New Auto: One payment lease vs. buy outright?

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Browser
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New Auto: One payment lease vs. buy outright?

Post by Browser » Mon Mar 11, 2013 6:48 pm

Buying a new car, and the dealer suggested a one-payment 3-year lease instead of buying outright. Apparently you first agree on the price of the vehicle and then make a single payment that covers a 3-year lease. It's always difficult to know if you're getting taken in by the dealer. I understood this lease deal to mean that you basically pay the difference between the purchase price and the residual value as a one-time lease payment up front. At the end of the lease, you are left with a vehicle which you can purchase at the residual value. For example, on a $40K vehicle with 50% residual value, you would pay $20K up front for the 3-year lease and after the lease is up you will have a car with a residual value of $20K that you can purchase for that amount at that time. I know this can't be right because basically this would mean you are able to buy a car by paying half down and the other half in 3 years. Can someone explain this to me?
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Rubiosa
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Re: New Auto: One payment lease vs. buy outright?

Post by Rubiosa » Mon Mar 11, 2013 6:55 pm


strafe
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Re: New Auto: One payment lease vs. buy outright?

Post by strafe » Mon Mar 11, 2013 9:11 pm

1). You will pay interest on the residual value (which you are borrowing for 3 years). It's not a free lunch.

2) if a leased car is totaled or stolen, insurance will pay off the lease but not reimburse your down payment. Since you're putting 100% down, you could lose nearly all of your down payment depending on when the loss occurs.

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Re: New Auto: One payment lease vs. buy outright?

Post by Cyclone » Mon Mar 11, 2013 9:56 pm

I did this and it worked out great for me. I thought it must be a trick, too. Somebody pointed out that the financing firm gets tax benefits for the three years (depreciation - technically they own the car), so I guess that is where they make their money.

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Re: New Auto: One payment lease vs. buy outright?

Post by grabiner » Mon Mar 11, 2013 9:57 pm

strafe wrote:1). You will pay interest on the residual value (which you are borrowing for 3 years). It's not a free lunch.

2) if a leased car is totaled or stolen, insurance will pay off the lease but not reimburse your down payment. Since you're putting 100% down, you could lose nearly all of your down payment depending on when the loss occurs.
But comparing this to buying the car outright, neither of these is an issue. If you buy the car outright, you pay interest (if you borrow the purchase price) or lose the opportunity to invest the money (if you pay cash) on the whole value. And if you buy a car with cash and it is totaled, insurance will reimburse you for only the value of the car.

It wouldn't make sense for the dealer to offer the same car with $20K up front and $20K in three years if he could sell it for $40K up front; he would be better off taking the $40K up front and putting $20K in a three-year CD. Therefore, I would expect that you should be able to get a lower price if you pay all in cash. (And you can get a lower price for yourself, even if you don't make more money for the dealer; if you own the car outright, you can take a higher deductible on collision and comprehensive coverage than the leasing company would require.)

However, the dealer may have the expectation that most people who take a single-payment lease don't buy the car for the residual (and many of them can't afford it), even though the car is likely to be worth more than the residual; if that happens, the dealer can collect $20K up front and get back a car worth $25K in three years. If this is the case, it is the equivalent of a large sign-up bonus for a credit card; the bank offers the bonus in the expectation that you will make lots of purchases or carry a balance, and accepts the loss from those customers who take the bonus and charge very little.
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Leesbro63
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Re: New Auto: One payment lease vs. buy outright?

Post by Leesbro63 » Tue Mar 12, 2013 4:09 am

I believe if you total a leased car, insurance will pay whatever the car was worth. Regardless of how much or how little was put "down" on a lease. If the amount owed on the lease is less than the value of the car/amount payable by insurance, the lessee will get the difference. Just as if the amont owed is less than the lease payoff, the lessor will be responsible to pay the difference (unless there is "Gap"insurance). This is no different that financing or paying cash. You get what the car is worth, independent of what you owe. Again, unless there is coverage for this "gap", which is often, but not always, built into many leases. My Corolla lease from Toyota Credit did NOT have gap coverage but offered it at $7/month so I took it.

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Re: New Auto: One payment lease vs. buy outright?

Post by WatchinU » Tue Mar 12, 2013 9:25 am

if you don't own the car out right then why would a person consider making an up front large payment for a 3 year lease?
Is that the best use of you money? cars are typically considered to be depreciating assets. wouldn't it be better to invest that money into something that has a chance of appreciating. Perhaps I'm more skeptical of the dealer than I should be. I never tell them my options regarding financing or paying for the cars. I have it worked out before I step foot in the dealership.

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Re: New Auto: One payment lease vs. buy outright?

Post by Leesbro63 » Tue Mar 12, 2013 3:57 pm

I've done 1 Pay leases before. It's a math decision. If they give a big enough discount and you have the money, you do it. If not, then make the payments

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Lee Saage
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Re: New Auto: One payment lease vs. buy outright?

Post by Lee Saage » Tue Mar 12, 2013 4:15 pm

If you plan to keep the car for only three years irrespective of means of acquisition then a lease, one payment or many, might make sense. In California, for instance, sales tax is assessed on the full purchase price (when buying) even if there were a trade in. In some states, only the net cost after trade-in is taxed but California, and perhaps other jurisdictions, tax the full purchase price. If leasing, however, you are taxed on total lease payments including any down payment. On a $40,000 car kept for three years with a total lease payment of $20,000, the tax savings can approach $1,800 (assuming a 9% sales tax rate).

Best way to know is to run a spreadsheet and calculate net present worth of whatever purchase or lease options you are considering. And don't forget to account for sales or use tax and opportunity costs.
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Re: New Auto: One payment lease vs. buy outright?

Post by btenny » Wed Mar 13, 2013 1:21 pm

I think this is how the math works. There is a acquisition cost for the car by the bank or finance company on the order of $5-700. This is a real cost for them to do the paperwork and fund a loan to you and then to send money to the dealer for the car. This fee is sort of like points for a home loan. In some cases the dealer will cover part of this cost to make the deal thus setting up you to come back to buy another car in three years. Then there is the interest they charge you monthly for the lease on the loan balance. So if you only pay for half the vehicle at purchase they will charge you interest for 3 years on half the price. So figure $20K loan at 1.9% or another $1140. So net net the lease does have some cost to you of around $1840 for the three years. But you get to keep your $20K so you may earn 5% or more on that money or $3K. So net net the deal may be good for many.

Plus in the lease case I am planning I also get to save a bundle on income taxes if I pay for the car over 36 months. I get to leave the $20K in my IRA for the next three years and only pay 15% income tax when I withdraw it over the time period. So I have to withdraw $23530. But if I pay cash for the car all in one year I have to withdraw $20K extra and pay 25% taxes since I am spending the money all in one year and moving up my tax bracket. That means I would have to withdraw $26667. So net net I save $6137 ($3K + $26667 - $23530). So in my case leasing a car is VERY good deal.

This is how I figured out the lease I am plannig and the associated costs. Please review as I am not an expert and I have only been studying and have never actually leased a car before.

Bill
Last edited by btenny on Wed Mar 13, 2013 3:01 pm, edited 1 time in total.

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Re: New Auto: One payment lease vs. buy outright?

Post by btenny » Wed Mar 13, 2013 1:23 pm

Heh Lee. What about beautiful women?

Bill

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Lee Saage
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Re: New Auto: One payment lease vs. buy outright?

Post by Lee Saage » Wed Mar 13, 2013 2:11 pm

btenny wrote:Heh Lee. What about beautiful women?

Bill
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Re: New Auto: One payment lease vs. buy outright?

Post by grabiner » Wed Mar 13, 2013 8:08 pm

btenny wrote:So if you only pay for half the vehicle at purchase they will charge you interest for 3 years on half the price. So figure $20K loan at 1.9% or another $1140. So net net the lease does have some cost to you of around $1840 for the three years. But you get to keep your $20K so you may earn 5% or more on that money or $3K. So net net the deal may be good for many.
This is not a fair comparison; the 1.9% loan is risk-free to you, while you can only earn 5% by taking a lot of risk. The fair comparison would be between taking out the loan and investing the money in a three-year CD, or paying in cash, and paying in cash comes out ahead. (If it didn't, the dealer wouldn't offer a loan at 1.9%, as they could just put the money in a CD themselves.)
Plus in the lease case I am planning I also get to save a bundle on income taxes if I pay for the car over 36 months. I get to leave the $20K in my IRA for the next three years and only pay 15% income tax when I withdraw it over the time period. So I have to withdraw $23530. But if I pay cash for the car all in one year I have to withdraw $20K extra and pay 25% taxes since I am spending the money all in one year and moving up my tax bracket. That means I would have to withdraw $26667. So net net I save $6137 ($3K + $26667 - $23530). So in my case leasing a car is VERY good deal.
And this is an important point; the cost of money to you may not be the same over time. If it costs you $26,667 to get money now and $23,530 to get it in three years, then you have a guaranteed 4.26% return for waiting three years on top of whatever you can earn on your investments, and that makes taking out a lease (or a loan) worthwhile.

I used a similar logic when I bought a car in 2001. I could have paid cash, but that would have required me to sell a lot of stock and pay 25% combined federal and state tax on the capital gains. Instead, I took out a loan, intending to pay it off quickly with money that would have otherwise gone to taxable investments, and to pay less in loan interest than I would have paid in taxes.
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