship?

because it was TOO good for the consumer. if it was so bad for the consumer, no way they would eliminate leasing as an option.

It probably has to deal with stupid low interest rates. If you are financing at a low interest rate, the car company still gets total value of the car. If you are simply leasing, the car company is losing out on a lot of value in payments.

[Sliver]

Originally Posted by bizaro86

But he has the OPTION to buy it. If his option to buy price is similar to what the total cost of financing is, then he's better off, since he can decide whether it's worth buying at that point or not.

If the car was worth 15k for some reason, he could do the buyout at 12 and be 3k ahead. If it was only worth 9k, he could give it back, and go buy a used one for 9k if he still wanted a similar vehicle.

Yes I realize if you make up numbers to put you $3000 ahead you will appear to be $3000 ahead.

[Bring_Back_Shantz]

Originally Posted by ken0042

Don't many leases require a security deposit?

If so- that is what the person should be expecting to get back.

Yeah, fair enough. But when Sylvan was talking about putting money down I assumed he meant the down payment.
When I leased my car the topic of a security deposit didn't even come up.

[DementedReality]

Originally Posted by TylerSVT

It probably has to deal with stupid low interest rates. If you are financing at a low interest rate, the car company still gets total value of the car. If you are simply leasing, the car company is losing out on a lot of value in payments.

no it has to do with the fact that they didnt want the cars back!

they knew they would be worth less then the residual and didnt want the risk of trying to sell their own used cars.

so a company with all the marketing and sales infrastructure doesnt want to own for resale their 4 year old car, why would I?

[Sliver]

Originally Posted by DementedReality

no it has to do with the fact that they didnt want the cars back!

they knew they would be worth less then the residual and didnt want the risk of trying to sell their own used cars.

so a company with all the marketing and sales infrastructure doesnt want to own for resale their 4 year old car, why would I?

Their residual value was uncertain because the car companies were heading for bankruptcy so the lenders saw too much risk.

[Sliver]

Originally Posted by bizaro86

But he has the OPTION to buy it. If his option to buy price is similar to what the total cost of financing is, then he's better off, since he can decide whether it's worth buying at that point or not.

If the car was worth 15k for some reason, he could do the buyout at 12 and be 3k ahead. If it was only worth 9k, he could give it back, and go buy a used one for 9k if he still wanted a similar vehicle.

One other thing because I know I was originally dismissive of your point. It's true you can have the option to buy for less than the value of the vehicle. I lease a Tacoma through my work right now and I'm expecting the buy-out price to be lower than the value of the truck, in which case we will either buy it and keep it, or buy and sell it.

It can also happen the other way - before the Tacoma, our Ranger was off-lease in 2008 and the buy-out price was more than the value, so obviously we gave it back and weren't out anything.

What's strange about a pro-lease argument to me is the point you raise as being such a benefit is ultimately to buy used at the end of the term. So it seems like we agree on that point - buying a 2-4 year old car makes the most sense out of any of the options.

After this lease is up I don't think we're going to lease a truck again. I'd rather buy something used, forgo the tax write-off a lease provides, and I think we'll be ahead of the game.

[DementedReality]

Originally Posted by Sliver

One other thing because I know I was originally dismissive of your point. It's true you can have the option to buy for less than the value of the vehicle. I lease a Tacoma through my work right now and I'm expecting the buy-out price to be lower than the value of the truck, in which case we will either buy it and keep it, or buy and sell it.

It can also happen the other way - before the Tacoma, our Ranger was off-lease in 2008 and the buy-out price was more than the value, so obviously we gave it back and weren't out anything.

What's strange about a pro-lease argument to me is the point you raise as being such a benefit is ultimately to buy used at the end of the term. So it seems like we agree on that point - buying a 2-4 year old car makes the most sense out of any of the options.

After this lease is up I don't think we're going to lease a truck again. I'd rather buy something used, forgo the tax write-off a lease provides, and I think we'll be ahead of the game.

to each his own, i dont really want to own a used car. 4 years is when things start needing repairs and such and all it takes is one major repair to equal the cost of an entire years lease payment. it happened to me last time i owned a used car.

also, in my world, i WANT the car to be worth LESS then the buyout. this means I was subsidized for the term of the lease and should have been paying more per month. thats the point of why i lease, so i have the least possible contractual obligation to that car.

[bizaro86]

Originally Posted by Sliver

Yes I realize if you make up numbers to put you $3000 ahead you will appear to be $3000 ahead.

I didn't make up the numbers, they were upthread. I thought someone said they got them from Toyota's website? I don't really care, I only buy cars for cash, and keep them a long time, so leasing is irrelevant for me.

But depending on the exact numbers, leasing could be better than financing. Without exact numbers on a specific vehicle, it's like trying to argue which girl is prettier based on their business cards.

[bizaro86]

Originally Posted by Sliver

One other thing because I know I was originally dismissive of your point. It's true you can have the option to buy for less than the value of the vehicle. I lease a Tacoma through my work right now and I'm expecting the buy-out price to be lower than the value of the truck, in which case we will either buy it and keep it, or buy and sell it.

It can also happen the other way - before the Tacoma, our Ranger was off-lease in 2008 and the buy-out price was more than the value, so obviously we gave it back and weren't out anything.

What's strange about a pro-lease argument to me is the point you raise as being such a benefit is ultimately to buy used at the end of the term. So it seems like we agree on that point - buying a 2-4 year old car makes the most sense out of any of the options.

After this lease is up I don't think we're going to lease a truck again. I'd rather buy something used, forgo the tax write-off a lease provides, and I think we'll be ahead of the game.

I don't think we actually disagree. The only situation where leasing could make sense is if you want a new vehicle every 2-5 years. It's a big assumption, because it's a lot cheaper to buy used and/or keep your vehicles for a long time. In that specific situation, the main value you get is that someone else is taking the risk of resale value for you, but you probably pay a bit more on average to avoid that risk.

I actually liken it to fixed vs variable mortgage rates. Variable is cheaper on average, but a bit more risky. Leasing a car is probably more expensive on average, but someone else is taking the risk the vehicle will be worth less than expected at the end of the term.

[Travis Munroe]

This thread is too funny.... half the people who are saying leasing is "fleecing" obviously did not read the very first post.
As someone who is self employed there are greater financial gains in terms of write-offs to lease a vehicle.
I myself (self employed) just finished shopping around for a new car and looked at the option to lease. My biggest issue is not owning out right and adding another payment to the already long list.

[DementedReality]

Originally Posted by Realtor 1

This thread is too funny.... half the people who are saying leasing is "fleecing" obviously did not read the very first post.
As someone who is self employed there are greater financial gains in terms of write-offs to lease a vehicle.
I myself (self employed) just finished shopping around for a new car and looked at the option to lease. My biggest issue is not owning out right and adding another payment to the already long list.

whats the problem with a payment?

even if i had the cash, i would still prefer to dole it out at a rate of 1/48 per month then to hand it all over in one lump sum.

assuming low interest rate enviroment of course.

i guess, i just want as little money out of my pocket on a cash flow basis to run the car. a lease fixes my budget annually, makes it predictable and doesnt tie me to owning a depreciating (non) assett.

to each his own i suppose.

[Travis Munroe]

Yea, i see your point of view and as you mentioned, to each his own.