Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

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Wannaretireearly
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Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Wannaretireearly »

Always bought relatively good cars for under $40k out the door.
No issues, good cars, Toyota & Honda currently.

Been thinking (dreaming?) about leasing a luxury car. (5 series, 7 series, E class? World is my oyster!)

1. What are peoples honest thoughts about leasing an expensive luxury car, personal experience with leasing would be great (pitfalls etc)
My thoughts: Life is short, cars are now very complex and have high maintenance costs, its nice to drive new/different cars, thinking along the same reasons why people rent vs. buy a house, life is short...

2. At what point does Leasing actually make (some) financial sense?
My thoughts: for a $60k car (5 series example). I would pay ~$70k out the door in CA (Taxes etc). If I can lease that same car for ~$15k total cost over 3 years (25% of the out of the door cost), that seems reasonable. Essentially for the out the door cost ($70k) I get to lease for 12 years and rotate cars every 3 years. Can I get this deal? I dont know! Perhaps some kind folks can share details of their total lease costs over 3 years and let us know what % (estimate) of the total out the door (buy) cost this ended up being.

Cheers! :sharebeer :D Its almost Friday for us working stiffs!
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Jack FFR1846
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Jack FFR1846 »

I know of only one time where I saw a lease deal that made sense.

This was the owner of a rep company where I was technical support for one of their rep'd companies. The owner was driving a very high end BMW. It was leased by the business at a rate of $10,000 per month with a $1 residual value. After 1 year of the business leasing the car, he bought it personally for $1.

If you are not doing that, you're paying acquisiton fee and surrender fee if nothing else. You could simply buy the car and trade it when you want to trade it. If you do this and want to keep it longer, you're not locked into a lease already. If you're leasing because you can't afford the car, then you can't afford the car.
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Zabar
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Zabar »

Jack FFR1846 wrote:The owner was driving a very high end BMW. It was leased by the business at a rate of $10,000 per month with a $1 residual value. After 1 year of the business leasing the car, he bought it personally for $1.
That strikes me as a nice way to trigger an IRS audit!

Most leases, in my opinion, are suckers' bets. However, I once leased a car using the approach--although not at that extreme--that JackFFR1846 describes above. I owned my own business, and had that business lease a car (2004 Saab 9.5) with a three-year lease in which I prepaid for 20,000 miles/year even though I actually drove it for only about 10,000 miles/year. The residual value at the end of the lease reflected the prepaid 60,000 miles rather than the actual 30,000, which allowed me to buy it for significantly less than its actual value. The benefit came because the lease payments were made with pretax money, while the purchase was made with after-tax money.

A friend of mine, who has an eight-figure net worth, leases Ferraris and Bentleys because, he says, he doesn't want to have a lot of money tied up in a single asset of that type.
Last edited by Zabar on Thu Mar 20, 2014 5:16 pm, edited 1 time in total.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by tennisplyr »

I used to own my cars but for about the last 10 years I've leased and I like it. First of all I build all costs into the monthly lease so no upfront out of pocket and also if I total the car after a year there are no losses from upfront costs. Also love having a new car every few years, even the less luxurious models are nice. Also virtually no maintenance like tires even my Accord has free inspections, oil changes and roadside assist. A dealer relative of mine said why would you ever own a depreciating asset?
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ryuns
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ryuns »

If I were in that market, I'd certainly consider a lease for BMW or Benz. Status cars that you mostly want to own when they're nice anyway, that tend to have maintenance issues. If, on the other hand, I just wanted a fiscally responsible way to own a luxury car, I'd buy something a little more reasonable like a Lexus ES and try to own for about 10 years. That'd be in the neighborhood of $4k/yr - a decent figure when you ultimately sell.

Keep in mind other gotchas with leases, like limits on annual mileage. It would be a bummer to learn you couldn't take your summer road trip in your sweet Benz because of that lease!
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Wannaretireearly
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Wannaretireearly »

Thank you! Would love to hear from others
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by poker27 »

If you are selling cars every few years, then I could see leasing make financial sense. But of course it only makes financial sense because of habit. Of course you get the added non financial bonus of enjoying new cars and not having to do maintenance.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ClevrChico »

Car salesmen seem extremely happy when they learn you're going to lease. They're borderline giddy.

When I've bought for cash, they are in an okay mood, but obviously just want to finish the transaction and catch bigger fish.

Where do you think the profit is?

I used to hate leasing, but understanding the money could be invested, making money to pay some of the lease, it makes a little more sense. For complex luxury cars that you want to own for a short time, it could be worth it.
Last edited by ClevrChico on Thu Mar 20, 2014 8:22 pm, edited 1 time in total.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by sambb »

I have always bought, and have owned several high end european cars, and several reliable japanese family sedans.
I often get bored and switch cars ever ~3 years
For this reason, I calculated - I either need to keep cars for 6 years or lease every 3 years. Its that simple.
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dm200
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by dm200 »

In my opinion and experience, as well as a little knowledge of the inside nuts and bolts, car leasing vs financing/buying is nearly nothing like home rent vs. buy.

While I have stated this information (and my opinions, based on what I believe are facts), others post different opinions - many of which I believe incorrect.

First the FACTS - a car lease, under the covers, is a balloon loan amortized over an extended period (perhaps 84 - 96 months), with the balloon due at the completion of the lease (say 36 months) in an amount that is keyed to the guaranteed "value" at the termination of the lease. Leases are financed by the same kinds of lenders that finance autos with purchasers - banks, credit unions, auto company finance arms. The leasing company sets the value with the goal of not losing money - like a bet. The person leasing the car pays for the interest on the "loan" (under the covers), as well as other costs with leasing. The apparent low payment is, primarily, due to this being a balloon loan. There is NO free lunch for personal leasing. There may be added taxes in some jurisdictions. The interest rate is, as far as I know, not visible to the person leasing the car.

Those leasing cars pay pretty much the same operating costs as a purchaser. There are significant penalties for turning in a car early and for exceeding the number of miles specified in the lease. if you drive fewer miles than allowed, you are paying for miles not driven. My conclusion is that leasing is "smoke and mirrors" and "self delusion" on the part of the person leasing. Just as in any type of bet (or prediction of the future), there may be times when leasing companies misjudge the value of cars at the end of the lease - so occasionally, leasing individuals might get MORE than the market value of a car. BUT - that is just a roll of the dice and it could be the other way around.

As far as I know, the ONLY case where leasing is (or could be) a good deal is for business use vehicles because of tax advantages - but I am not an expert on that.

For personal use, it seems to me that most of us are not, or will not be able, to predict that a leased car will be driven the "right" or optimum number of miles or that circumstances will not change during the lease.

If you want a new car regularly, I would finance it with low rate new car financing and get the best deal available in purchasing the car. THEN, you have the flexibility to get the next new car when you want/need to get one. There is NO FREE LUNCH! The added "work" done in the leasing process is not free. Someone pays for that -- and it is likely to be YOU.

If you want a new car every 2, 3 or 4 years - that's fine. Just admit that you want one (or need one) and are willing to pay for it. Just don't delude yourself (or others here) that leasing is a better deal financially. it is NOT. - with the possible exception of business use.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Aish »

dm200 wrote:In my opinion and experience, as well as a little knowledge of the inside nuts and bolts, car leasing vs financing/buying is nearly nothing like home rent vs. buy.

While I have stated this information (and my opinions, based on what I believe are facts), others post different opinions - many of which I believe incorrect.

First the FACTS - a car lease, under the covers, is a balloon loan amortized over an extended period (perhaps 84 - 96 months), with the balloon due at the completion of the lease (say 36 months) in an amount that is keyed to the guaranteed "value" at the termination of the lease. Leases are financed by the same kinds of lenders that finance autos with purchasers - banks, credit unions, auto company finance arms. The leasing company sets the value with the goal of not losing money - like a bet. The person leasing the car pays for the interest on the "loan" (under the covers), as well as other costs with leasing. The apparent low payment is, primarily, due to this being a balloon loan. There is NO free lunch for personal leasing. There may be added taxes in some jurisdictions. The interest rate is, as far as I know, not visible to the person leasing the car.

Those leasing cars pay pretty much the same operating costs as a purchaser. There are significant penalties for turning in a car early and for exceeding the number of miles specified in the lease. if you drive fewer miles than allowed, you are paying for miles not driven. My conclusion is that leasing is "smoke and mirrors" and "self delusion" on the part of the person leasing. Just as in any type of bet (or prediction of the future), there may be times when leasing companies misjudge the value of cars at the end of the lease - so occasionally, leasing individuals might get MORE than the market value of a car. BUT - that is just a roll of the dice and it could be the other way around.

As far as I know, the ONLY case where leasing is (or could be) a good deal is for business use vehicles because of tax advantages - but I am not an expert on that.

For personal use, it seems to me that most of us are not, or will not be able, to predict that a leased car will be driven the "right" or optimum number of miles or that circumstances will not change during the lease.

If you want a new car regularly, I would finance it with low rate new car financing and get the best deal available in purchasing the car. THEN, you have the flexibility to get the next new car when you want/need to get one. There is NO FREE LUNCH! The added "work" done in the leasing process is not free. Someone pays for that -- and it is likely to be YOU.

If you want a new car every 2, 3 or 4 years - that's fine. Just admit that you want one (or need one) and are willing to pay for it. Just don't delude yourself (or others here) that leasing is a better deal financially. it is NOT. - with the possible exception of business use.
You're making some assumptions and just drawing a conclusion. I don't think it's as clearcut as you say.

I decided to take a look for the luxury car market (personally this is where I would lease) using the Mercedes Benz E Class. An E Class is around $52,000. Right now, looking at carfax, I can get a 3 year old E class for around 29k. This is a depreciation of around 23k. Going to the mercedes benz website, and checking out lease details, I can lease for 27 months for 580 a month. Over 36 months, this is a $20,880 price tag. Furthermore, you don't have to deal with taxes when buying (compared to leasing, correct me if I'm wrong please) and the hassles of selling a car. So you're coming out 2000 on top and maybe even a bit more because if the lease is 36 months the per month price goes down. Also, if you put that entire 2k towards extra mileage, you could get 38,000 miles on a 3 year lease- not a bad usage for a luxury car by any means.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by fulltilt »

edmunds has a pretty good explanation of calculating your lease payment which you might find helpful to get a ballpark number.
http://www.edmunds.com/car-leasing/calc ... yment.html
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Zabar »

Aish wrote:I decided to take a look for the luxury car market (personally this is where I would lease) using the Mercedes Benz E Class. An E Class is around $52,000. Right now, looking at carfax, I can get a 3 year old E class for around 29k. This is a depreciation of around 23k.
That rate of depreciation sounds like an excellent argument for buying a 3-year-old Mercedes instead of either buying or leasing the new one! :wink:
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Aish »

Zabar wrote:
Aish wrote:I decided to take a look for the luxury car market (personally this is where I would lease) using the Mercedes Benz E Class. An E Class is around $52,000. Right now, looking at carfax, I can get a 3 year old E class for around 29k. This is a depreciation of around 23k.
That rate of depreciation sounds like an excellent argument for buying a 3-year-old Mercedes instead of either buying or leasing the new one! :wink:
Maintenance costs on luxury European cars are hideously high.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by tim1999 »

Wannaretireearly wrote: My thoughts: for a $60k car (5 series example). I would pay ~$70k out the door in CA (Taxes etc). If I can lease that same car for ~$15k total cost over 3 years (25% of the out of the door cost), that seems reasonable. Essentially for the out the door cost ($70k) I get to lease for 12 years and rotate cars every 3 years. Can I get this deal?
You aren't going to be able to lease a 5-series for $15,000 total over 3 years. Maybe a 3-series with few options.

A car where the manufacturer has been running some decent lease deals is the new Infiniti Q50...a $40,000-$50,000 car depending on options. You should be able to lease one of those for well under $500/mo. total cost if you don't go crazy with the options or mileage allowance. If you put down a large refundable security deposit, Infiniti will let you basically buy down the interest rate on the lease to near zero.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by kcb203 »

Look on lease swapping websites and find a car with six months to a year left on the lease. Assume the lease, drive it for six months, and realize that you're no happier with an expensive car over a Honda. (I bought a new 2011 Infiniti G37 to replace my perfectly fine 2000 Honda Accord and regret every penny of it. I don't care about the prestige, the roads are too crowded to drive it fast, the gas mileage is worse, and I'm $38K poorer.)
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by sls239 »

Going from buying and keeping Honda / Toyotas to leasing a new luxury car every 3 years is really two steps up the expense ladder. You might want to take it one step at a time.

Leasing can make sense if the residual value of the vehicle is unpredictable because you'd be paying someone to take that risk for you, but I think for mainstream luxury cars this probably isn't the case.

Considering that the design cycle for most cars is 6 years, you might not really be getting a "new" car when you lease, you might just be getting a newly manufactured car whose design is not any newer than the last car you leased.

So what I would do is compare the cost of leasing to the cost of buying new every 5/6 years, a timescale on which you really are likely to be getting a new car in the full sense of the word.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Jack FFR1846 »

My observations from people leasing are that either the car is above the level they would buy or they do lease with the intention of turning them over relatively quickly.

The mileage guess is something that is truly a bet. A co-worker leased a 5 series for 3 years. He is on the road for his job and at the 2 year mark, hit his miles. He literally let the car sit and bought a used car until the lease was up. Before the lease was up, he regularly travelled for work between southern NH and Montreal. He would always rent a car for this trip.

A coworker of mine right now is driving his parent's Audi A6 convertible. Why? They are retired and don't drive much at all. With 6 months left on the lease, instead of being close to 30k miles, they had less than 5k miles on the car. My coworker swapped cars with them for the last 6 months to "put some miles on it".
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by swaption »

Feel the need to correct a few things here:
dm200 wrote:First the FACTS - a car lease, under the covers, is a balloon loan amortized over an extended period (perhaps 84 - 96 months), with the balloon due at the completion of the lease (say 36 months) in an amount that is keyed to the guaranteed "value" at the termination of the lease. Leases are financed by the same kinds of lenders that finance autos with purchasers - banks, credit unions, auto company finance arms. The leasing company sets the value with the goal of not losing money - like a bet.
It's not exactly a balloon loan. The big difference is the embedded option at lease maturity. If you have that 15 mpg SUV and gas hits $6, In the case of the loan you can't really walk away, whereas in the case of a lease you can turn those keys over to the dealer with a smile on your face. As well, the comment that the contract residual is set with the goal of not losing money is actually not quite right. The way in which those providing the lease provide incentives is through an elevated residual vaulue embedded in the lease to a level likely above expectations, which lowers the monthly payment. This value is typically subsidized by the manufacturer to make the finance company or bank whole. Going in, the expectation is that the rational consumer will turn in the car at maturity due to the elevated residual, although that has not been the case over the last several years as the health of the used car market has boosted residual realization.
dm200 wrote:If you want a new car every 2, 3 or 4 years - that's fine. Just admit that you want one (or need one) and are willing to pay for it. Just don't delude yourself (or others here) that leasing is a better deal financially. it is NOT. - with the possible exception of business use.
I don't necessarily agree here. I think the expensive part of the equation is getting a new car every few years. But if you know that you are doing that, then leasing may be a perfectly acceptable path to take. Selling a car privately (or through trade-in) can be a cumbersome and inefficient process. Embedded in the lease are the advantages that the OEMs and dealers have in the CPO programs that provide efficiency to the process. There may also be sales tax inefficiencies to buying a car and then selling a car privately. Ultimately, all of this is within the context of a brutally compeitive industry and lease offers very much reflect that. The incentives built into the contract residual drive a monthly payment intended to move cars out the door. If too much is left on the table, competotors will happily fill the void.
Last edited by swaption on Fri Mar 21, 2014 9:44 am, edited 1 time in total.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Leesbro63 »

What you are talking about (the embedded option at the end) is a "put option". The option to "put" the vehicle back to the lessor and be done. A couple of instances come to mind: Back in the '80's when many people got stuck with Audi 5000 cars. There was concern about sudden acceleration. It's not clear that anything was ever proven, but it didn't matter...the value of these expensive cars plummeted and they really couldn't be given away. Those who leased (if they were brave enough to keep them till the end of the lease) used the "put" option and put back a car worth way way way less than the residual value. Those who owned but fleeced. Same for owners of first generation Ford Explorers before the Firestone tire thing got sorted out.
Last edited by Leesbro63 on Fri Mar 21, 2014 10:38 am, edited 1 time in total.
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Post by SRenaeP »

ryuns wrote:If I were in that market, I'd certainly consider a lease for BMW or Benz. Status cars that you mostly want to own when they're nice anyway, that tend to have maintenance issues. If, on the other hand, I just wanted a fiscally responsible way to own a luxury car, I'd buy something a little more reasonable like a Lexus ES and try to own for about 10 years. That'd be in the neighborhood of $4k/yr - a decent figure when you ultimately sell.
+1 on this

Also, as a current 5 Series owner, I would NOT recommend buying one. You're paying an (IMHO) excessive premium for 'prestige' with less than stellar reliability and increased maintenance costs. A losing proposition in my book. If I pay more for a car, I expect it to be better than a less expensive car. If you feel you must drive a 5 Series, leasing is the way to go.

-Steph
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Post by Leesbro63 »

I used to do German cars. Mercedes, VW and Audi...as well as many Fords. At one point during that phase, I owned a Lexus LS460 for a short time (this was before I became a "car Boglehead" and learned to "buy and hold" them). One day in 2002 a light bulb went off in my head that the most hassle-free car ownership experience that I ever had was owning that Lexus. Since then all I've owned is Lexus (plus Toyota and Honda for my adult kids) and I now realize this: This has been one of the biggest quality of life improvements I've ever made (not including the big stuff like education, family etc). Just no friggin' hassles! I would encourage anyone stuck on German make cars to reconsider. The real question in my mind is why it has to be this way? Lexus has now existed for 25 years. You'd think the quality gap would have closed by now.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Aish »

Leesbro63 wrote:I used to do German cars. Mercedes, VW and Audi...as well as many Fords. At one point during that phase, I owned a Lexus LS460 for a short time (this was before I became a "car Boglehead" and learned to "buy and hold" them). One day in 2002 a light bulb went off in my head that the most hassle-free car ownership experience that I ever had was owning that Lexus. Since then all I've owned is Lexus (plus Toyota and Honda for my adult kids) and I now realize this: This has been one of the biggest quality of life improvements I've ever made (not including the big stuff like education, family etc). Just no friggin' hassles! I would encourage anyone stuck on German make cars to reconsider. The real question in my mind is why it has to be this way? Lexus has now existed for 25 years. You'd think the quality gap would have closed by now.
Because the ethos of German design is not simple, long-lasting cars. It's about the beauty and complexity of their engineering.
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Post by Leesbro63 »

Aish wrote:
Leesbro63 wrote:I used to do German cars. Mercedes, VW and Audi...as well as many Fords. At one point during that phase, I owned a Lexus LS460 for a short time (this was before I became a "car Boglehead" and learned to "buy and hold" them). One day in 2002 a light bulb went off in my head that the most hassle-free car ownership experience that I ever had was owning that Lexus. Since then all I've owned is Lexus (plus Toyota and Honda for my adult kids) and I now realize this: This has been one of the biggest quality of life improvements I've ever made (not including the big stuff like education, family etc). Just no friggin' hassles! I would encourage anyone stuck on German make cars to reconsider. The real question in my mind is why it has to be this way? Lexus has now existed for 25 years. You'd think the quality gap would have closed by now.
Because the ethos of German design is not simple, long-lasting cars. It's about the beauty and complexity of their engineering.
IT'S A CAR! Just like the Japanese cars....it gets you from Point A to Point B with luxury. Hey, lots of people (many who don't know better, but many who do) buy Mercedes/BMW/Audi. More power to you. Getting rid of those hassles improved the quality of my life. Without much tradeoff. OK, so Lexus is less a "driver's feel" ride. But how much is that worth?
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by swaption »

Leesbro63 wrote:What you are talking about (the embedded option at the end) is a "put option". The option to "put" the vehicle back to the lessor and be done.
To be precise (what else would you expect given my moniker), only when viewed as a loan is it a put option. As part of the lease, it is an embedded call option because it gives you the right to purchase an asset that you don't currently own. Further, as a put option at lease inception it would typically be considered in the money, and as a call option it would be considered out of the money (because the option strike is likely higher than the expected car value at maturity).
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Leesbro63 »

swaption wrote:
Leesbro63 wrote:What you are talking about (the embedded option at the end) is a "put option". The option to "put" the vehicle back to the lessor and be done.
To be precise (what else would you expect given my moniker), only when viewed as a loan is it a put option. As part of the lease, it is an embedded call option because it gives you the right to purchase an asset that you don't currently own. Further, as a put option at lease inception it would typically be considered in the money, and as a call option it would be considered out of the money (because the option strike is likely higher than the expected car value at maturity).
I think you are right! I stand corrected. I wonder what the percent of leased cars get purchased by the original lessee? I'll bet it's in the single digits.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by swaption »

Leesbro63 wrote:I wonder what the percent of leased cars get purchased by the original lessee? I'll bet it's in the single digits.
To say I have a decent grasp of this is putting mildly, but single digits is a bit on the low end. Not surprisingly, luxury cars do have very high lease return rates in the 70% - 90% range. When gas prices spiked during the financial crisis, for SUVs in particular the return rate really went up. You definitely see the optionality as return rates do move with used car values. With the recent health of the used car market, not unusual to see return rate in the 50% range with a lot of those options landing in the money.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ubermax »

Don’t have any experience with leasing but I’ve thought about possibly using a spreadsheet to evaluate the financial difference between lease and buy – as a start you could make some simplifying assumptions – for example, assume a BMW and a 2 year lease – then assume no repairs and estimating the residual value might be easier than under a 4 year – then you need an interest rate assumption to determine the time value of money , maybe use an estimate of your current investment return – you could further assume that you don’t plan to exceed the 12k or 15k or whatever it is mileage allowance.

Then you want to look at each cash flow stream – I’ll make up some numbers – under the buy scenario you spend 55K – so that’s -55K at time 0 and then when you sell at time 2 it’s +(R value) – you’d have property tax payments – all this adjusted with interest to time 2 .

On the lease side you have the monthly lease payments , property tax is already built in , maybe a required up front charge , and then an asset valued at (R value) at time 2 and again all adjusted with interest.

Then you see under which scenario you end up with the most cash at time 2.

And you can make the model as simple or sophisticated as you want – there’s probably a bunch of things I’ve left out but this is the “back of the envelope” type approach that I visualize to address the second part of the OP’s post.
Last edited by ubermax on Fri Mar 21, 2014 1:28 pm, edited 1 time in total.
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ryuns
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ryuns »

Just a very simplistic point to add to the conversation--don't forget about "total due at signing". Dealerships seem to do a really good job structuring leases, so that, psychologically, you really don't seem to be paying that much. A modest number upfront fee, and that reduces the payments over time. Nice sweet spot between sticker shock and high carrying costs. As an example, google showed me I could lease a new Civic for $159/mo for 36 months. Only $2000 at signup! Too bad that $2000 amortized, adds 35% to the monthly cost of the lease! (When I googled "honda civic lease", an ad in the search results said "Elantra is Better". Shrewd marketing. I'm sure they paid the folks at the agency top dollar for that quip!)
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Aish
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Aish »

Leesbro63 wrote:
Aish wrote:
Leesbro63 wrote:I used to do German cars. Mercedes, VW and Audi...as well as many Fords. At one point during that phase, I owned a Lexus LS460 for a short time (this was before I became a "car Boglehead" and learned to "buy and hold" them). One day in 2002 a light bulb went off in my head that the most hassle-free car ownership experience that I ever had was owning that Lexus. Since then all I've owned is Lexus (plus Toyota and Honda for my adult kids) and I now realize this: This has been one of the biggest quality of life improvements I've ever made (not including the big stuff like education, family etc). Just no friggin' hassles! I would encourage anyone stuck on German make cars to reconsider. The real question in my mind is why it has to be this way? Lexus has now existed for 25 years. You'd think the quality gap would have closed by now.
Because the ethos of German design is not simple, long-lasting cars. It's about the beauty and complexity of their engineering.
IT'S A CAR! Just like the Japanese cars....it gets you from Point A to Point B with luxury. Hey, lots of people (many who don't know better, but many who do) buy Mercedes/BMW/Audi. More power to you. Getting rid of those hassles improved the quality of my life. Without much tradeoff. OK, so Lexus is less a "driver's feel" ride. But how much is that worth?
Well that depends on each person. This can be said for any hobby really.
Leesbro63
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Leesbro63 »

Aish wrote:IT'S A CAR! Just like the Japanese cars....it gets you from Point A to Point B with luxury. Hey, lots of people (many who don't know better, but many who do) buy Mercedes/BMW/Audi. More power to you. Getting rid of those hassles improved the quality of my life. Without much tradeoff. OK, so Lexus is less a "driver's feel" ride. But how much is that worth?

Well that depends on each person. This can be said for any hobby really.
I agree that many find the feel of a German car worth the hassle. And if they trade/lease every few years, cost isn't a factor and some even enjoy the frequent free biscotti and use of the dealer loaner car. And seeing the new cars come in the showroom etc. I used to be like that. Now I just like the reliability of the Japanese product. We've come a long way from my dad's 1977 Sedan DeVille where we made a list of everything wrong before we even got the new car out of the showroom.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by southwest_stacker »

The car dealer is not going to lose money.

The have actuaries that know what the car is going to be worth when the lease is up.

They are going to get enough money from you in the form of upfront payments and monthly payments to cover the loss in value of the car, their cost of capital, and a healthy profit. If they didn't they would be broke and would not be wanting to lease cars.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by cherijoh »

SRenaeP wrote:
ryuns wrote:If I were in that market, I'd certainly consider a lease for BMW or Benz. Status cars that you mostly want to own when they're nice anyway, that tend to have maintenance issues. If, on the other hand, I just wanted a fiscally responsible way to own a luxury car, I'd buy something a little more reasonable like a Lexus ES and try to own for about 10 years. That'd be in the neighborhood of $4k/yr - a decent figure when you ultimately sell.
+1 on this

Also, as a current 5 Series owner, I would NOT recommend buying one. You're paying an (IMHO) excessive premium for 'prestige' with less than stellar reliability and increased maintenance costs. A losing proposition in my book. If I pay more for a car, I expect it to be better than a less expensive car. If you feel you must drive a 5 Series, leasing is the way to go.

-Steph
But if you had it to do over again, would you lease one? Or just buy a less prestigious car that had stellar reliability? I personally don't get the "lease a more expensive car than you would be willing to buy" argument, but then I guess I'm not a car person.

To get back to the original poster's comparison with buying vs. renting a house. No they aren't the same thing at all in my opinion. When you buy a house, it can limit your ability to accept another job or relocate. So you are essentially limiting your options by buying a house. You get some advantages too, but only you can decide if it is worth it. I know several people who ended up going from an ok commute to an excruciating one because they lost a job and the only one they could find within commuting distance was 50 - 100 miles further than their old commute. They were underwater on their mortgage, so selling the house was not an option. Had they been renting, they could have expanded their job search to a wider geographic area or at least split the commuting difference with their spouse if they were tied to that particular city.

I don't believe the same argument holds true with leasing a car. A car isn't a illiquid asset like a house. You might not get a good price, but you could definitely sell your car the same day if it were necessary.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by dm200 »

southwest_stacker wrote:The car dealer is not going to lose money.

The have actuaries that know what the car is going to be worth when the lease is up.

They are going to get enough money from you in the form of upfront payments and monthly payments to cover the loss in value of the car, their cost of capital, and a healthy profit. If they didn't they would be broke and would not be wanting to lease cars.
The car dealers are not the ones taking any of the leasing "risk". Those "risks" are assumed by the financing/leasing entity. While there certainly are actuaries, etc. that quantify the risks, predicting the future is not perfect. I know several, large credit unions that actually did lose some money on their leasing operation. I don't know exactly why, but something either was wrong with the projections or some other "assumptions". In general, though, you are correct that the "risks" to the leasing entity are probably well understood and factored into the pricing and other business practices.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by sambb »

As someone who has bought in the past, and may lease in the future, i have a few comments.
1. All cars over 20-30k are luxuries. Maybe even that # is too high. The point of the car is to get you reliably from point a to point b, and most family sedans can do that in that price range.
2. Lease vs Buy - I have been shafted in buying because i wanted a new car in 3-4 years. Leasing probably would have been better. I also change my computer every 2 years. These are luxuries. But I choose to do that because I can afford it. I also change my cell phone every 2 years. All of this is unnecessary. I also think it is unnecessary to eat out or even buy a soda, when I could have water for free. So what - I choose to spend on these luxuries.
3. I am not deluded into thinking that the lease vs buy argument for luxury cars over 40k in price is rational, since the rational decision is to buy a regular inexpensive and reliable foreign sedan at way less than 40k.
4. I'm not rational with car purchases
5. So after a history of trading every 3 years, I am going to start leasing b/c it makes sense for me, but my experience may differ markedly compared to people who are happy driving a honda civic for 200k miles. And that person will make a far better financial choice than myself trading every 3 years on my car (and every 2 years on my computer, cell phone, etc.)
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by southwest_stacker »

dm200 wrote:
southwest_stacker wrote:The car dealer is not going to lose money.

The have actuaries that know what the car is going to be worth when the lease is up.

They are going to get enough money from you in the form of upfront payments and monthly payments to cover the loss in value of the car, their cost of capital, and a healthy profit. If they didn't they would be broke and would not be wanting to lease cars.
The car dealers are not the ones taking any of the leasing "risk". Those "risks" are assumed by the financing/leasing entity. While there certainly are actuaries, etc. that quantify the risks, predicting the future is not perfect. I know several, large credit unions that actually did lose some money on their leasing operation. I don't know exactly why, but something either was wrong with the projections or some other "assumptions". In general, though, you are correct that the "risks" to the leasing entity are probably well understood and factored into the pricing and other business practices.
I agree. My point is though that the leasing is profitable for those offering it (most of the time). If it wasn't they would not be trying so hard to get people to lease cars. They are making a profit off of those who lease cars which means if you don't lease you can get the same car for less.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by SpaceCommander »

Cars are a consumption item. You're going to pay one way or another. The cheapest route is to buy used and drive til the tires fall off. But I think you get to a point in your life where getting the cheapest item is not your motivation anymore. You're willing to pay up to get what you want. Could you cut a better deal buying used, haggling, paying cash? Sure. But frankly, when you've won the game, getting a better "deal" isn't the objective. Your goal simply isn't the same as the frugal "cheapskate" (I mean that in the best sense of the word :) ) At that point, convenience is a major factor; trading up every few years is a nice perk; driving luxury might be important to you, etc. It's like parking your car: sure, I can save a few bucks and park it myself, but I'll usually pull into valet. What's the point hoarding your wealth and not enjoying a little all the prosperity you've worked so hard for?

Also, with interest rates still near zero, leases are very attractive right now. I might balk if rates were much higher, but you can find manufacturer subsidized leases today at the equivalent of zero percent interest. My last car was a lease. Sure, I could have paid cash, but I chose to lease for many of the reasons discussed in the thread above.

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hudson
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by hudson »

Wannaretireearly wrote: 2. At what point does Leasing actually make (some) financial sense?
James Bragg has a $40 service to coach and assist car leasers/buyers. His web page for free gives a short course in leasing....probably nothing new after the preceding contributions....maybe a good summary?

"Leasing A New Car?
Here's Everything You Need To Know
©2013 Fighting Chance® & James Bragg
Thinking of leasing a new car and pondering these questions? Should I lease or buy, which is best for me? How does leasing work? What am I paying for when I lease? What elements can and can’t I negotiate? How do they calculate my monthly payment? How are leases taxed? Will I get the incentive if I lease? What’s in a typical leasing “drive-off’ check?
If you’ve answered “yes” to any of these questions, this "Leasing 101" guide has the answers you need. At no charge."

http://www.fightingchance.com/auto_leasing.php
bb
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by bb »

A dealer relative of mine said why would you ever own a depreciating asset?
I love that line. If I lease instead of buying I wonder who pays for that depreciation...
maybe Santa Claus?
Aish
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Aish »

hudson wrote:
Wannaretireearly wrote: 2. At what point does Leasing actually make (some) financial sense?
James Bragg has a $40 service to coach and assist car leasers/buyers. His web page for free gives a short course in leasing....probably nothing new after the preceding contributions....maybe a good summary?

"Leasing A New Car?
Here's Everything You Need To Know
©2013 Fighting Chance® & James Bragg
Thinking of leasing a new car and pondering these questions? Should I lease or buy, which is best for me? How does leasing work? What am I paying for when I lease? What elements can and can’t I negotiate? How do they calculate my monthly payment? How are leases taxed? Will I get the incentive if I lease? What’s in a typical leasing “drive-off’ check?
If you’ve answered “yes” to any of these questions, this "Leasing 101" guide has the answers you need. At no charge."

http://www.fightingchance.com/auto_leasing.php
Summary of the article is if you get a new car every 3-4 years and drive <15k miles, lease a car. If you keep cars for more than 5 years, and drive a lot more than 15k miles, buy your car. It's pretty much the same thing that's been said here.
killjoy2012
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by killjoy2012 »

While I think you guys have talked a lot about the basic mechanics of lease vs. buy, I think you've glossed over some important, practical points:

1) It's very common for manufacturers to incentivize a lease through their captive finance companies by artificially inflating the residual. e.g. The manufacturer wants to move more of a certain model, so they throw some incentive money at the captive that effectively boosts the residual value a couple points, thereby making that model cheaper to lease to the customer, while the manufacturer 'eats' that residual boost. Manufacturers generally do this more with leases vs. purchases (regular incentives) because the impact to the customer is larger (bang per buck) since the lease is essentially only financing ~1/3rd of the vehicle price, whereas a purchase, the incentive gets more 'diluted' by the entire purchase price.

2) While I understand the apprehension of avoid leasing due to not understanding all of the 'magic' that goes on in the calculation, it really is pretty easy to compare apples to apples. You tell the dealer to give you a lease price with $0 due at signing, for X months. Then compare how that stacks up to traditional financing. Obviously, if you're planning to hold the vehicle for the long term, leasing is a waste of time. And then after that, factor in your personal value/opinion on mileage limitations, having to get a car fixed for all major events, disposition PITA, etc.

3) Leasing avoids commitment. How many people know someone that owned a vehicle that had continuous problems and the dealer were of no help? You avoid 99.9% of these possible headaches with leasing.

4) If you are the type that generally gets a new car every 2-4 years anyway, you really need to look at how efficient your disposition process is in relation to TCO. You're going to get raped at trade in to the dealer. Selling a car yourself via private party takes a lot of time, effort and cost as well. This is not so much an issue when you buy and hold a car for 10+ years...
SRenaeP
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by SRenaeP »

cherijoh wrote:
SRenaeP wrote:
ryuns wrote:If I were in that market, I'd certainly consider a lease for BMW or Benz. Status cars that you mostly want to own when they're nice anyway, that tend to have maintenance issues. If, on the other hand, I just wanted a fiscally responsible way to own a luxury car, I'd buy something a little more reasonable like a Lexus ES and try to own for about 10 years. That'd be in the neighborhood of $4k/yr - a decent figure when you ultimately sell.
+1 on this

Also, as a current 5 Series owner, I would NOT recommend buying one. You're paying an (IMHO) excessive premium for 'prestige' with less than stellar reliability and increased maintenance costs. A losing proposition in my book. If I pay more for a car, I expect it to be better than a less expensive car. If you feel you must drive a 5 Series, leasing is the way to go.

-Steph
But if you had it to do over again, would you lease one? Or just buy a less prestigious car that had stellar reliability? I personally don't get the "lease a more expensive car than you would be willing to buy" argument, but then I guess I'm not a car person.

To get back to the original poster's comparison with buying vs. renting a house. No they aren't the same thing at all in my opinion. When you buy a house, it can limit your ability to accept another job or relocate. So you are essentially limiting your options by buying a house. You get some advantages too, but only you can decide if it is worth it. I know several people who ended up going from an ok commute to an excruciating one because they lost a job and the only one they could find within commuting distance was 50 - 100 miles further than their old commute. They were underwater on their mortgage, so selling the house was not an option. Had they been renting, they could have expanded their job search to a wider geographic area or at least split the commuting difference with their spouse if they were tied to that particular city.

I don't believe the same argument holds true with leasing a car. A car isn't a illiquid asset like a house. You might not get a good price, but you could definitely sell your car the same day if it were necessary.
No, I wouldn't lease because I feel leases are a waste of money. I like to buy lightly used vehicles and drive for 8-10 years. If I wanted new car every 2-3 years, a lease MIGHT pay sense.

If I had it to do again, I'm not sure what I would have done because the 5 Series was DH's dream car. From a purely financial point of view, we wasted a lot of money on it. However, from an emotional point of view, he really enjoyed the car and it wasn't necessarily detrimental to our finances. While it was definitely a lesson learned, I don't begrudge him the experience of having the car but was not willing to go down that road again.

That said, we just traded it in for a (marginally) less prestigious vehicle with better reliability. DH is a little miffed that we 'regressed' and I'll admit the new vehicle isn't quite as nice as the 5 Series but to me, the nice to haves aren't worth an extra $20K.

-Steph
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ubermax »

The following is aimed at the OP's second question #2 in the original post .

Typically a couple of things that make it difficult to do a financial comparison between leasing and buying is the interest rate and the residual value ; since lease payments are stretched over a future time period you need to assume an interest rate in order to discount those future payments back to the present and then compare to a current purchase price.

To make the calculations simple on myself I assumed that I had money in a very low interest bank account - essentially 0% - that I could use to either buy a new BMW outright or lease it for 3 years - and I accepted the dealership's residual amount.

I went out to the BMW-USA site yesterday and pulled up leasing info for the BMW and then went to the dealership to get the Cap Cost and any other miscellaneous leasing costs.

What I end up with then is : L+R-P , where L is all the lease payments, cash at signing, disposition fee at the end, and an excess mileage charge since I assumed 50K in 3 years based on current driving history , R is the dealer's residual , and P is what's called Cap Cost which apparently is what I could buy it for , I bumped that up for sales tax.

What I found was that (L+R) was roughly $4,100 more than P which tells me that buying it is a better deal.

This surprised me since in this current low interest environment ,in general, I though leasing would be the better option .

Can anyone point out where my thinking is flawed or is there anyone who has come to a similar conclusion, i.e. purchase better than leasing ??
Last edited by ubermax on Wed Mar 26, 2014 6:44 am, edited 1 time in total.
FireProof
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by FireProof »

To answer whether it's like a house, not at all.

Cars are mobile and fungible - location is not important. Basically either all leases are good (financially), or all leases are bad (financially). It turns out they are bad. On the other hand, houses are obviously very location-dependent. Thus, the rent vs. buy decision varies by market, since there is variation in supply vs. demand, estimated future appreciation, rent control etc.

And of course another big difference is that buying a house is also an investment in real estate in that location (generally leveraged), so you have to judge whether you think it's a good investment, while obviously buying a car is no kind of investment
desiderium
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by desiderium »

In 2006 I purchased a 2005 E-class. Now has over 150K miles. Still a very nice car to drive; has required 3 repairs in almost 9 years, will keep for forseeable future.

Recently decided on a small BMW SUV. I made a detailed spreadsheet of lease vs. buy for that car and actual annual costs for my mercedes. There just wasnt much difference, and I ended up leasing, mostly because my family is changing and I am not sure I need this car for 10 years.

Not sure you can be categorical anymore about buying being always less than leasing (at least not way less). Leasing tends to be more favorable when you live in a high sales tax environment (mine is 9.2%) and when you consider realistic maintenance costs--cars are complicated and fixing them is expensive. BMW now has all free maintenance for the first 4 years. Do your own spreadsheet and you may be surprised.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by TX_TURTLE »

killjoy2012 wrote:While I think you guys have talked a lot about the basic mechanics of lease vs. buy, I think you've glossed over some important, practical points:

1) It's very common for manufacturers to incentivize a lease through their captive finance companies by artificially inflating the residual. e.g. The manufacturer wants to move more of a certain model, so they throw some incentive money at the captive that effectively boosts the residual value a couple points, thereby making that model cheaper to lease to the customer, while the manufacturer 'eats' that residual boost. Manufacturers generally do this more with leases vs. purchases (regular incentives) because the impact to the customer is larger (bang per buck) since the lease is essentially only financing ~1/3rd of the vehicle price, whereas a purchase, the incentive gets more 'diluted' by the entire purchase price.
BMW subsidizes its leases because this fuels their CPO (certified pre-owned) program. They sell the car twice. If you 1) are planning to get a new car every three years or so 2) do your homework and don't overpay, then it is a good deal. Check http://www.bimmerfest.com/forums/forumdisplay.php?f=20. Lots of good information on this.
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by Leesbro63 »

desiderium wrote:In 2006 I purchased a 2005 E-class. Now has over 150K miles. Still a very nice car to drive; has required 3 repairs in almost 9 years, will keep for forseeable future.

Recently decided on a small BMW SUV. I made a detailed spreadsheet of lease vs. buy for that car and actual annual costs for my mercedes. There just wasnt much difference, and I ended up leasing, mostly because my family is changing and I am not sure I need this car for 10 years.

Not sure you can be categorical anymore about buying being always less than leasing (at least not way less). Leasing tends to be more favorable when you live in a high sales tax environment (mine is 9.2%) and when you consider realistic maintenance costs--cars are complicated and fixing them is expensive. BMW now has all free maintenance for the first 4 years. Do your own spreadsheet and you may be surprised.
For what it's worth, the sales tax thing here sort of works against leasing in PA. There is a 10% tax on lease payments vs a 7% sales tax on the difference between your trade in (if any) and the new car price. Also once you go to leasing, you give up the sales tax value on the used car forever. If you lease a $40,000 car, your $20,000 used car would have had a tax credit value worth $2100 (7%) that you give up. True, the tax on the lease payments is not a tax on the full value of the car, however.
ubermax
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Re: Cars: Lease vs. buy. (Similar to houses? rent vs. buy?)

Post by ubermax »

desiderium wrote:In 2006 I purchased a 2005 E-class. Now has over 150K miles. Still a very nice car to drive; has required 3 repairs in almost 9 years, will keep for forseeable future.

Recently decided on a small BMW SUV. I made a detailed spreadsheet of lease vs. buy for that car and actual annual costs for my mercedes. There just wasnt much difference, and I ended up leasing, mostly because my family is changing and I am not sure I need this car for 10 years.

Not sure you can be categorical anymore about buying being always less than leasing (at least not way less). Leasing tends to be more favorable when you live in a high sales tax environment (mine is 9.2%) and when you consider realistic maintenance costs--cars are complicated and fixing them is expensive. BMW now has all free maintenance for the first 4 years. Do your own spreadsheet and you may be surprised.
I originally thought I also would need a detailed spreadsheet but after talking to our dealership and finding out that whether I lease or buy I would still be paying insurance , property tax , and sales tax , i.e. many of the same costs either way --- and not being a business lease I wouldn't have to worry about tax ramifications and depreciation deductions , etc. - and purchasing with my own money from a very low yielding mutual fund made the interest assumption real easy - the calculations collapsed to the simple formula in my earlier post.

The big unknown is residual value - with a crystal ball to the future if it's much lower than what the dealership is currently using then leasing would end up being better.
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