Leasing 101: Should you lease a car?

Discussion in 'The Garage and Car Talk' started by Philpug, Jun 26, 2017.

  1. Philpug

    Philpug Enjoying being back on two skis. Admin Pugski Ski Tester

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    The subject came up on another forum and it reminded me that I did an article on Epic. It might be useful for some members here.

    Ah, the age old question..should I lease or buy? With the average price of a new car being around $32,000 it is a question many buyers are asking and many of those have never leased or considered leasing in the past. The short article will help answer some of the answers about leasing and maybe dispel some of the misconceptions. Before getting into the meat, yes, used is always a way to go and sure it is a viable option but for this conversation sake, lets just keep it to lease verses buy of new cars.

    First, there is no pat answer either way. Both leasing and buying do have their pluses and minuses and there is strong arguments both ways. With I just want to pass along some of the basics by taking the emotion or “this is the way we always bought cars” out of the equation.

    Second. Leasing is not leasing is not leasing and not all leases are equal there there are times when leasing makes sense and times when it does not. Of the thirteen new cars I purchased in the past three decades seven were lease and six were purchased. Oh and there were two used car leases on top of the list too. Yes, used car leases are out there but few and far between and need many qualifications are need for them to make sense. Usually high line again that are CPO (Certified Pre Owned) cars.

    When leases make sense:

    You drive high miles-Yes. But be realistic with what you drive. If you drive 20,000 miles a year, build a 20,000 mile a year lease, don’t buy a 10,000 a year lease and expect your habits to change by it’s self. Building your miles up front in a lease tend to be less expensive than the charges at the end, in some cases by 50%, ask. Some leases will also refund you the extra miles that you paid for if you don’t use them, again ask. Nothing depreciates a car faster than miles on the odometer, let the leasing company take the hit of depreciation.

    You come to the realization that you will always have a car payment- If you know that you will have a car payment. If thats the case, why not be in a new car every 3 years and be under warranty and risk extra expenses of out of warranty maintenance? Using that $32,000 car as a reference, putting 10% down and a tax rate of 8% along with an interest rate of about 4%, your payment is still $575 for 60 months and if you want a payment under $500, you have to go a whopping 72 months. Ouch.

    You don’t keep a car more than 3 years- See above. Needs change, wants change. How often de we get tired of a ski after a season? not uncommon to get tired or bored with a car after three years.

    You are out of equity on the car you are in- Yes it happens, you have a car that you want to trade and owe $10,000 on a car thats worth only $7500. Be it in a loan or a lease, that money has to go somewhere. Why I suggest the lease here is that with the GAP insurance that leases have, if the car is totaled at any point on the lease, you are forgiven that debt. In a purchase, that can still cary over. Am I saying that you will total a car? No, but this is a consideration. After the three years you are out of the out of equity cycle.

    When leasing does NOT make sense:

    You keep a car a long time- I bought my TDi wagon because I planned on keeping it a while, I am going on 4 years and I am happy with it and I plan on keeping it another 4. Leasing didn’t make sense for me in this purchase for that reason. My previous Forester I did lease because A. The lease deal was super strong and B. I only planned on keeping it 2 years (they had a good 2 year lease which is rare). It worked out well because I didn’t like the car.

    You are rough on your cars or you modify them- Residuals (the projected future value which is part of the lease calculation) is based upon the vehicle coming back in “average” 3 year old condition so it can be resold. An aftermarket lowered suspension or custom paint job is frowned upon, stock as close to original is better. Now, adding leather or tinting windows tend to be fine but will not change the residual, but ask. So if adding leather is a cost of $1200 you will basically be “financing” the who amount over term of the lease so it will be about $33/mo (plus interest & tax) ) more in the lease. Again, there are exception some lease companies might give a flat projected residual for that leather of say $300 so you will be dividing $900 by the term so it will be $25 plus the other costs.

    Like I said, leasing is not leasing is not leasing. I usually suggest leasing from a manufactures leasing program. Why? because they have a vested interest in keeping you happy. They want to have you come back and lease again. A regular bank lease, not as much. A bank has no spot in the vault to keep the car when it comes back off lease. The manufacturer lease also will have perks like waving disposition fee at the end of the lease when you lease again. Programs such as Subaru will waive the first $1,000 of damage to the car, so that cracked windshield won’t come out of your security deposit.

    Figuring out a lease:

    Not too different from a purchase there is simple calculations that go into figuring out a lease…

    MSRP (Sticker Price): The number that the residual is based off of.

    Capitalization cost (selling price of the car): Negotiated sale price

    Cap Cost Reduction (down payment/money down/trade equity): Unless you want a lower payment, I usually do not recommend putting money down into a lease. If something happens 18 months into a 36 month lease, you lose the balance. If you have money burning a hole in your pocket, there are other ways to utilize it like multiple security deposits that lower your interest rate in the lease and it is kept aside.

    Money Factor (interest rate): usually number followed by a decimal and a couple of zeros such as .0014. take that number and multiply it by 2400 and it will give you are interest rate. so that wold give you an interest rate of 3.36.

    Term: 36 months tend to be the sweet spots in leases now you will see variations such as a 39 month lease which will use a 36 month residual but will divide the lease cost over 39 months to give a lower payment. The same with 27 mo verses 24 month leases.

    Residual: Projected value at the end of the lease based off of the MSRP. a guideline for a strong residual..
    48 Months: 50%
    36 Months: 60%
    24 Months: 70%
    • +/- 1-2%
    • Based on 12,000 miles a year. 10,000 mile leases tend to add 1-2%, 15,000 mile leases will from the residual 2-3% depending on companies.
    • If it gets 5% lower than these numbers, chances are it is not a strong lease and either look at another model or consider purchase.
    Acquisition Cost/bank Fee: Basically points on a mortgage, a set amount that the back charges in the start of the lease. This amount usually ranges for about $495 to $995 for high line cars. Be careful some dealers will increase this amount for additional profit. When comparing numbers from dealer to dealer with your lease make sure you compare this number along with the payment. This is figure that a dealer can “adjust” for more profit.

    Tax: This varies from state to state. Some states will tax just the payment, in some cases a higher percentage than on a sale but you are paying it in a smaller amount. Some states tax the capitalization cost and add it to the payments (divided by the term).

    Security Deposit: Usually required with a first time leaser with a new leasing company, this can get waived with very good credit or if you are returning with a another lease.

    Disposition fee: Usually $395.00-$595.00 a fee at the end of the lease if you either A. do not buy the car at the end or B. Do not lease another car from that leasing company.

    When it comes down to leasing you have to be flexible. not only with in a manufacturer but also from manufacturer to manufacture and how they are incentivizing their models. There are times that a Audi A6 might lease for less (or about the same or near) an A4. So be open minded going it. You might have planned on getting a Forester but the new Outback might be incentivized better because it is fresher and when it runs on a 4 year cycle a first year model comes back in that 4th year and is still fresh therefore it will have a good resale value. Look for the deal and ask about perks like BMW, if you are into the lease and you are doing many more likes than you expected, you can pay for additional miles before the end of the lease at the ip front mileage rate of .15 verses waiting for the penalty at the end of .22.

    Here is one of the better lease calculators I have found: CARS.COM.

    What happens at the end of the lease?

    You have a couple of options.

    Hand the keys back and walk away. Part friends and move on. You will have the above disposition fee and also we responsible for any damage or excess wear and tear of the vehicle.

    Hand the keys back and go into another lease from the same company. This is what the dealer/manufacturer wants you to do so they make it the most financially appealing buy waving security deposits and disposition fees.

    Buy the car at the end. See if this is advantageous..for you. You are basically buying your own used car. You know the previous owner and you know how the car was maintained and you know it’s idiosyncrasies. Now..is to worth it? What is market value of the car? Is it more or less that what your purchase option in? Is the residual/purchase option negotiable? Ask the dealer then call the leasing company. If you want to buy it, can you CPO the car? Especially with high line cars, you can ask to run the car through their Certified Used Car check list and for a nominal charge, usually $500-1,000 the car will get additional warranty added to the balance of what is left from the factory along with an incentivized interest rate. This is not always an option but again..ask.

    I hope this helps you with any questions you might have regarding leasing a car. Now, these are guidelines and there are always exceptions to the rules. I am not saying leasing IS the way to go but it is a viable option and can be pretty straight forward. While leasing might not be for you, does not mean it is not for someone else.
     
    Last edited: Jun 26, 2017
  2. Jim McDonald

    Jim McDonald Engleberg, March 2019 Skier

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    Fascinating stuff, makes me happy to be living where a car isn't a necessity.
    Plan to pass this on to my sibs and some friends for whom it will not doubt be eye-openingly useful!
     
  3. Jilly

    Jilly Lead Cougar Skier

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    Something else to think about is taxes. In Ontario the HST is added to your lease payment. If you buy then it's added to the price of the vehicle. You may be borrowing money to pay taxes.

    I leased about 4 cars/SUV's. The last 3 I have bought using 0% financing. The lease didn't have that option. I crunched the numbers and it better to buy, even though it was going to longer payments. I get a car allowance against my personal car for company use. My new Equinox is on a 66 month payment. But they'll call me again before it's up.
     
  4. coskigirl

    coskigirl Making fresh tracks Skier

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    You can get GAP insurance for purchasing a vehicle now. I've done it on at least my last 3 cars.
     
  5. river-z

    river-z searching for seasons Skier

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    I enjoyed leasing a Mini Cooper for three years (2014-16). Fun car and good in LA. Loved driving the tight curves up to Big Bear, and even took it to Mammoth a couple times. No regrets about doing a lease, which was a really good deal (nothing down, reasonable payment).

    But then I decided to go cheap for a few years and got a $3000 used CR-V. But someday I'll probably do another lease.
     


  6. surfsnowgirl

    surfsnowgirl loves soft bumps, trees and ungroomed Skier

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    I have been screwed by gap before because when my car was totaled they don't automatically just cover the difference. There's this whole analytical process they go through and what you'll get is an estimation and that isn't always enough to cover the difference. Sometimes I'm sure it might be fine but not always and not in my case. When i bought my jeep I opted out of gap coverage because wranglers hold their value so well. I just checked my value and for the first time I'm my life i owe less than my vehicle is worth.
     
  7. mdf

    mdf entering the Big Couloir Skier

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    We've been leasing both our cars for several cycles now. The last time I turned in my car I replaced it with one that looked identical. There happened to be another customer husband-and-wife on the lot at the time who gave me a really strange look.

    One thing to bear in mind if you start to lease, is that you are a little bit locked in. You won't have a trade in the next time. Combine that with the incentives from the car company to re-up, and it is hard to break away.
     
  8. SBrown

    SBrown Steve Admin Pugski Ski Tester

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    Typically we buy used, pay cash, and drive high miles, so leasing is definitely not our gig, but this made me remember something I had forgotten ... we did lease two cars, and the second one we bought at the end of the lease. Before the check had cleared the bank, it got totaled.
     
  9. JeffB

    JeffB Refilling the flask Skier

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    I've only leased one car. Bought and traded way too many others.

    The lease ended about a year ago. Turned it in and bought a different model by the same brand. There were some incentives to stay with the brand even with a purchase, but I would have stayed with the brand anyway.

    My thoughts - the lease was a "good deal" for what it was. Basically an extended rental.

    I didn't like it though and wouldn't do it again. I felt like I lost "pride of ownership" for lack of a better term. I took care of the car, but only so much. I never felt like it was mine. I'm not knocking leases in general - it's just not for me.

    My wife doesn't care about cars - not really. For her, we have been buying nice off lease cars and keeping them a long time - until the trouble of keeping them outweighs replacement. I'm the one with the car problem. Trade about every 2 years. It's financially stupid but perhaps a small vice in the grand scheme of things.

    The last car I bought was brand new. I have vowed to keep it pristine and give it to our oldest in 6 more years when she turns 16. It will have about 130k on the clock by then. We'I'll see if I can hold out. I still feel pretty strongly about that plan but I'm only on month 13 and just hit 20k.

    The wife's car is probably within 2-3 years of needing replacement. She loves the car so if we had to do it, she'd want the exact same thing in a newer model.

    YMMV seem appropriate here.
     
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  10. mdf

    mdf entering the Big Couloir Skier

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    :roflmao:
     
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  11. Xela

    Xela On the way to Squaw Skier

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    The reason I'm leasing right now is because Honda won't sell the Clarity to anyone. I guess they need to get them back for testing after 3 years.
     
  12. fatbob

    fatbob Making fresh tracks Skier

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    Interesting. The personal lease has definitely been getting traction in the UK in recent years whereas previously it had been kinda viewed as a weird US thing. Now I'd say most people driving around in cars under 2-3 years old are in company cars or personal leases except for the sub-compact city cars etc. It certainly seems to be replacing the car loan as a model due to the way they can have much lower monthly payments.

    I view mass market auto companies these days as predominantly finance businesses with a sideline in vehicles, which they may or may not turn a small profit on. Thus that biases me toward thinking if I can afford not to be in their model I'm probably better off. I think the idea of laying cash out for a brand new car is probably dying with the boomer generation, cheap small runabouts excepted and depending on taste/ego the personal lease or the buying an ex-lease vehicle at 2-3 year old will take its place.

    I recently bought a 30 month old ex-lease vehicle. Took a bit of shopping around until I hit the sweetspot for value as a lot of the stock outside the franchised dealer network seemed to have one or more "issues" e.g. missed services, overly high miles for the year etc etc. I think this is a feature of the fact that primo lease vehicles get sucked back into the "used approved" marque schemes and the dealers then flog them based on saving vs new list price and a different finance package. As it is patience has got me a vehicle with 6 months original warranty , services on the button and an engine that is barely run in at the price of a few minor boddywork blems. So if I amortise the cash cost I'll have "paid it off" at current lease rates in 2 years, at which point I'll have a 4.5 year vehicle (still current model for another 2 years or so, excuding facelifts) with under 50k miles free and clear. Plus given my last vehicle was so old I'm getting all the thrill of a new vehicle with all the toys etc without the upfront depreciation hit.

    I think on balance if you like latest and greatest and "new" cars then there is a lot to be said for leasing, if you prefer to let someone else take the hit of early depreciation buying the right vehicle off lease makes sense. What you guys don't seem to get in the US is true bangernomics as there is a long tail market for older used vehicles. Here if a vehicle older than 10 years requires major work to pass an MOT (annual roadworthiness test) it can be pretty marginal whether its worth running or scrapping. This leads to a subset of people running cars that they've picked up for under £500 for daily short commutes/drudge vehicles and rolling the dice each MOT. When I've looked in US classifieds similar sorts of vehicles seem to be $3000+, and some of your pricing is crazy - I've seen Subarus advertised at over $10,000 at 10+ years , 120k+miles.
     
  13. LKLA

    LKLA Out on the slopes Skier

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    Like most things in life, one size does not fit all, at least not well.

    My family has bought cars and come to regret it. In one case the car was a lemon. Something or other kept breaking every 6-12 months. After 10 years, it needed ~$5,000 in repairs (new a/c) lowering the value of the car considerably when we finally decided to sell it. Other times it has been more of our doing, mainly by holding on to the cars for too long. We held onto two cars for over 15 years and ended up spending a fair amount of money to keep the cars in good shape, which we were not able to recover when we went to sell them (ended up donating both of them to charity).

    But leasing has not always been the best answer either. We leased twice while living in NYC and it was a bit of a nightmare given all the chips and dents and nicks that a car gets while driving and parking around NYC. Even paying big money to garage the car only somewhat solves the problem. In this case perhaps we would have been better off buying a car (used car) so we did not have to worry about every scratch costing us an arm and a leg at the end of the lease.

    One also has to consider what the car will be used for. If you want a second/third car for a second home or for using for a short commute to the train station, then you are likely better off buying a car, a used car perhaps. If you are going to use the car often and drive a fair amount, then it may make sense to buy a new car. If you use the car sparingly and keep it garaged then perhaps a lease is best.

    Having said that, if I had to chose, I think leasing is the preferable way to go even though it can be more expensive in the long run. It's nice to be able to change cars every three years to adjust to your changing needs (growing family and need more space, get a dog and want an open trunk, start going skiing and want 4x4,...move to warmer climate and want a convertible,...) and it's nice not to not have to worry about maintenance/repairs since most cars barely need much more than a couple of oil changes during the term of the lease. It's also nice to be able to have a new car that is likely more reliable and offers the latest in comfort/safety/gas mileage...And, not having to deal with the hassle of selling a used car is a plus, though Ebay and other online marketplaces make this much easier than it used to be.
     
  14. graham418

    graham418 Out on the slopes Skier

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    Leasing is generally just a different way of financing the vehicle. Not sure of tax implications in the USA, but in Canada, it makes sense as you can write off car payments vs having to depreciate it over time. You have to talk to your accountant .

    But lately, as cars become ever more complicated , with many systems not fully developed by the time they are incorporated into the cars , repairs out of warranty can be too costly. We may be at a time when we should just get a new one after 3 years, and save the aggravation and expense of some repairs .
     
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  15. Don in Morrison

    Don in Morrison I Ski Better on Retro Day Skier

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    I buy 'em used with about 50k miles on them with plans to run them until the wheels fall off. What happens instead is that at somewhere between 130k and 200k miles, the car gets cratered and we're suddenly in the market for another 50k mile used car.
     
  16. at_nyc

    at_nyc Getting off the lift Pass Pulled

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    All the cars I've own (not many), I kept them for no less than 5 years.

    Some I bought new, some used.

    Never leased because I just don't fit into the "favorable model"
     
  17. fatbob

    fatbob Making fresh tracks Skier

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    Good point - particularly as Electric Vehicles become more mainstream - battery tech and lifespan becomes a huge issue and we already see different models addressing it. A lease model makes a lot of sense in that world, particularly if bundled with charge "credit", where ownership may be whole lot riskier long term.
     
  18. Plai

    Plai Paul Lai Skier

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    I generally buy used 1-3 years old with 10-40K, and keep them until 10+ years old, or when car problems become too annoying. I hate that vehicles are deprecating assets, so I try to minimize the outflow. The ride quality and "fun" of the "nicer/newer" vehicles hasn't been "enough" for me increase the outflow. Leasing has never made sense to me.
     
  19. Thread Starter
    TS
    Philpug

    Philpug Enjoying being back on two skis. Admin Pugski Ski Tester

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    This is why I said...
    It isn't a "new verses used" debate ;).
     
  20. Dadskier

    Dadskier Getting off the lift Skier

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    How's it working out with the TDi? :roflmao:
     

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