Car leasing

flyingcheesehead

flyingcheesehead

Touchdown! Greaser!
Joined
Feb 23, 2005
Messages
24,256
Location
UQACY, WI
Display Name
Display name:
iMooniac
Hi folks,

I have never even purchased a new car in the past, but I'm looking at it - And I'm interested in leasing. What do you all see as the pros and cons of leasing? Any tips/tricks to get the best deal? Is it financially smart to lease? If you lease, do you plan to buy it out at the end?
 
For personal use, The only possible way I can ever imagine it makes sense is if you're the type of person that ABSOLUTELY NEVER wants to drive a car more than 2 years old.

That said I hate it on principle...so perhaps someone else will have better information :)
 
So many variables... But imo it rarely makes sense.
 
Never put money down on a lease. Essentially, a lease accomplishes the same thing as a balloon payment loan (these are also available). The downside is at the end of your lease period, you had better have a car that's returnable within the mileage and other constraints at the end.

Leases only really make sense if you KNOW you're not going to drive the hell out of the car and you will turn it in at the end of the lease. If you're going to keep the car longer, you almost certainly can do better financing it yourself. The rates and other "overhead" are going to be lower.

Actually, I've not had a car payment in over 15 years. I tend to drive my cars for a long time and then just buy another one outright. I'd still be driving my Suburban had it not been totalled by a speeding moving van. I drove it's replacement for over ten years before it started to make signs of letting go at any minute then I traded it in on a Volt.
 
Leasing is nothing more than a complicated and expensive way to borrow money. A shell game, really, where the total cost of the game is well disguised. Which is why the sales guy and/or the F&I guy get extra commissions when they hook a sucker.

If you absolutely have to buy a car that you can't afford to pay for (why?), then talk to a credit union about taking out as small a loan as possible.
 
What's written above.

Also, some leasing companies are notorious about claiming "excess wear" or "damage" on returned vehicles which are in flawless condition. American Honda is the worst on this; have had to go all lawyer on them before.
 
Leasing is proven to be the most expensive way to own a vehicle. Primary reason is you ALWAYS have a payment and never own the asset outright.
 
I think leasing makes sense if you don't mind always having a car payment (jumping lease to lease), want to drive newer cars and don't feel hamstrung by the mileage limitations generally put in place.

In my experience, the cars family and friends have owned start getting less reliable and more expensive (ie, trips to the shop) at about the 10 year mark. So I prefer to buy my cars new, pay them off in 3 years and drive them for 7-10 years. It feels like a decent tradeoff to have 4-7 years to save what would've been a car payment while never driving a car that's TOO old or being forced to get a different used car every few years.
 
flyingron said:
... Actually, I've not had a car payment in over 15 years. ...
Click to expand...
When I got out of graduate school I borrowed to buy a used Porsche 911. I hated that loan and paid it off as fast as possible. Many car-loan-free years followed; I always bought only what I could afford. I thought I was done forever but 6-8 years ago when I bought my Mazda RX-8, Mazda offered a $2500 discount if I financed with them. I did the deal, waited two months for the title paperwork to clear the state, then paid it off. Net cost to get $2500 was two car payments of a couple hundred $$ each. That kind of loan I will do all day!
 
Well, to be fair, if you want to own a vehicle cheaply, any new vehicle is a stupid idea.

I've been known to pick up $1000 cars and drive them for 200,000 miles. Full cost of ownership works out to mostly fuel, and around 20 cents per mile or less. Of course, they are ugly, but that means I never have to worry about dings in the supermarket parking lot, or vehicle theft.

I occasionally get compliments on them you (or I) wouldn't expect in a million years. It seems gen2 Jettas are getting very rare, and have a distinctive look. Except, the Germans I work with think it's an old lady car.

I find it stunning people talk about "equity" in cars. They depreciate. Very quickly. It's one of the most mind bogglingly stupid investments you could imagine.

I buy a car cheap (most I've spent is $3000) and drive it until it's not drivable and not worth repairing anymore for some reason. Usually, the wife totals it….
 
Last edited:
flyingcheesehead said:
And I'm interested in leasing. What do you all see as the pros and cons of leasing?
Click to expand...

I leased once a long time ago. Since then, I buy what I want, usually cash unless I'm offered 0%, and drive it until it's not useful anymore. My present vehicle is nearly 14 years old and nowhere near done yet. I am no financial/leasing whiz, but this is how I see it:

Pros:

  • You can drive a car much nicer than you could otherwise afford
  • It's nice if you always like driving new (3 years or less) cars and are comfortable with ALWAYS having a car payment.
  • You only pay tax on the portion of the vehicle value you use
  • The vehicle is always in warranty so no unexpected repair expenses
  • Many new cars come with service for 2-3 years, so your only cost could be the payment
Cons:

  • You have no equity at the end of the lease, you turn in the car and start over. Of course any down payment towards the lease is gone.
  • You must keep your mileage within the agreement, extra miles are very expen$ive. Extra miles can be purchased up front for less, however.
  • You must keep the car in tip top condition, no dings, keep it washed, the interior vacuumed, etc. If your family is rough on vehicles, it will cost you at the end.
  • You will have to pay for anything they deem to be excessive wear, and that can be highly subjective.
  • You will likely have to buy new tires before turning the car in.
 
Waiting for input from the dealer in Atlanta. This is his domain of expertise.

I've never leased a car either, but man the payments seem dirt cheap for being able to drive a nice new vehicle.

The huge down side for me would be the mileage restriction. That would remind me too much of the old days when cell phone contracts charged you 25 cents/minute so you were always in a hurry to get off the phone. To me, that would take the fun out of driving the new vehicle.
 
Gerhardt said:
The huge down side for me would be the mileage restriction. That would remind me too much of the old days when cell phone contracts charged you 25 cents/minute so you were always in a hurry to get off the phone. To me, that would take the fun out of driving the new vehicle.
Click to expand...

Heh. The time I leased, I set up a spreadsheet and updated it weekly and kept tabs on actual miles vs. where we should be at that point in the lease.

Multiple times we let that car sit the last week or week and a half of a month because we were at the timeline. It's a ***** to drive the old car and leave the new one sit because of this.

1st lease. Last lease. :yes:
 
My problem with leasing even over what has been previously said is that now they require a "down payment" (actually a lease buy down) to make the payments acceptable. If you can't afford the car you want new, get a one or two year old one with reasonably low mileage.
 
Bill Jennings said:
I leased once a long time ago. Since then, I buy what I want, usually cash unless I'm offered 0%, and drive it until it's not useful anymore. My present vehicle is nearly 14 years old and nowhere near done yet. I am no financial/leasing whiz, but this is how I see it:

Pros:

  • You can drive a car much nicer than you could otherwise afford
  • It's nice if you always like driving new (3 years or less) cars and are comfortable with ALWAYS having a car payment.
  • You only pay tax on the portion of the vehicle value you use
  • The vehicle is always in warranty so no unexpected repair expenses
  • Many new cars come with service for 2-3 years, so your only cost could be the payment
Cons:

  • You have no equity at the end of the lease, you turn in the car and start over. Of course any down payment towards the lease is gone.
  • You must keep your mileage within the agreement, extra miles are very expen$ive. Extra miles can be purchased up front for less, however.
  • You must keep the car in tip top condition, no dings, keep it washed, the interior vacuumed, etc. If your family is rough on vehicles, it will cost you at the end.
  • You will have to pay for anything they deem to be excessive wear, and that can be highly subjective.
  • You will likely have to buy new tires before turning the car in.
Click to expand...

That about sums it up. There are only two things I'd add.

Firstly, there apparently are some tax advantages to leasing if you use the car for business. I don't know how that works, but when I was in that situation, my accountant told me to lease my cars in the business's name.

Secondly, if you lease a car through a new car dealer for four years, there's a very good chance that the same dealer is going to try to lease you a new one to replace it in two years. This can be a good thing because the dealers tend not to be quite so anal about mileage, wear, and tear when they're trying to pitch you a new car. Of the three four-year leases I had, only one made it past two years before the dealership offered me a new car.

Rich
 
RJM62 said:
Firstly, there apparently are some tax advantages to leasing if you use the car for business. I don't know how that works, but when I was in that situation, my accountant told me to lease my cars in the business's name.
Click to expand...

The lease becomes, and Operating Expense, and reduces your Net Operating Income, and thus the amount in which you are taxed.

Secondly, if you lease a car through a new car dealer for four years, there's a very good chance that the same dealer is going to try to lease you a new one to replace it in two years. This can be a good thing because the dealers tend not to be quite so anal about mileage, wear, and tear when they're trying to pitch you a new car. Of the three four-year leases I had, only one made it past two years before the dealership offered me a new car.
Click to expand...

Factory supported leases are typically the only ones that can make sense because the manufacturer is subsidizing the dealer to move inventory.
 
Anthony said:
The lease becomes, and Operating Expense, and reduces your Net Operating Income, and thus the amount in which you are taxed.
Click to expand...

That makes sense. Thanks. I just pay the accountant and do what he says. I don't worry too much about the whys.

Anthony said:
Factory supported leases are typically the only ones that can make sense because the manufacturer is subsidizing the dealer to move inventory.
Click to expand...

In the case of the last lease, the dealership couldn't offer me a new car halfway through because the company (Saturn) and the dealership were both out of business. GMAC eventually did, but I declined. I had already decided to sell the business and move, so the lease no longer made sense.

Rich
 
A lease gets you into more of a vehicle than you can rightly afford. People had a lot of trouble when they did that with houses. You still have to buy the insurance which you should check into BEFORE you start out. It only makes sense if you plan to buy out the lease at the end. You still pay more for the car than if you'd buy a similarly equiped used car. Check the used cars out at the rental agencies. Those are, in essence, leased automobiles. No bargain there that I can tell.
Go one or two years old even if it is a dealer lease return. I had really good luck on a Bonneville that way. It helped that I had a good relationship with the dealer. Too bad he was Pontiac only. Now he's just another used car place.
 
Anthony said:
The lease becomes, and Operating Expense, and reduces your Net Operating Income, and thus the amount in which you are taxed.
Click to expand...

... provided it is structured as an operating lease rather than a capital lease. There are some subtle differences.

That said, I moved us to leasing at a former employer for a variety of reasons, not the least of which was that the implied cost of money in the lease was substantially less than our WACC if we used regular company capital. That's not always true, and for a smaller company it may weigh into the creditworthiness of the company (depending on overall size, capital structure, etc.). We also eliminated "executive" vehicles and simply boosted their salary a bit to ensure no change in compensation.

If a company has only a very few vehicles it may not pay to lease - if a company has a good sized fleet (and we did), it may make more sense to lease through a large fleet management company that not only can offer a good cost of money but also can offer services & negotiated base prices.
 
I've leased twice. You want to be sure you can keep within the mileage limits. Do some research ahead of time to understand leasing terms as it relates to interest rates. I would go in and find the vehicle you want and negotiate a price based on buying for cash so you can nail them down on a number. Only after you've done that do you say you want to lease and then be damned sure the number you agreed on shows up on the paperwork.

http://www.money-zine.com/financial-planning/leasing-or-buying-a-car/money-factors-in-car-leases/
 
HERE'S JOHNNY!!
We lease about 2-5% of our new vehicles, usually one to two per month. My personal take on leasing is it works if the deal is right, sometimes Ford really supports the leasing of certain models making the payment affordable with little cash down. Then, if you are like a lot of people and will always have a car payment or trade every 2-3 years it could be a good deal vs buying/financing. We don't push leasing, and generally the only ones we do are when there is a really good factory program.
The imports Honda/Toyota and the Koreans in Atlanta spend 40% of their ad budgets on promoting lease payments, they collectively lease between 5-8% of their sales. The advertised lease payments generally include 10% down which on a modest car is $2500-3000.00, divide by 24 months = $125.00 more per month, of course 36 months is less, but still $75-90.00 more. So, the $179.00 payment is really $300.00, plus tax, in Georgia you have to pay the tax on the entire amount of the car, not just the lease payment. So, add another $50-70 per month for the sales tax! :eek:
For people who keep the mileage in check, use history, not we won't drive this one as much and will trade every couple years it can work, I'd rather see someone get into a 24 month lease than a 72 month purchase. ;)

If you have a legitimate business use and can deduct the entire lease payment it can also make more sense.

Gerhardt said:
Waiting for input from the dealer in Atlanta. This is his domain of expertise.

I've never leased a car either, but man the payments seem dirt cheap for being able to drive a nice new vehicle.

The huge down side for me would be the mileage restriction. That would remind me too much of the old days when cell phone contracts charged you 25 cents/minute so you were always in a hurry to get off the phone. To me, that would take the fun out of driving the new vehicle.
Click to expand...
 
Last edited:
N747JB said:
If you have a legitimate business use and can deduct the entire lease payment it can also make more sense.
Click to expand...

My old man never had a legitimate business use, but he leased his cars and deducted them anyway. I think the rules were different back then, and leasing it through is business made it all good.

There are people who really need a nice new car. If you're a real estate agent driving people around, you need a nice car. I am certain there are other professions where this is the case as well. At that point a lease makes good sense, since buying and selling cars every couple years can be financially prohibitive.

I don't mind buying a new car, since I don't feel myself sufficiently mechanically adept to evaluate a used car for faults or fix it when it breaks. That said, I keep cars for an average of 12 years and take good care of them. The only car that's ever cost me buku money in repairs is the one I bought used.
 
Anthony said:
The lease becomes, and Operating Expense, and reduces your Net Operating Income, and thus the amount in which you are taxed.
Click to expand...
Yes, but that is not really the whole story.


  • But #1, if you borrow to buy the thing, you can deduct depreciation and interest which will probably mean a smaller deduction because you are spending less money to own the car. Bigger tax deductions = bigger expenses = Bad Idea.
  • But #2, there is a thing called Section 179 depreciation that may let a small business deduct 100% of a purchased vehicle's cost in the first year. There are rules on types of vehicles, etc. that the company CPA will know.
  • But #3, sometimes a business wants to window dress the balance sheet by leasing. I have never done this so I don't know the rules, but some kinds of leases are kind of below the balance sheet radar and don't show up. If you buy, though, the vehicle and the loan both appear on the balance sheet. This may affect how you look to your lender's loan analyst when he/she calculates the various ratios. It sounds like wsuffa knows more about this.

So, evaluating a lease in a business context is much more involved. A lease is still a complicated and expensive way to borrow money but in a business context it can occasionally make sense.

Anthony said:
Factory supported leases are typically the only ones that can make sense because the manufacturer is subsidizing the dealer to move inventory.
Click to expand...
Usually, though, there seems to be a loan interest rate buy-down offered too, so that should be compared to the total lease costs, hassles, and restrictions.

But, back to the more important point (and reinforcing silver-eagle): Why buy a new car that you can't afford? If you just have to have new, at least wait until the new models have been out for a while and then shop the dealers for deals on last model-year cars. That gets you new and you save most of a year's worth of depreciation with the lower price. Maybe even a price that you can afford without borrowing. Next fallback: Lease returns. Cheaper and more affordable yet. Next fallback, 2-3 YO car that you can afford. Next fallback, start saving the lease payment amount until it builds up to the point where you can afford to buy.

If you haven't read "Millionaire Next Door," read it now. Buy a used copy on Amazon.
 
Dave Ramsey response:

QUESTION: Listener asks Dave to break down the mathematical flaws in a car lease.

ANSWER: A car fleece is basically renting a car. You pay $400 a month and at the end of the new car lease, you turn it back in. If you want to buy it, you are buying it for what they estimate at the beginning of the fleece to be the market value. At the end of the lease, it’s called the residual value. If you pay $400 a month for 60 months, you pay $24,000 before turning it in. The car will not have gone down in value more than that, because the car companies would lose money if it did. When they get the car back, you will have paid them more than the car has depreciated during that time.

During that time, you’re maintaining the car as if you owned it. You’ll get charged for excessive wear and tear, or if you put too many miles on it. If you rent it for $24,000 and it went down $15,000 in value, then it cost me $9,000 to rent this car for this period of time. That is their profit during that time.

Another thing is that the interest rates on a vehicle lease are not disclosed because the Federal Trade Commission has determined that this is not a debt, so there is no federal disclosure involved. Therefore, you have no truth in lending disclosure sheet. The interest rates you get charged are unbelievably high. That’s where you’ll realize you got screwed over.

People get sold automobile leases because they are told that it’s what sophisticated people do. But as it turns out, the car companies make more money on leasing you the car than if you bought the car with cash, according to the National Auto Dealers Association. Broke people think ‘how much down and how much a month’. Rich people think ‘how much’. If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.
 
airdale said:
I agree totally with the sentiment and the strategy, but it is delusional to think that a mutual fund investment will earn 12% over a long period of time. So the numbers are not nearly as nice as the video promises. Still good, but not that good.
Click to expand...

When asked about the 12% figure, Dave quotes a very long term viewpoint of the stock market. IIRC, it's something like 25 years. I think he says, (paraphrasing) "if you were to look at just about any 25 year historical period of the DJIA (or other index), you would see a growth of about 12%"

Dig around on his web site and you'll find the correct citation that explains how he came up with the 12% figure.

Remember, the premise is once you put the dollar into that "car fund" you don't ever touch it.

And even if shorter term reality is less than 12%, the concept is still possible, you just need more in the "base" fund.

I've met a few folks who have successfully "laddered" their way into better and better cars. At the end of 5 or 6 years, they have as nice of a car as someone who bought that same model new, but didn't suffer the depreciation or debt service costs, resulting in paying significantly less than the new purchaser.
 
flyingcheesehead said:
Hi folks,

I have never even purchased a new car in the past, but I'm looking at it - And I'm interested in leasing. What do you all see as the pros and cons of leasing? Any tips/tricks to get the best deal? Is it financially smart to lease? If you lease, do you plan to buy it out at the end?
Click to expand...

The main economic tipping point revolves around how many miles per year you drive. If you go over it gets expensive. It also depends on what you need out of a car. For some people leases work very well. Look for a lease program through a Credit Union or real leasing agency. 'Factory Lease' deals often aren't a particularly good deal and are actually a balloon payment loan paying interest on the entire value while only paying the principle down to the projected residual value. If you only drive <12,000 miles a year, you can do well on these deals. More than 18,000 miles a year and it gets iffier.

Also ask Hertz and others about a long term rental.
 
AggieMike88 said:
Dave Ramsey response:

QUESTION: Listener asks Dave to break down the mathematical flaws in a car lease.

ANSWER: A car fleece is basically renting a car. You pay $400 a month and at the end of the new car lease, you turn it back in. If you want to buy it, you are buying it for what they estimate at the beginning of the fleece to be the market value. At the end of the lease, it’s called the residual value. If you pay $400 a month for 60 months, you pay $24,000 before turning it in. The car will not have gone down in value more than that, because the car companies would lose money if it did. When they get the car back, you will have paid them more than the car has depreciated during that time.

During that time, you’re maintaining the car as if you owned it. You’ll get charged for excessive wear and tear, or if you put too many miles on it. If you rent it for $24,000 and it went down $15,000 in value, then it cost me $9,000 to rent this car for this period of time. That is their profit during that time.

Another thing is that the interest rates on a vehicle lease are not disclosed because the Federal Trade Commission has determined that this is not a debt, so there is no federal disclosure involved. Therefore, you have no truth in lending disclosure sheet. The interest rates you get charged are unbelievably high. That’s where you’ll realize you got screwed over.

People get sold automobile leases because they are told that it’s what sophisticated people do. But as it turns out, the car companies make more money on leasing you the car than if you bought the car with cash, according to the National Auto Dealers Association. Broke people think ‘how much down and how much a month’. Rich people think ‘how much’. If you can’t pay cash for a car, then ride a bicycle. But don’t lease a car.
Click to expand...

The "down" on the "lease" is the kicker, and it is pure profit up front.
 
AggieMike88 said:
... I think he says, (paraphrasing) "if you were to look at just about any 25 year historical period of the DJIA (or other index), you would see a growth of about 12%" ...
Click to expand...
I wonder if he also believes in the Easter Bunny.

Sorry to say, the numbers over long periods of time come in at around 7% in constant dollars (real return). For example, S&P 500 total return from 1940 to 2013 was 6.93%. For the past 10 years it was 5.66% The notion that someone should plan for 12% real return over the short periods suggested in his video is, as I said, delusional.

It won't get to 12% even if you use inflated dollars, and to use inflated dollars is very misleading.

Any casual internet search will back this assertion up. Samples from the first page of a search:

http://seekingalpha.com/article/584...tic-long-term-rate-of-return-for-u-s-equities

http://www.moneychimp.com/features/market_cagr.htm

http://dqydj.net/sp-500-return-calculator/

It would be nice if it really was 12%. But it isn't.
 
Last edited:
AggieMike88 said:
When asked about the 12% figure, Dave quotes a very long term viewpoint of the stock market. IIRC, it's something like 25 years. I think he says, (paraphrasing) "if you were to look at just about any 25 year historical period of the DJIA (or other index), you would see a growth of about 12%"

Dig around on his web site and you'll find the correct citation that explains how he came up with the 12% figure.

Remember, the premise is once you put the dollar into that "car fund" you don't ever touch it.

And even if shorter term reality is less than 12%, the concept is still possible, you just need more in the "base" fund.

I've met a few folks who have successfully "laddered" their way into better and better cars. At the end of 5 or 6 years, they have as nice of a car as someone who bought that same model new, but didn't suffer the depreciation or debt service costs, resulting in paying significantly less than the new purchaser.
Click to expand...

I'm a little surprised at 12%. The number is generally accepted as being somewhere between 8-9%, with the right management, you can do a bit better, but I think 12% is stretching it. (You might expect that for riskier investments, but for what most would consider prudent investments, it's less).
 
IME, Ramsey's teachings are pretty sound advice, especially for those that struggle with money. When it comes time to do the math however, the result is often horrendously wrong. Sometimes it's as if he doesn't even look up the "facts" he spews as the foundation for the advice.
 
airdale said:
I agree totally with the sentiment and the strategy, but it is delusional to think that a mutual fund investment will earn 12% over a long period of time. So the numbers are not nearly as nice as the video promises. Still good, but not that good.
Click to expand...

Not only is 12% delusional but I don't agree with putting money in an aggressive mutual fund you'll need in a few years. You might find your free sports car just became a free Dihatsu (do they still make those?)
 
Personally never a fan of leasing a car...

That being said...don't forget there is room for negotiation even with a lease. Dealers love it because almost all people who lease take the terms seen as advertised.

Miles....amount down...and amount to purchase at end of lease are negotiable.
 
TEFLONSEAN said:
Personally never a fan of leasing a car...

That being said...don't forget there is room for negotiation even with a lease. Dealers love it because almost all people who lease take the terms seen as advertised.

Miles....amount down...and amount to purchase at end of lease are negotiable.
Click to expand...

Yep, the lower the miles you take, the better you could negotiate when I was selling.
 
I look at it more as risk allocation. Put nothing down on the lease and use the built-in gap insurance to take the risk of loss off of you. Example, you buy a new car for cash, you wreck it, you get 80% of the value...20% loss. Example_lease, you lease a new car, you wreck it, you tell them where they can pick up THEIR car.

That being said, we both lease and buy...generally buy used, lease new. On the lease always get maintenance included and it's a rental car (make payment, insert gas). Will only lease if it is subsidized by the manufacturer with $0 down. Will only buy when the rate is subsidized to below 1% and the car is CPO'd...otherwise I have the philosophy of "don't need it" and "the right deal will come."
 
Also on the subsidized leases, generally NEVER buy the car out at the end, the residual is likely to be more than it would cost to get the same car / mileage / year with a CPO warranty...just my experience
 
You must log in or register to reply here.
Back
Top