Leasing a Car with Intention to Buy at End

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N10sive
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Leasing a Car with Intention to Buy at End

Post by N10sive » Wed Oct 12, 2016 6:47 pm

Hello,

Can you please humor me and answer this question. I know everyone will say leasing is bad if you keep a car for more than 5 years or drive a lot of miles. But I have a questions regarding leasing and buying at the end. Ive read a couple threads with views on both lease vs buy but am still haven't found all the answers to my questions.

The specific vehicle I am looking at has a 70% residual value at the end of 3 years. Leasing would provide a low monthly payment currently for me. The money factor and MSD's end up to having a rate of around 3.3% (maybe 2.9% if I get tier 1+ but not sure where that starts). I hear people say having a higher residual value is better for leasing since you don't pay as much depreciation in the lease payment. However is it good if you were to purchase at the end of lease? Granted this vehicle has a very high resale value, would most likely be able to sell higher than the residual value.

I am asking this because currently I would like the vehicle long term however that can completely change in 3 years depending on where I live.

TIA for the responses.

nhdean
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Re: Leasing a Car with Intention to Buy at End

Post by nhdean » Wed Oct 12, 2016 7:04 pm

It is not a good idea to buy out your lease. First of all you pay the fees twice, plus you end up financing a car for 8 plus years. Leases are designed to have low monthly payments. It is very rare to have equity at the end of the lease. If you plan on keeping the car for long time buy it out right, don't lease than buy it out.

Jags4186
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Re: Leasing a Car with Intention to Buy at End

Post by Jags4186 » Wed Oct 12, 2016 7:12 pm

The only time leasing works out in your favor is if the car you have is miraculously worth more at the end of the lease than the car company thought it would be worth.

Example: Car company assumes car will be worth 50% of MSRP after 36 months and 36,000 miles. Car happens to be extremely popular/reliable and is worth 70% of MSRP at end of lease. You buy car from manufacturer for contractually obliged 50% value and sell it on the open market for 70%.

Guess how many times this situation happens...

randomguy
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Re: Leasing a Car with Intention to Buy at End

Post by randomguy » Wed Oct 12, 2016 7:18 pm

nhdean wrote:It is not a good idea to buy out your lease. First of all you pay the fees twice, plus you end up financing a car for 8 plus years. Leases are designed to have low monthly payments. It is very rare to have equity at the end of the lease. If you plan on keeping the car for long time buy it out right, don't lease than buy it out.
Fees are very state specific. You would have to look at how things like sales tax, transfer, registration fees and the like work to figure out which ones you get double charged on. And no you don't have to finance the car for 8 years with this option. You could finance for the same length as you do with a new car purchase. What you will get hit with is a lease acquisition fee.

You need to compare the 3 cases
a) you lease and then buy the car
b) you buy and then sell the car in 3 years.
c) you buy and keep the car

and decide what the difference will be for each of them. You have to make some assumption (i.e. how are you going to dispose of the car in case b) and see how they work out and which ones you are happy with.

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ClevrChico
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Re: Leasing a Car with Intention to Buy at End

Post by ClevrChico » Wed Oct 12, 2016 7:26 pm

Recently bought out a leased car for family. With the fees, I calculated we paid an extra $1k rather that buying/financing to begin with. Plus two extra trips to a dealer to buy.

randomguy
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Re: Leasing a Car with Intention to Buy at End

Post by randomguy » Wed Oct 12, 2016 7:28 pm

Jags4186 wrote:The only time leasing works out in your favor is if the car you have is miraculously worth more at the end of the lease than the car company thought it would be worth.

Example: Car company assumes car will be worth 50% of MSRP after 36 months and 36,000 miles. Car happens to be extremely popular/reliable and is worth 70% of MSRP at end of lease. You buy car from manufacturer for contractually obliged 50% value and sell it on the open market for 70%.

Guess how many times this situation happens...
What about if I buy a 50k car and the leasing company assumes 70% depreciation. In 3 years it turns out to be 50% depreciation. Didn't I win since I used 25k of depreciation and only paid for 15k? Leasing also works well when deducting it as a business expenses but that is an another discussion.

And it also isn't clear to me that if you need a car for 2 years if you are better off leasing or better off buying and selling. It seems like a borderline choice either way. In general you should expect to pay for flexibility (i.e. the ability to set the sale price of the car in x years). Every now and then you get some big lease incentives (basically 0% interest and inflated residuals. They don't want a big discount to tarnish the brand so they inflate the residual to be .70 instead of .65. The leases of EV cars in states with large state tax credits also give some crazy numbers when you are spreading 5k of tax credit over 2 years instead of say 7).

Those are all edge cases though. Most people are better off buying a car and driving it 7+ years.

countofmc
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Re: Leasing a Car with Intention to Buy at End

Post by countofmc » Wed Oct 12, 2016 7:31 pm

ClevrChico wrote:Recently bought out a leased car for family. With the fees, I calculated we paid an extra $1k rather that buying/financing to begin with. Plus two extra trips to a dealer to buy.
Mind sharing what roughly the MSRP of the vehicle was?

Honestly paying $1k for the "option" to keep a car long term or get rid of it fairly hassle-free if for whatever reason it doesn't work out doesn't seem too bad...

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ClevrChico
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Re: Leasing a Car with Intention to Buy at End

Post by ClevrChico » Wed Oct 12, 2016 7:34 pm

countofmc wrote:
ClevrChico wrote:Recently bought out a leased car for family. With the fees, I calculated we paid an extra $1k rather that buying/financing to begin with. Plus two extra trips to a dealer to buy.
Mind sharing what roughly the MSRP of the vehicle was?

Honestly paying $1k for the "option" to keep a car long term or get rid of it fairly hassle-free if for whatever reason it doesn't work out doesn't seem too bad...
No problem, about $26k

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dm200
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Re: Leasing a Car with Intention to Buy at End

Post by dm200 » Wed Oct 12, 2016 7:51 pm

A lease is, under the covers, a balloon loan with a guarantee of a minimum residual value.

There are fees, charges, perhaps more taxes, if leasing then purchasing at the end of the lease.

In my opinion, you are better off purchasing and financing the purchase. To get lower monthly payments (similar to lese), finance the car for 7 or 8 years.

sc9182
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Re: Leasing a Car with Intention to Buy at End

Post by sc9182 » Wed Oct 12, 2016 8:05 pm

At times your manufacturer/finance interest rate is lower than what you get outside, similarly some leases allow lenient credit scores but still offer great APR/money-factor. If you have top-tier credit you can get 1.5% to 1.99% apr from usual credit unions. Never put money down on lease - try for 0-down (MSDs may be ok..). Look out, some times some manufacturers offer first payment or two free.. Also, negotiate price - then take/accept lease-cash incentives (offered some times)

In some states you pay Sales Tax at both events (lease time, again at lease-end-buy event): tax due on 'then' lease/purchase price.

Definitely make sure to have GAP coverage (hopefully your lease Co. provides this free of cost) if you decide to lease!

Ifor your payments are really low, may be you can do another lease at the end of this lease.

Never lease beyond manufacturer warranty period (hopefully your vehicle comessage with free maintenance, if not trying to prepaid maintenance if they residulize, ie, in your case: you only pay 30% of say $800 on 3 year prepaid maintain cost)

Never buy/lease a car just because the deal is slightly better than a great car at slightly-higher monthly/payment. Payment/new-smell wears off after a few months and you will end up with a bad car for remainder term (and very hard to get out of a lease unless you are ready for grossly upside-down $$ exit)

Many a times manufacturers offer odd terms such as 27-months or 39 months for same depreciation as that of 24-months, or 36 months respectively. Lease payments go down ..

If you work for large employer- consider additional savings such as Vendor/fleet incentives (also USAA incentive). These typically in-addition to your already negotiated low price (and any applicable lease cash).

Recent graduate, military, and/or vet status could pitch in extra $500 to $1500 additional savings when leasing.

If you currently own/lease any competitor vehicle/hybrid., manufacturers offer competitive-cash on top of other incentives.

Some manufacturers offer registered Uber driver discount of $1000.

Share with us you are buying or leasing ?

btenny
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Re: Leasing a Car with Intention to Buy at End

Post by btenny » Wed Oct 12, 2016 8:07 pm

I did exactly what you describe in 2013. I leased a new Subaru Outback Limited in March 2013. The residual was about 65%. I paid 0.5% interest on my lease payments. It was a good deal for us as we would have had to withdraw cash from our IRA and pay income tax on that to pay in full when we made the purchase. By leasing I paid for the car monthly out of regular income with no extra cash needed. Right now we are evaluating buying the car at lease end versus buying another car brand. I did a 39 month lease when I started and then extended in 6 months to let me shop the 2017 models versus buying out the old car at the end of the lease. I am sure I spent a little extra for the lease but I saved 25% taxes if I paid cash and withdrew much of the money in 2013 from my IRA so net I saved money.

I am very pleased with the lease experience so far. It may be more expensive but it was painless. I did the deal 100% over the phone and the internet. I paid a few $K for the down payment and picked up the car the next week the first time I visited the dealer. The whole thing took about 2 hours.

Good Luck.

FoolStreet
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Re: Leasing a Car with Intention to Buy at End

Post by FoolStreet » Wed Oct 12, 2016 9:58 pm

N10sive wrote:Hello,

Can you please humor me and answer this question. I know everyone will say leasing is bad if you keep a car for more than 5 years or drive a lot of miles. But I have a questions regarding leasing and buying at the end. Ive read a couple threads with views on both lease vs buy but am still haven't found all the answers to my questions.

The specific vehicle I am looking at has a 70% residual value at the end of 3 years. Leasing would provide a low monthly payment currently for me. The money factor and MSD's end up to having a rate of around 3.3% (maybe 2.9% if I get tier 1+ but not sure where that starts). I hear people say having a higher residual value is better for leasing since you don't pay as much depreciation in the lease payment. However is it good if you were to purchase at the end of lease? Granted this vehicle has a very high resale value, would most likely be able to sell higher than the residual value.

I am asking this because currently I would like the vehicle long term however that can completely change in 3 years depending on where I live.

TIA for the responses.

As with anything, there is a way to do it frugally vs not, just like index funds vs variable annuities. Do you want to do it the way the average person does it? Then maybe it's not a good deal. Do you want to do it like a Boglehead frugal fanatic? Then it can work.

I did it with our new car and it worked wonderfully. At the time, I needed a cheap car, wanted to minimize my loan exposure during the Great Recession and wanted optionality. Finally, I wanted to spread out my California tax due (9%). 9% of $23k is a big chunk. 9% on that months lease is smaller.

The key is doing the right research.

First, research prices, incentives, money factor and residual values. Make sure you understand MRDs, cap cost, etc. Post on leasehackr dot com, edmunds discussion boards and any enthusiast sites to get all the pricing before even talking to a dealer. Put it all into a spreadsheet. Then find the Internet salesperson who will give you the terms you have researched on the Internet. Bring your spreadsheet when you go to pick it up and make sure it matches to the penny. If you are not a spreadsheet kind of person, then just don't lease. Buy used from Craigslist.

As the lease ends, When it is time to buy the car, don't call the dealership! Get your loan (payment saver from penned). Then, just call the 800 number of the leasing arm, get the payoff and write the check to the leasing arm. Register at DMV. Done!

inbox788
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Re: Leasing a Car with Intention to Buy at End

Post by inbox788 » Thu Oct 13, 2016 1:06 pm

countofmc wrote:
ClevrChico wrote:Recently bought out a leased car for family. With the fees, I calculated we paid an extra $1k rather that buying/financing to begin with. Plus two extra trips to a dealer to buy.
Mind sharing what roughly the MSRP of the vehicle was?

Honestly paying $1k for the "option" to keep a car long term or get rid of it fairly hassle-free if for whatever reason it doesn't work out doesn't seem too bad...
That's $1k more than you had to pay if you made the correct decision on the onset. ClevrChico, what was your though process when you bough the car? What was your likelihood of buying at the end? Sounds like OP is 90-100% going to buy, so if I knew it would cost me $1k for the option I'm unlikely to exercise, I wouldn't do it. Further, 50-60% residual is more typical after a 3 year lease and I'm guessing 60-70% is actual value. So if the lease is for 70% residual buyout, I wouldn't do it, since I'm guessing the worth of the car is only 60%. If it's for 50% residual, and there's a chance the car is worth 60-70%, then it's more enticing, but then you have the issue of higher monthly payments.

As far as pricing the option, you have to expect the car is going to be worth $1k more than the residual in 3 years. I'm guessing that the car dealers have gotten very good at this and 80% of the residual values are $0-1k of this mark, with trade in costs below the residual and retail prices above.
N10sive wrote:The money factor and MSD's end up to having a rate of around 3.3% (maybe 2.9% if I get tier 1+ but not sure where that starts). I hear people say having a higher residual value is better for leasing since you don't pay as much depreciation in the lease payment. However is it good if you were to purchase at the end of lease? Granted this vehicle has a very high resale value, would most likely be able to sell higher than the residual value.

I am asking this because currently I would like the vehicle long term however that can completely change in 3 years depending on where I live.
1) What's the vehicle? MSRP? Very rare for 70% residual after 3 years, even those with low depreciation.
2) Are you getting any additional lease incentives?
3) What is your loan interest rate? You will pay more interest with a lease, and even more with a higher residual.
4) What state are you in? How is sales tax paid? You might avoid sales tax on the residual if you turn the car in.

Just buy the car, finance at low rate 2-3%, and you'll pay same or less in finance charges. You'll also save the lease acquisition/disposal charges. If you must, you can sell the car in 3 years ("most likely be able to sell higher than the residual value"), and if you're right, you'll wind up doing better. And even if you're wrong, after factoring in the savings, you might still be doing better.

swaption
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Re: Leasing a Car with Intention to Buy at End

Post by swaption » Thu Oct 13, 2016 1:16 pm

Very bad idea. The way a manufacturer provides incentives in a lease is to subsidize the contract residual value. What this does is it artificially inflates the contract lease end purchase price to a level above what is expected, and thereby it reduces the monthly lease payments. As a result, the lease purchase option is expected to be out of the money, and the rational thing to do would be to return the car at lease end. Sometimes the option lands in the money (as is the case possibly right now with SUVs due to the far lower than expected price of oil), but that is not the expectation. Much better off just buying from the outset.

sk2101
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Re: Leasing a Car with Intention to Buy at End

Post by sk2101 » Thu Oct 13, 2016 1:43 pm

Jags4186 wrote:The only time leasing works out in your favor is if the car you have is miraculously worth more at the end of the lease than the car company thought it would be worth.

Example: Car company assumes car will be worth 50% of MSRP after 36 months and 36,000 miles. Car happens to be extremely popular/reliable and is worth 70% of MSRP at end of lease. You buy car from manufacturer for contractually obliged 50% value and sell it on the open market for 70%.

Guess how many times this situation happens...
Actually in your example you are only getting back even to where you'd be if you had bought the car in the first place. You would have paid the 50% depreciation in the monthly payments.

The Lease is favorable in the exact opposite case, when you have a contract residual of 70% but the car is only worth 50%. Then you turn the car in and walk away and the leasing company or the manufacturer eat the 20% difference. This is the case in many instances where manufacturers subsidize lease residuals in order to achieve low monthly payments.

inbox788
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Re: Leasing a Car with Intention to Buy at End

Post by inbox788 » Thu Oct 13, 2016 3:24 pm

mmarreco wrote:The Lease is favorable in the exact opposite case, when you have a contract residual of 70% but the car is only worth 50%. Then you turn the car in and walk away and the leasing company or the manufacturer eat the 20% difference. This is the case in many instances where manufacturers subsidize lease residuals in order to achieve low monthly payments.
Yes, if you can get this type of lease, it's a great deal. Lease the car and walk away after 3 years.

About the only type vehicle I've seen around 70% residuals are trucks like the Toyota Tacoma, and with those, the resale values match the residuals, so pretty much a wash, and no big deal.

Jags4186
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Re: Leasing a Car with Intention to Buy at End

Post by Jags4186 » Thu Oct 13, 2016 5:13 pm

mmarreco wrote:
Jags4186 wrote:The only time leasing works out in your favor is if the car you have is miraculously worth more at the end of the lease than the car company thought it would be worth.

Example: Car company assumes car will be worth 50% of MSRP after 36 months and 36,000 miles. Car happens to be extremely popular/reliable and is worth 70% of MSRP at end of lease. You buy car from manufacturer for contractually obliged 50% value and sell it on the open market for 70%.

Guess how many times this situation happens...
Actually in your example you are only getting back even to where you'd be if you had bought the car in the first place. You would have paid the 50% depreciation in the monthly payments.

The Lease is favorable in the exact opposite case, when you have a contract residual of 70% but the car is only worth 50%. Then you turn the car in and walk away and the leasing company or the manufacturer eat the 20% difference. This is the case in many instances where manufacturers subsidize lease residuals in order to achieve low monthly payments.
Nah you're not because the depriciation is based on MSRP while you pay based on the negotiated sell price. So say a car has MSRP of $30,000 and manufacturer says depreciation is 50%. When you negotiate the lease you negotiate a sell price of the car at $27,000 so you "pay" for $12,000 of use ($27,000 sell minus $15,000 in depreciation). At end of lease you find out car only had depreciated to 70% of initial value (MSRP), or $21,000, but you get to buy it for $15,000. You then turn around and sell car for $21,000 and pocket $6,000.

Make sense?

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Re: Leasing a Car with Intention to Buy at End

Post by jimb_fromATL » Thu Oct 13, 2016 5:25 pm

N10sive wrote:Hello,

Can you please humor me and answer this question. I know everyone will say leasing is bad if you keep a car for more than 5 years or drive a lot of miles. But I have a questions regarding leasing and buying at the end. Ive read a couple threads with views on both lease vs buy but am still haven't found all the answers to my questions.

The specific vehicle I am looking at has a 70% residual value at the end of 3 years. Leasing would provide a low monthly payment currently for me. The money factor and MSD's end up to having a rate of around 3.3% (maybe 2.9% if I get tier 1+ but not sure where that starts). I hear people say having a higher residual value is better for leasing since you don't pay as much depreciation in the lease payment. However is it good if you were to purchase at the end of lease? Granted this vehicle has a very high resale value, would most likely be able to sell higher than the residual value.

I am asking this because currently I would like the vehicle long term however that can completely change in 3 years depending on where I live.

TIA for the responses.
It would be interesting to compare some actual numbers instead of idle speculation about what you might be paying for both choices.

One big factor you may be overlooking that if you plan to purchase it at the end of the lease, you'll need to set aside enough extra money every month to accrue that much by the end of the lease.

Or if you plan to finance it at the end of the lease, you'll need to consider the payments including interest for that. Rates are typically higher for used cars, and the terms shorter ... thus a higher payment.

If you're able to pay cash for it, then you need to consider the time value of that money versus what you might earn if you lease or buy the car and make payments.

For example, how much cash do you have to bring to "closing" on the contract?
How much is the sales tax you have to pay for the lease?
How much are dealer fees, processing fees, etc?

What is the MSRP of the car?
How much would you have to pay for it if you were to negotiate a good deal for an outright purchase?
(for example, what's the average price shown by truecar.com ?)
How much is your state's sales tax on car purchases?

What rate can you get at a credit union or your own bank; and what rate does the manufacturer offer if you finance through them?

How much is the lease payment?
How much do you pay as fees to purchase the car at the end of the lease?

How would you plan to pay for it at the end of the lease?

What would you do with the difference between the lower lease payment and the higher loan payment, assuming you finance the car?

And as a matter of curiosity, what kind of car is it? I do see that some Subaru leases show a residual value of about 68% of the MSRP after a 3 year lease. That's about as good as anything I've seen. But a problem is that Subaru also seems to be one for which there is not much room for negotiation for a discounted price at purchase.

jimb

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LiveSimple
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Re: Leasing a Car with Intention to Buy at End

Post by LiveSimple » Thu Oct 13, 2016 5:49 pm

Anything works, it mostly depends

Have bought at the end of the lease, have returned the lease, have bought to own.

It all starts with how you negotiate the initial price or what regional and national incentives are in place, when you shop for a car, plus other discounts you qualify.

Lease and buy, puts you in the driver's seat :
  • After lease end, you can choose to buy if you liked the car and price. Just send the check to the leasing company.
    After lease end, you can lease another car, if you want to try something different, and you do not like the price above.
    After lease end, you can buy the same car, brand new or another brand model, what is best then.
Do not think it is only a dollar decision !!!

N10sive
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Re: Leasing a Car with Intention to Buy at End

Post by N10sive » Thu Oct 13, 2016 6:48 pm

inbox788 wrote: 1) What's the vehicle? MSRP? Very rare for 70% residual after 3 years, even those with low depreciation.
2) Are you getting any additional lease incentives?
3) What is your loan interest rate? You will pay more interest with a lease, and even more with a higher residual.
4) What state are you in? How is sales tax paid? You might avoid sales tax on the residual if you turn the car in.

Just buy the car, finance at low rate 2-3%, and you'll pay same or less in finance charges. You'll also save the lease acquisition/disposal charges. If you must, you can sell the car in 3 years ("most likely be able to sell higher than the residual value"), and if you're right, you'll wind up doing better. And even if you're wrong, after factoring in the savings, you might still be doing better.
MSRP is around 36-38k, I haven't decided exactly which model. It is a toyota tacoma truck. The residuals range from 68-74% depending on model. There are rarely any lease incentives but the goal would be to reduce the capital cost. 2-3 year old tacomas at least from carmax are only a thousand or two lower than their original MSRP. It sucks their is no lease incentives but I assume that is because of the high residual value estimate.

There are three vehicles I am looking at. My ideal is the tacoma. But the new civic hatchback and subaru are competing. I just talked to a ford dealer about the focus ST and it has a residual of 35%! Terrible idea to lease that vehicle so it is out of the question. The civic hatchback is gaining interest from me for the lower price, reliability, and I would pry finance with a 5k down.

finite_difference
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Re: Leasing a Car with Intention to Buy at End

Post by finite_difference » Thu Oct 13, 2016 7:01 pm

Including all fees, if you can lease for $250/month or less then I think it's a reasonable deal. Otherwise you're paying a premium.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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ClevrChico
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Re: Leasing a Car with Intention to Buy at End

Post by ClevrChico » Thu Oct 13, 2016 9:03 pm

inbox788 wrote:
countofmc wrote:
ClevrChico wrote:Recently bought out a leased car for family. With the fees, I calculated we paid an extra $1k rather that buying/financing to begin with. Plus two extra trips to a dealer to buy.
Mind sharing what roughly the MSRP of the vehicle was?

Honestly paying $1k for the "option" to keep a car long term or get rid of it fairly hassle-free if for whatever reason it doesn't work out doesn't seem too bad...
That's $1k more than you had to pay if you made the correct decision on the onset. ClevrChico, what was your though process when you bough the car? What was your likelihood of buying at the end? Sounds like OP is 90-100% going to buy, so if I knew it would cost me $1k for the option I'm unlikely to exercise, I wouldn't do it. Further, 50-60% residual is more typical after a 3 year lease and I'm guessing 60-70% is actual value. So if the lease is for 70% residual buyout, I wouldn't do it, since I'm guessing the worth of the car is only 60%. If it's for 50% residual, and there's a chance the car is worth 60-70%, then it's more enticing, but then you have the issue of higher monthly payments.

As far as pricing the option, you have to expect the car is going to be worth $1k more than the residual in 3 years. I'm guessing that the car dealers have gotten very good at this and 80% of the residual values are $0-1k of this mark, with trade in costs below the residual and retail prices above.
N10sive wrote:The money factor and MSD's end up to having a rate of around 3.3% (maybe 2.9% if I get tier 1+ but not sure where that starts). I hear people say having a higher residual value is better for leasing since you don't pay as much depreciation in the lease payment. However is it good if you were to purchase at the end of lease? Granted this vehicle has a very high resale value, would most likely be able to sell higher than the residual value.

I am asking this because currently I would like the vehicle long term however that can completely change in 3 years depending on where I live.
1) What's the vehicle? MSRP? Very rare for 70% residual after 3 years, even those with low depreciation.
2) Are you getting any additional lease incentives?
3) What is your loan interest rate? You will pay more interest with a lease, and even more with a higher residual.
4) What state are you in? How is sales tax paid? You might avoid sales tax on the residual if you turn the car in.

Just buy the car, finance at low rate 2-3%, and you'll pay same or less in finance charges. You'll also save the lease acquisition/disposal charges. If you must, you can sell the car in 3 years ("most likely be able to sell higher than the residual value"), and if you're right, you'll wind up doing better. And even if you're wrong, after factoring in the savings, you might still be doing better.
In the case of the lease > buy, the family member planned to lease the rest of their life. But, when their first lease ended, they had used less than 30% of the miles they leased for! The car was still wrapper fresh new, and worth more than the residual due to the low miles. They were going to lease the exact same car, so it made sense to buy. Why lease when you will barely use the miles you "rented"?

And you're right, it would make no sense to lease, if you plan on buying. It complicates things, higher fees, etc.

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Re: Leasing a Car with Intention to Buy at End

Post by swaption » Fri Oct 14, 2016 8:18 am

N10sive wrote:2-3 year old tacomas at least from carmax are only a thousand or two lower than their original MSRP. It sucks their is no lease incentives but I assume that is because of the high residual value estimate.
You really do have to understand what is going on here. 2-3 years ago that Tacoma residual was priced with an assumption of very different oil prices today and with an assumption of a very different dynamic in the auto market generally. How many commercials do you see on tv that talk about gas mileage? That's because these days people really don't care. As a result, demand is way down for small, fuel efficient cars and way up for things like trucks (also with trucks, pent up demand due to the housing and construction sector). That mismatch is even more pronounced in the used market as your supply is dependent on what was sold 3 years ago, but demand is based on today. But none of that is of any relevance to the considerations regarding a lease you would enter into today, it just means buying a used truck today might not be such a great deal, except for those with the opportunity to buy out of their lease. It is an option initially out of the money that has landed in the money.

sk2101
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Re: Leasing a Car with Intention to Buy at End

Post by sk2101 » Mon Oct 17, 2016 1:30 pm

Jags4186 wrote:
mmarreco wrote:
Jags4186 wrote:The only time leasing works out in your favor is if the car you have is miraculously worth more at the end of the lease than the car company thought it would be worth.

Example: Car company assumes car will be worth 50% of MSRP after 36 months and 36,000 miles. Car happens to be extremely popular/reliable and is worth 70% of MSRP at end of lease. You buy car from manufacturer for contractually obliged 50% value and sell it on the open market for 70%.

Guess how many times this situation happens...
Actually in your example you are only getting back even to where you'd be if you had bought the car in the first place. You would have paid the 50% depreciation in the monthly payments.

The Lease is favorable in the exact opposite case, when you have a contract residual of 70% but the car is only worth 50%. Then you turn the car in and walk away and the leasing company or the manufacturer eat the 20% difference. This is the case in many instances where manufacturers subsidize lease residuals in order to achieve low monthly payments.
Nah you're not because the depriciation is based on MSRP while you pay based on the negotiated sell price. So say a car has MSRP of $30,000 and manufacturer says depreciation is 50%. When you negotiate the lease you negotiate a sell price of the car at $27,000 so you "pay" for $12,000 of use ($27,000 sell minus $15,000 in depreciation). At end of lease you find out car only had depreciated to 70% of initial value (MSRP), or $21,000, but you get to buy it for $15,000. You then turn around and sell car for $21,000 and pocket $6,000.

Make sense?
No, it does not make sense. Using your numbers (and for the sake of this exercise we are ignoring financing costs and just considering depreciation), your total lease out of pocket would be $6,000 ($12K depreciation in the lease payments minus $6K "profit"). If you had bought the car you'd have been able to negotiate the same selling price of $27k and at the end of 3 years the car would be worth the same $21K, so your total cost of ownership is $6K... so buying back the lease just gets you back to even.

That's why it typically only makes sense to lease vehicles with high residuals so the risk is shifted to the lessors, if you end up in a situation where the market value is higher than the buyout price it means that your monthly payments were too high and you should consider recouping that by buying out the car.

sk2101
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Re: Leasing a Car with Intention to Buy at End

Post by sk2101 » Mon Oct 17, 2016 1:43 pm

inbox788 wrote:
mmarreco wrote:The Lease is favorable in the exact opposite case, when you have a contract residual of 70% but the car is only worth 50%. Then you turn the car in and walk away and the leasing company or the manufacturer eat the 20% difference. This is the case in many instances where manufacturers subsidize lease residuals in order to achieve low monthly payments.
Yes, if you can get this type of lease, it's a great deal. Lease the car and walk away after 3 years.

About the only type vehicle I've seen around 70% residuals are trucks like the Toyota Tacoma, and with those, the resale values match the residuals, so pretty much a wash, and no big deal.
I was just using the same numbers in Jags4186's example in order to be consistent. But in order to give you a real life example, on the last vehicle I leased, a Lexus I had a buyout price of approx $24K (about 66% residual) and at lease end I took the car to CarMax and they appraised it at $17.5K (49%). A difference of $6,500 in my favor. I turned the car in and walked away happy.

Edit: I just checked the residuals on the Tacoma and they are amazing: 72% for a 36-month lease. This is probably the highest I have ever seen!

obgraham
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Re: Leasing a Car with Intention to Buy at End

Post by obgraham » Mon Oct 17, 2016 2:06 pm

You guys are talking theory, and missing out on reality.

I've leased a few times over the years, and though it likely didn't save me any money, it worked out with cash flow and deductibility of the vehicle at that particular time of my life. So sometimes it is the right thing to do.

However, this idea that "if the vehicle is worth more than the residual you can pocket the difference" is a bunch of wishful thinking. I've actually tried this twice, got no interest from any dealer in purchasing the cars (they prefer to buy used vehicles from the car auction agencies), nor from the auction sites, nor from private buyers in a reasonable time frame.

Lease when it works, but buy most of the time.

Snezz1e
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Re: Leasing a Car with Intention to Buy at End

Post by Snezz1e » Mon Oct 17, 2016 3:11 pm

One area where lease could make a lot of sense and could be an advantage in the end is electric vehicles. Depending on the state there may be a lot of incentives/rebates to buy/lease a EV. This can cause resale value to plummet as when the lease is over it is cheaper to lease another new EV then it is to buyout your lease. For the Nissan Leaf, Nissan was offering up to $7k discount to buyout your lease. If you had lease it and bought it out at lease end you would of paid less than the person who bought it out at the start.

researcher
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Re: Leasing a Car with Intention to Buy at End

Post by researcher » Mon Oct 17, 2016 3:29 pm

N10sive wrote:There are three vehicles I am looking at.
My ideal is the tacoma.
But the new civic hatchback and subaru are competing.
How did end up with such disparate vehicles like (Toyota Tacoma vs. Honda Civic) in your final consideration set?
What criteria are you using to select your new car?

tim1999
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Re: Leasing a Car with Intention to Buy at End

Post by tim1999 » Mon Oct 17, 2016 4:05 pm

I've leased numerous cars in my lifetime and none was ever worth as much as the residual in the end. The one I have now has 6 more months to go on the lease and will probably end up 5,000 miles below the mileage limit, and it's current wholesale value is less than what the residual value is. Since I put up multiple security deposits to get the money rate down to zero, I am making out bigtime on this one. They are getting the car back at the end. Plus I had an accident in it so it's worth even less. It was a new model car that wasn't selling well so the manufacturer gave crazy lease deals at the time. They have insurance on the residual values vs. what they can wholesale the car for at lease-end so they don't care what the value ends up being in the end.

doublehub
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Re: Leasing a Car with Intention to Buy at End

Post by doublehub » Mon Oct 17, 2016 7:36 pm

AS a proponent of leasing I can say that if I wanted the vehicle at the end of the lease and had a good experience, then buying the vehicle could be a great choice versus paying more for another vehicle for lease that has appreciated since the last leased vehicle. Leasing gives the buyer a chance to use the vehicle and see if it meets their needs. I've had vehicles {age 69} that I wouldn't purchase no way, no how. Others that I should have purchased but didn't. I have an '09 Liberty with a lifetime pwer train warrant. I bought out the lease. I had a '93 Wrangler that my son purchased when my lease was up. Great vehicle. My wife had I thin six vans but purchased only two of them. Try buying a used vehicle off a lot that has under 90,000 miles on it.

killjoy2012
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Re: Leasing a Car with Intention to Buy at End

Post by killjoy2012 » Mon Oct 17, 2016 7:48 pm

N10sive wrote: I just talked to a ford dealer about the focus ST and it has a residual of 35%! Terrible idea to lease that vehicle so it is out of the question.
Generally speaking, a 70% residual factor is very good. Please keep in mind when comparing residuals across brands/vehicles, you need to compare all at the same term & mileage allowance - otherwise you're comparing apples to oranges. Most vehicles in the US for a 24-39 month lease term are in the 50-70% range. There's no way that a Ford Focus is a 35% residual, unless it was for something like a 5-6 year term. Odds are the F&I manager meant that residual was 65%, you financing the 35%.

As others have said, there are some indirect benefits of leasing. But I would not go into a lease with the intention of buying it out; you're just fooling yourself into an extended loan that has extra fees/taxes. The only time I suggest a lessee consider buying out the vehicle is if they are way under in miles, love the car, and have had no major issues. You'd be surprised how often people do a 2-3 year, 15k mile/year lease and only drive half of that.

closetoreality
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Re: Leasing a Car with Intention to Buy at End

Post by closetoreality » Mon Oct 17, 2016 7:59 pm

I can't get myself to lease a car.

A $400.00/MO lease payment comes out to 14.4K at the end of 36/MO. That is strictly the math without an APR added in. 14.4K to rent a car for 3 years?

killjoy2012
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Re: Leasing a Car with Intention to Buy at End

Post by killjoy2012 » Mon Oct 17, 2016 8:15 pm

I think you're over simplifying things. Not all leases are $400+/month, and if that $14.4k provides 3 years use of a $80k vehicle that otherwise would've cost you $1.2k/month over 6 years, that lease really isn't a bad value, is it?

How many people do you know that purchase/finance a new vehicle over 4-6 years, and shortly after paying it off, just turn around and finance another vehicle? What's the difference?

Sure, if you live in the south or west USA, and can be happy driving a $20k car for 15+ years, you can maximize value. But not everyone is in that scenario.

printer86
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Re: Leasing a Car with Intention to Buy at End

Post by printer86 » Mon Oct 17, 2016 8:18 pm

Last September, my wife informed me that she wanted a new car. I do what she says sometimes. We had always bought our cars, but we decided to trade in her old car and do a single pay 36 month lease. Not sure if it was the best deal, but I was able to defer the car purchase choice until 2018. Sometimes, the decisions choose you.

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Flymore
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Re: Leasing a Car with Intention to Buy at End

Post by Flymore » Mon Oct 17, 2016 9:02 pm

tim1999 wrote:I've leased numerous cars in my lifetime and none was ever worth as much as the residual in the end. The one I have now has 6 more months to go on the lease and will probably end up 5,000 miles below the mileage limit, and it's current wholesale value is less than what the residual value is. Since I put up multiple security deposits to get the money rate down to zero, I am making out bigtime on this one. They are getting the car back at the end. Plus I had an accident in it so it's worth even less. It was a new model car that wasn't selling well so the manufacturer gave crazy lease deals at the time. They have insurance on the residual values vs. what they can wholesale the car for at lease-end so they don't care what the value ends up being in the end.

Can you put some simple numbers to this?
I don't see how you're making out.
If the car was in an accident, don't you have to have it fixed at your expense?
If the car isn't worth as much as the residual value in the end, don't you have to make up the diff?
Is it because the mileage is so low?

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Re: Leasing a Car with Intention to Buy at End

Post by lazydavid » Tue Oct 18, 2016 7:57 am

killjoy2012 wrote:
N10sive wrote: I just talked to a ford dealer about the focus ST and it has a residual of 35%! Terrible idea to lease that vehicle so it is out of the question.
Generally speaking, a 70% residual factor is very good. Please keep in mind when comparing residuals across brands/vehicles, you need to compare all at the same term & mileage allowance - otherwise you're comparing apples to oranges. Most vehicles in the US for a 24-39 month lease term are in the 50-70% range. There's no way that a Ford Focus is a 35% residual, unless it was for something like a 5-6 year term. Odds are the F&I manager meant that residual was 65%, you financing the 35%.
Nope, N10sive is right. Leasehackr lists a slightly higher 41% residual after 36 months, which is still abhorrently low:

http://leasehackr.com/blog/2015/9/26/fo ... ember-2015

N10sive
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Re: Leasing a Car with Intention to Buy at End

Post by N10sive » Tue Oct 18, 2016 11:10 am

researcher wrote:
N10sive wrote:There are three vehicles I am looking at.
My ideal is the tacoma.
But the new civic hatchback and subaru are competing.
How did end up with such disparate vehicles like (Toyota Tacoma vs. Honda Civic) in your final consideration set?
What criteria are you using to select your new car?
Good Question.

Needs: Able to haul a bike(bike rack), ample space to haul outdoor gear, decent power for higher elevations
Wants: 4x4/AWD, manual for a hatchback
Other factors: Residual value if I were to lease, general reliability and maintenance factors, etc.

I live in Southern California, but came from Tahoe and am a pretty active outdoor person. However, moving to so cal I do not get out so much to the mountains during the winter. That being said, my ideal vehicle is a tacoma 4x4. It is a great bike hauler and great in the snow. I like the peace of mind of a 4x4. And the added benefit of the bed to haul things. And I am actively trying to get back to tahoe or to a mountain town.

But its pretty expensive, upwards of 35k in the model I would like. So thats where the new civic hatchback and a subaru comes in. The subaru has the AWD and being a hatchback can haul a decent amount. The impreza and crosstrek though had pretty bad reviews for the cvt and being underpowered n general(as reviews go). I read a manual might help in this factor. Other options come into mind but if I were to get a hatchback I would like a manual transmission which I believe aren't offered on the outback. I will test these out soon and see if I would like them.

In comes the new honda civic hatchback(besides being the most financially conservative). Is manual and has a turbo. Hatchback so it can still fit a lot of stuff. Honda reliability etc. Only thing it is FWD, which by now I might have to come with terms with. FWD would fare a lot better than a 2WD truck though. The ford focus ST was another option but it is way more expensive and for leasing is not the smartest idea having a 35% residual.

Might not be the best reasoning but these are my wants and needs. I can get by with a hatchback for the time being since I am in socal.

Thanks for the insight everyone. Definitely a lot to think about.

N10sive
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Re: Leasing a Car with Intention to Buy at End

Post by N10sive » Tue Oct 18, 2016 11:18 am

lazydavid wrote:
killjoy2012 wrote:
N10sive wrote: I just talked to a ford dealer about the focus ST and it has a residual of 35%! Terrible idea to lease that vehicle so it is out of the question.
Generally speaking, a 70% residual factor is very good. Please keep in mind when comparing residuals across brands/vehicles, you need to compare all at the same term & mileage allowance - otherwise you're comparing apples to oranges. Most vehicles in the US for a 24-39 month lease term are in the 50-70% range. There's no way that a Ford Focus is a 35% residual, unless it was for something like a 5-6 year term. Odds are the F&I manager meant that residual was 65%, you financing the 35%.
Nope, N10sive is right. Leasehackr lists a slightly higher 41% residual after 36 months, which is still abhorrently low:

http://leasehackr.com/blog/2015/9/26/fo ... ember-2015
Ford is offering a 3750 lease rebate but it sill doesn't make the vehicle a great lease. Although its hard for me to believe that a focus st has such a low residual after only 3 years.

inbox788
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Re: Leasing a Car with Intention to Buy at End

Post by inbox788 » Tue Oct 18, 2016 11:21 am

closetoreality wrote:I can't get myself to lease a car.

A $400.00/MO lease payment comes out to 14.4K at the end of 36/MO. That is strictly the math without an APR added in. 14.4K to rent a car for 3 years?
Don't fool yourself into thinking that buying is a lot less (unless you got totally ripped off on the lease). A competitively priced lease only costs a little more than a similar purchase/finance, and you're spending around $14k to buy and sell the same car.

tim1999
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Re: Leasing a Car with Intention to Buy at End

Post by tim1999 » Tue Oct 18, 2016 8:00 pm

Flymore wrote:
tim1999 wrote:I've leased numerous cars in my lifetime and none was ever worth as much as the residual in the end. The one I have now has 6 more months to go on the lease and will probably end up 5,000 miles below the mileage limit, and it's current wholesale value is less than what the residual value is. Since I put up multiple security deposits to get the money rate down to zero, I am making out bigtime on this one. They are getting the car back at the end. Plus I had an accident in it so it's worth even less. It was a new model car that wasn't selling well so the manufacturer gave crazy lease deals at the time. They have insurance on the residual values vs. what they can wholesale the car for at lease-end so they don't care what the value ends up being in the end.

Can you put some simple numbers to this?
I don't see how you're making out.
If the car was in an accident, don't you have to have it fixed at your expense?
If the car isn't worth as much as the residual value in the end, don't you have to make up the diff?
Is it because the mileage is so low?
2014 Nameless car (PM me if you want to know)
$43,600 MSRP
$41,185 Selling Price
$42,057 Gross Capitalized Cost
$39,395 Adjusted Capital Cost (included owner loyalty rebate and a misc. rebate which they consider to be capital cost reduction)
Put up a $3,600 refundable security deposit (the maximum) to buy down the money factor near zero. Not getting anything in the bank anyway.
$52 "rent charge" over the life of the lease due to the above.
10,000 miles per year for 39 months.
Residual value $27,190
$342 per month including sales tax
Total monthly payments $13,350

The car is worth less than $27,000 now. Dealers are selling certified 2014's with similar mileage with asking prices of $28,000ish. Meaning they paid more like $24,000-$25,000 wholesale. And mine isn't due back for another 6 months. Values will be even lower then.

The accident was the other driver's fault. $4,000 in damage. I got my deductible back. I was out zero besides about $50 to get a nicer rental than the bare bones model they wanted to put me in for a week.

If the car isn't worth as much as the residual at the end, it's the leasing company's problem, not the lessee.

jalbert
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Re: Leasing a Car with Intention to Buy at End

Post by jalbert » Tue Oct 18, 2016 11:01 pm

What about if I buy a 50k car and the leasing company assumes 70% depreciation. In 3 years it turns out to be 50% depreciation. Didn't I win since I used 25k of depreciation and only paid for 15k?
It works as a contrived example, but I doubt the residual value will be underestimated like that.

I think a more realistic scenario is inverting the above, e.g. VW diesels probably depreciated more than expected due to the VW emission testing fraud. Being able to walk away from a leased car is a win there.

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