Car Leasing Question

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Pepe.Silvia
Posts: 10
Joined: Sun Mar 06, 2016 10:16 pm

Car Leasing Question

Post by Pepe.Silvia »

Let's say I want a new car every three or so years. I know that it isn't the most financially prudent move but I like having new safety features (and am guessing that the features are going to continue to get even better). Is leasing the right move in this situation or would I come out ahead buying a new car and selling it in 3 or 4 years? When you lease a car you are essentially buying a car and agreeing to sell it back at a prearranged price (the residual value). The residual value is the assumed wholesale price at the end of the term. Do finance companies usually guess correctly at what the market wholesale price will be after three years? I would assume they do because they would lose a lot of money if they weren't good at picking the correct residual price. If we assume that the finance companies are correct then I could "probably" sell back the car for (at least) the wholesale price three years after buying the car. If all of the above is true then buying the car should be the better option because I don't lock myself into the terms of the lease and purchasing is no more expensive than leasing (potentially cheaper). The only negative I see is that I would need to pay sales tax on the total purchase price if I buy but only the leased portion if I lease. I am I missing something or am I off base on my assumptions?
Luckywon
Posts: 1078
Joined: Tue Mar 28, 2017 10:33 am

Re: Car Leasing Question

Post by Luckywon »

This has been extensively discussed multiple times on this forum. What I would say in brief is that the often stated advice that it's always better to buy than lease is wrong and indicates the person saying it knows little about leasing. There are factors for and against it and which is better for you depends on the specifics of the available car leasing terms for the car you want, how long you plan to keep the car, and several other factors.

Tax is usually not a consideration, as most states charge sales tax on car leases as well as car purchases.

Edit: Agree with comments below. Effect of tax depends on state and usually favors leasing. Thank you.
Last edited by Luckywon on Sun Jul 21, 2019 5:40 pm, edited 1 time in total.
Topic Author
Pepe.Silvia
Posts: 10
Joined: Sun Mar 06, 2016 10:16 pm

Re: Car Leasing Question

Post by Pepe.Silvia »

Thank you. Would you recommend a particular thread that you think sums up the argument for leasing well?
Luckywon
Posts: 1078
Joined: Tue Mar 28, 2017 10:33 am

Re: Car Leasing Question

Post by Luckywon »

Here is one recent one, though I am sure they are others that are as or more comprehensive.

viewtopic.php?t=284182
Broken Man 1999
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Location: West coast of Florida, inland on high ground!

Re: Car Leasing Question

Post by Broken Man 1999 »

I can totally see DW and I leasing a vehicle in a few years, when it is probable it would be our last vehicle.

The finances don't always have to be good, the convenience and lack of worry becomes more important in some cases.

I see it similar to buying only 5-6 bananas, instead of a whole bunch. :D

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
LegendaryRed
Posts: 34
Joined: Thu May 09, 2019 12:17 am

Re: Car Leasing Question

Post by LegendaryRed »

Actually, the sales tax treatment of leasing vs. buying is very different in most states, with the advantage going to leasing. Most states, including California, only charge sales tax on the lease payments for a leased car, whereas you must pay sales tax on the ENTIRE car for purchasing. Some states offer a sales tax credit on trade-in-vehicles (not CA), but you must then sell at a lower price than private party. So if you lease a $30K car that will be worth $15K at the end of the lease, you pay almost double in sales tax by buying and selling than if you just lease. In a state with 10% sales tax in many counties like CA, this can make a large difference.

Now, does the advantage outweigh the downsides of being forced to start with a brand-new car (the most depreciation), the stress over "will I go over miles", the potential mispricing of the residual, etc.? If you are driving <15K miles a year and always want a new car every 3 years, and are not leasing a model that leases poorly due to bad incentives (the automobile forums and leasehackr will be better sources of this), leasing will often win. As for being able to beat the residual price on selling - I wouldn't be so sure about that if you are just trading into a dealer or Carmax. If you are selling private party, you probably will be able to beat their residual - but it depends, sometimes certain manufacturers choose artificially high residuals to reduce lease payments and move cars, and you will have a hard time beating those. It really varies a ton by model.

Check out the leasehackr calculator and forums to find more details as well if you want to get into the nitty gritty of numbers - those people are the most up to date on the absolute best deals today - and a different perspective that is likely to be closer to your "swap cars every 3 years" demographic. https://leasehackr.com/calculator. Keep in mind to get the best deals you often have to go for a less desirable car, since manufacturers tend to give the strongest lease incentives to the models they have a hard time moving off lots.
Last edited by LegendaryRed on Sun Jul 21, 2019 4:55 pm, edited 2 times in total.
strafe
Posts: 1000
Joined: Sat Mar 03, 2007 12:49 pm

Re: Car Leasing Question

Post by strafe »

Luckywon wrote: Sun Jul 21, 2019 4:24 pm This has been extensively discussed multiple times on this forum. What I would say in brief is that the often stated advice that it's always better to buy than lease is wrong and indicates the person saying it knows little about leasing. There are factors for and against it and which is better for you depends on the specifics of the available car leasing terms for the car you want, how long you plan to keep the car, and several other factors.

Tax is usually not a consideration, as most states charge sales tax on car leases as well as car purchases.
+1
Though the comment about tax depends on the state. The OP is correct that there is a sales tax advantage in many states.
ASpenderInRecovery
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Re: Car Leasing Question

Post by ASpenderInRecovery »

I just stopped leasing myself so I can tell you my experience. Leasing is great for the reasons you listed like getting the latest and greatest, most advanced safety features, updated convenience/comfort tech, etc. every 3 years. On the flip side you never own the vehicle therefore you are paying alot for car usage in the long run. Buying cars outright can be and is cheaper when you buy the car and depreciate it over 7-10 years. Most people on this site will say "run it into the ground". If you buy a brand new car and only drive it for 3-4 years and sell it then more than likely it would have been cheaper to lease that same car. The big knock on buying brand new is the initial depreciation hit that occurs when you drive the car off the lot. If you buy a brand new car, then drive it for 7-10+ years then the depreciation hit doesn't matter because you got your money out of it over a long period. Over the length of 7-10 years you pay less per month than had you paid lease payments.

To answer your other question the finance companies that deal with leases are generally not bad at guessing the residual value. Don't expect to get some killer deal on the vehicle or be able to sell it private party for a massive profit at the end of the term. Also, I tend to think of leasing as you are agreeing to pay for the first 3 years of expected depreciation on a brand new vehicle and have the option to buy it at a stated value at the end of that 3 year term. Because you are only paying for the first 3 years of depreciation and not the entire price of the vehicle, lease payments are lower than a monthly payment to buy the same vehicle.
UpperNwGuy
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Re: Car Leasing Question

Post by UpperNwGuy »

All of the arguments for keeping a car for 7-10 years are sounding very unconvincing in an era in which significant new safety improvements are being introduced every couple of years. I'm thinking that the new normal for keeping a car will be 4-6 years — in other words just a bit longer than the average car loan. That should be the comparison to leasing. I'm in my late 60s, and I don't plan to keep any future car more than 5 years. (I'm currently driving an 18 year old 2002 model year car.)
Winston19
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Joined: Mon Jan 21, 2019 5:42 pm

Re: Car Leasing Question

Post by Winston19 »

UpperNwGuy wrote: Sun Jul 21, 2019 7:17 pm All of the arguments for keeping a car for 7-10 years are sounding very unconvincing in an era in which significant new safety improvements are being introduced every couple of years. I'm thinking that the new normal for keeping a car will be 4-6 years — in other words just a bit longer than the average car loan. That should be the comparison to leasing. I'm in my late 60s, and I don't plan to keep any future car more than 5 years. (I'm currently driving an 18 year old 2002 model year car.)
Actually the average age of cars on the road keeps getting older. I think this will continue as cars continue to get more expensive.
stoptothink
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Re: Car Leasing Question

Post by stoptothink »

Winston19 wrote: Sun Jul 21, 2019 8:22 pm
UpperNwGuy wrote: Sun Jul 21, 2019 7:17 pm All of the arguments for keeping a car for 7-10 years are sounding very unconvincing in an era in which significant new safety improvements are being introduced every couple of years. I'm thinking that the new normal for keeping a car will be 4-6 years — in other words just a bit longer than the average car loan. That should be the comparison to leasing. I'm in my late 60s, and I don't plan to keep any future car more than 5 years. (I'm currently driving an 18 year old 2002 model year car.)
Actually the average age of cars on the road keeps getting older. I think this will continue as cars continue to get more expensive.
...And more reliable. That was an odd post, considering the data shows it is completely the opposite https://www.autonews.com/automakers-sup ... -118-years .
Aku09
Posts: 64
Joined: Wed Jan 09, 2019 11:29 am

Re: Car Leasing Question

Post by Aku09 »

I just leased my first vehicle in December so I struggled with this same question. I didn’t need a brand new vehicle, but I did need a newer one (had an 15 year old one that was starting to have lots of problems). Do a lot of research as there are some brands that lease much better than others. I wanted a truck and haggled with several dealers for months before finally agreeing on a deal. You can still haggle for sale price which will ultimately alter your payment. Leasehackr is a great website to research.

I ended up with a 2019 RAM truck with a msrp over 63k. Even with 0% financing for 5 years my payment would be over a grand a month. Leased for 3 years with 12k miles each year (more than I drive) for $505 a month.

Basically I did the math and I could lease the same vehicle 3 separate times (assuming I got the same deal) and still pay less than purchasing. Never have to worry about maintenance other than oil changes.

Was it the best financial decision I’ve ever made? No. Do I regret it? Not really. I don’t like making a car payment, but my salary (just got a bump to 200k starting next month) can certainly afford it.
BeneIRA
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Joined: Sat Nov 29, 2014 8:43 pm

Re: Car Leasing Question

Post by BeneIRA »

All things equal, if I was the type of person who wanted a new car every three years, I would lease. I would also look for the vehicles with the crazy lease incentives, such as last model year in December, type of deals to split the difference a bit. In the midst of a cycle, one car year to the next isn't that big of a jump, so that shouldn't matter.

I would dispute that a whole heck of a lot changes in three years since most redesign cycles are four or five years, but let's say you keep jumping to the latest and greatest models to nullify my argument.

Here are some random considerations to think about:

Check the financing company to see how strict they are about damage: Years ago when I leased, the person who came out to do the inspection told me that a small dent I had wouldn't cost me any money, but if I had gone through other financing companies or brands, it could have cost me a pretty penny. Do some research to see what those companies are and avoid them. He specifically told me Ally Financial and most luxury brands are much more strict. There's nothing like getting a nice repair bill upon returning the car.

Maintenance: If it is your car, you care. When I had a leased vehicle, when I took the car in for service, the question was always "is the car safe to drive and will it be fine until "X" (lease end date). If it was yes, I didn't get the service done. If it was no, I did. It's a major benefit to a leased vehicle. It won't be your car, so as long as it runs, whatever.

Mileage: Standard is 36,000 or 12,000 a year. Do you drive more than that? A lot more? Then it might make sense to buy. I have a friend who drives 30 miles each way to work and has to drive about 500 miles every other month on top of that. He can't lease because it would be too expensive putting 20,000 miles or more on the car each year.

Sales Tax: This has been discussed quite a bit already, so I won't add anything.

Best of luck.
Hamberders
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Joined: Tue Feb 05, 2019 9:42 pm

Re: Car Leasing Question

Post by Hamberders »

A purchase usually requires more cash. Consider the opportunity cost of spending that cash instead of investing it.
David Althaus
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Re: Car Leasing Question

Post by David Althaus »

Addition to what's been said:

Is it really likely you will keep the car 10 years? Intentions are easy--behavior is real. Depreciation assumptions are probably based on 10 years. By the time you own the car it's worth very little.
What if you buy a lemon? Seems to happen all too often. That would really throw off benefit of buying vs leasing.

As someone older I also like the peace of mind knowing I don't have to worry about anything other than normal maintenance and it's unlikely a major breakdown will occur during the 3 year contract. We travel out of town by car somewhat often.

Everything of course depends on your personal situation.

All the best
b42
Posts: 371
Joined: Thu Apr 11, 2013 7:00 pm

Re: Car Leasing Question

Post by b42 »

Another vote for leasehackr.com. Once you understand the math behind a lease, you can run the numbers to see if leasing a specific make/model makes sense. The usual rule of thumb is to get a lease with no money down that has a monthly payment of 1% of the MSRP or less.
Jags4186
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Joined: Wed Jun 18, 2014 7:12 pm

Re: Car Leasing Question

Post by Jags4186 »

UpperNwGuy wrote: Sun Jul 21, 2019 7:17 pm All of the arguments for keeping a car for 7-10 years are sounding very unconvincing in an era in which significant new safety improvements are being introduced every couple of years. I'm thinking that the new normal for keeping a car will be 4-6 years — in other words just a bit longer than the average car loan. That should be the comparison to leasing. I'm in my late 60s, and I don't plan to keep any future car more than 5 years. (I'm currently driving an 18 year old 2002 model year car.)
I envision a future where I’m driving my crapbox down the road like a manic and everyone else’s super safe computer driven cars are getting out of the way for me.
ncbill
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Location: Western NC

Re: Car Leasing Question

Post by ncbill »

Using leasehackr I just leased a truck to replace a 20+ year old sedan with ~250,000 city miles.

Through a non-captive lender because they set crazy high residuals (for trucks) versus the captive.

Flip side is the non-captives like to charge you for every tiny nick & ding, so I also added "wear & tear" coverage.

Rolled everything into the payment...~$350/month for a ~$40,000 truck, only 1st months payment due at signing.
dsmclone
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Joined: Fri Oct 25, 2013 8:50 am

Re: Car Leasing Question

Post by dsmclone »

My best buys have always been 1-3 year old CPO luxury cars. Even if you get rid of them 3 years later, they don't lose a lot of value.
edge
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Location: NY

Re: Car Leasing Question

Post by edge »

lease companies are usually subsidiaries of the manufacturer. At times (or as part of an ongoing strategy), the lease company sets a very high residual (61% for example from BMW) to drive lower lease rates and more volume.

Leasing is not a simple equation and buying and selling after 3 years is not always cheaper.
ubermax
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Location: Connecticut

Re: Car Leasing Question

Post by ubermax »

OP , leasing is more like renting than buying and at the end of the lease the leasing company ,not you , own the vehicle - you would have the opportunity to buy at residual or possibly some different amount spelled out in the agreement - yes leasing companies have the benefit of a huge database of how autos depreciate and are able to set both the initial price and residual so that they make money .

From what I can tell there is no way that the average person can predict the future value of an auto to within a profitable tolerance and so subjective , personal , and financial reasons come into play - e.g. I can afford this Maserati if I lease or finance it , I like a new car every 3 years , etc. etc.

Good Luck !!!!
psteinx
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Re: Car Leasing Question

Post by psteinx »

LegendaryRed wrote: Sun Jul 21, 2019 4:52 pm Actually, the sales tax treatment of leasing vs. buying is very different in most states, with the advantage going to leasing. Most states, including California, only charge sales tax on the lease payments for a leased car, whereas you must pay sales tax on the ENTIRE car for purchasing. Some states offer a sales tax credit on trade-in-vehicles (not CA), but you must then sell at a lower price than private party.
Unless things have changed in the last few years, my state (Missouri) offers a sales tax credit even on private party sales. Last time I did it, if I remember correctly, you had a reasonably generous time window (+/- 90 days, or maybe it was 6 months) from the time you BOUGHT a car to sell another, and reduce the sales tax owed on the new car, if you hadn't paid it yet, or get a partial refund, if you HAD already paid it.

In short, look up your own state's rules.
boatdriver79
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Re: Car Leasing Question

Post by boatdriver79 »

We have always been car purchasers that held on to the bitter end. We always took good care of our cars so they would last a long time.

No more.

For the second time, our 'cream puff' car was wrecked by an at fault driver. Now the insurance companies will only give us a ridiculously low value for whats left of the car. No way to replace what we've had (and worked to take care of).

So now, were going to lease and if someone Tbones us, its the leasing company that can deal with the insurance company and the loss of value. There is no sense in taking care of your assets if someone can hit you and then you're left holding the bag for your loss. BTW, American Family sucks.

Rant over.
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