I’d agree that it’s “nice” to not make payments. It’s also nice to maximize your cash flow by not paying the full value of a vehicle up front. The point is it can (and often does) cost about the same in the end (per earlier post). If you’d like to rebut this, please do so, but just repeating that you think it’s stupid doesn’t really contribute anything to the discussion.
Please rebut if you’re sure you know better.
The point is it can (and often does) cost about the same in the end (per earlier post).
You’re ONLY comparing the cost while you’re making payments…You are NOT comparing the total cost after the life of the vehicle.
If I BUY a 28,000 vehicle my payments are about 591 for 4 years. If I lease my payments are 418 for 2 years…Then after the 2 years I need to lease another vehicle…So my payments are at LEAST 418…Because of Inflation the cost will more then likely be more. I need to keep getting into a new lease every couple years.
So after 10 years my total cost for leasing a vehicle is at LEAST…$50,160.
After 10 years my total cost of BUYING a vehicle is $28,368. Now keeping a car for 10 years there may be some repairs needed that a 2 year old car doesn’t have. So lets just add on $5,000 (which is FAR MORE THEN I EVER PUT INTO ANY OF THE VEHICLES I’VE OWNED FOR 10 YEARS). That brings the cost $33,369.
And lets not forget about the 6 years I wasn’t making any payments that I could INVEST those payments into a CD or MoneyMarket account. Even at 5% interest after 6 years of no payments will yield a savings of 43,555.
So after 10 years I have a total of $10,000 INCREASE in my net worth.
After 10 years of leasing I’d have a $50,000 DECREASE in my net worth. That’s a difference of $60,000. Oh yea…Leasing is SO MUCH BETTER.
I have a better, plan; let’s encourage everyone to lease cars and take advantage of dealer financing. Someone has to pay for those nice dealerships with the free coffee and wireless internet access. I do need to go to the dealer for the occasional part and cup of coffee (my kids really like those little designer mints too), and someone has to pay for all that infrastructure.
Those of us who only buy used cars and only pay cash for them would like to thank you for the subsidy. Without you, my dealer probably wouldn’t stock parts for my 25 year old cars and I would have to wait an extra day when I need something. Thanks guys!
In order to answer that question, you really have to define what “better” means. Personally, I would never lease something that I could own. It just doesn’t make sense financially since most decent new cars don’t depreciate as bad as they did when leasing first became popular.
I was just reading an article on edmunds.com called “Confessions of a Car Salesman”* which reads:
Personally, I think leasing can be a good way to go. For one thing, leasing allows people to drive more expensive cars. But you have to be careful. Some dealers base leases on 110 percent of the vehicle’s sticker price. This is called a “full pop lease” and it’s what most dealerships aim for. Also, it’s easy to disguise the interest rate in a lease because it is expressed as a decimal multiplier instead of a more recognizable percentage rate. For example, a 9 percent interest rate becomes .00375.
At the first dealership I worked at, a veteran sales manager rounded up all of us green peas and taught us how to present it to Mr. Customer. He said to tell customers: “In three years, you can turn your old car back in and get one that has the latest technological inventions. And what do you think cars will be able do in three years? Who knows? Fly in the air! Go across the water! Go under the water? Who knows?”
I think the best reason to lease is if you own your own business and want to limit what creditors and litigators can take from you. It is a way to insulate company assets.
Personally, I don’t believe in living beyond my means. If I can’t afford to own something, I don’t want to lease it. It makes more sense financially to own a car that I can afford than to lease one that I can’t afford to own. If you have money to throw away, you might think driving a new car every two or three years is “better” than living within your means. Who am I to judge?
The best reason to buy instead of leasing is that after the car is paid off, you get to own it without making payments. If you lease, that will never happen.
*http://www.edmunds.com/advice/buying/articles/42962/article.html
I can hardly wait for their next article: ?The Savvy Guide to Financing: How to Get the Best Payday Loan.?
…or how about “Lottery-Based Retirement Plans”?
Sorry, I couldn’t help it.
The truth is that Forbes is not in the business of giving sound financial advice. Forbes is in the business of selling magazines to rich people and those who want to be rich. If you want sound financial advice, Avalon, talk to a certified financial planner. If he or she endorses your leasing plan, let me know.
Even paying cash can be worse then financing the vehicle if you can get a better savings interest rate then the financing interest rate.
That is a GREAT point. If I get a 9% return on my money when it is invested, it makes sense to finance a car at 5.9% rather than spending cash for a car. In this case I would be better off leaving the money invested and making payments. Paying cash is not always the smarter choice.
That sounds like an open-end lease which is a terrible, terrible thing. If you decided not to buy the car you would still be responsible for the difference between the estimated residual value and the actual residual value. Most leases are closed-end leases where the residual value is set at the beginning of the lease and does not change.
That analysis also fails to consider risk. Based on that logic, I should pull a couple of $100K of equity out of my house by refinancing at 5% (and also take a tax deduction) and put that money in a mutual fund that has been historically returning 10%. If I only looked at the numbers that would also sound good, but I think (almost) everyone would agree that the risk is too high to justify the return.
Financing a car when you have sufficient investments to cover the full cost is less risky, but you could still be forced to sell off your investment at a loss to cover the cost of the car if something unexpected happens when your fund happens to be down. Also, you need to do this calculation based on the post-tax investment return. Your 9% return might be closer to 7% when you consider taxes and fund fees. I still wouldn’t do it.
Personally, I’m not comfortable borrowing money for anything except my primary residence (based on the pretty good assumption that it will appreciate over the long term), but I will still sleep better when that is 100% paid for. There are very few things I want badly enough to incur debt (certainly not a car).
Ah, I see the confusion now. At the end of 3 years I own the car, the money I have sticking into the savings account is to pay for the residual value of the car. Since I live in Illinois, the taxes were all paid as part of the lease so the only additional amount is a $69 title for the car. I agree, if I were to just turn in the car at the end of the lease and leased a new car that definitly wouldn’t be cost effective. Instead, after 3 years I own the car and I will have made $1,200 in interest on money that a cash buyer would not have had in their account.
There is absolutely no way leasing a vehicle for 3 years then buying it is better then buying a vehicle outright…It’s IMPOSSIBLE. If it were…dealers would be going out of business. You must NOT be reporting the correct numbers.
“That analysis also fails to consider risk.”
Not at all, Craig. There you go assuming facts not in evidence. Considering risk is a major component of every financial decision.
I am not talking about investing the money in high risk investments that earn 20% one year and 3% the next year. I am talking about low risk examples, like an annuity where you are guaranteed a yield that is higher than the APR of your car loan. Another example would be my 403(b) retirement account. The return for every year (not including the balance increase from deposits) has been more than 9%. Even in years where there were significant losses in particular segments, it has done better than 9%. Based on how that account is diversified, I can live with the risk of taking out a car loan of 5.9% so that it allows me to manage my cashflow in a way that lets me keep contributing to my 403(b) account. Also, you have to consider the compound interest generated by the money that I am putting into my 403(b) account. That 9% of annual growth this year will continue to generate interest for the next 25 years until I retire, and that will repeat each and every year. Financing the car will allow me to put that money away now so that the interest will be able to compound again and again until I retire. Besides, even if the value of my 403(b) declines this year, that just means that I am buying shares at a discount that will grow in future years. With compound interest, the future value of $1 that earns 9% interest for 25 years is $84.70.
“Based on that logic, I should pull a couple of $100K of equity out of my house by refinancing at 5% (and also take a tax deduction) and put that money in a mutual fund that has been historically returning 10%.”
If all of your investments were in real estate, it would be a good idea to do that to diversify your investments and lower your risk. I am sure you are smart enough to diversify on your own though. So it probably isn’t a good idea for you.
If you base your financial decisions on logic instead of fear, there is not one answer for every circumstance, and in this case, if I let fear get in my way, I would deprive myself of 25 years of compound interest.
You should do what works for you, and I have nothing against diversified investments. I hope I misunderstood, are you saying it would ever be a good idea to borrow against you primary home for investment capital? I really don’t know anyone who would seriously recommend that. I do know people that have bet their house to start a business (including my grandfather), but that takes much bigger brass ones than I have.
I am simply saying that debt always includes an element of risk and I personally do not ever borrow money to buy depreciating assets, even if i have the cash tied up elsewhere. I either pay cash, or I just don’t buy it. If it’s important enough to buy, it’s important enough to free up the capital and buy it will real money. If I’m not willing to free up the money and pay cash, I don’t really need that particular toy (I.e., if I don’t have $30K in hand, I can drive a $5K car, it’s not that important). That’s not fear, that’s managing risk by only spending money that I actually have in my hand. I simply don’t want/need anything that badly. That approach is not for everyone, but it works for me.
“I am simply saying that debt always includes an element of risk…”
And putting all of your investment eggs in one basket (your house) is risky too. Just look at all those people in the Gulf states who had flood insurance, homeowner’s insurance, and lost everything anyway. They thought they were “in good hands.”
“I hope I misunderstood, are you saying it would ever be a good idea to borrow against you primary home for investment capital?”
If your house was your only investment, then yes. With a mortgage you are required to insure the loan. Diversifying your investments and having the loan insured decreases your overall risk of losing everything. Actually, I would probably not recommend borrowing against a home for investment capital. It would be smarter not to pay cash for the home and invest your cash in non-real estate sectors from the start. After all, a home is an pretty sound investment and I would feel better about financing it than stock and bond purchases like when you buy them on margin.
The point is that if I have one dollar sitting around waiting to be spent or invested, would I be better off using it to avoid 5.9% interest payments for the next five years (saving $0.295), or would I be better off depositing it in an account that earns 9% compound interest for the next 25 years (saving $84.70)? You do the math. Even at 5% compound interest the dollar would be worth $47.727 after 25 years. Yet you would rather make the decision that saves you 30 cents than make more than $46 in compound interest. My friend, that is penny wise and pound foolish.
Let’s look at it another way. Let’s say you use that dollar to decrease the amount you borrow at 5.9% APR. That saves you $0.295. Then after the loan is paid off you put another spare dollar into your retirement account at 5% annualy compounded interest. That means you delayed making that one dollar investment for five years and it will only compound for 20 years instead of 25 years. That dollar you put in after five years will grow after 20 years to $33.066. That means that saving $0.295 in interest payments cost you $14.661 in lost compound interest that you would have earned in those additional five years. Either way you look at it, compound interest is your friend…even if your investment earns 0.9% per year LESS than the interest rate of the loan!
This must be what George W. Bush meant by “fuzzy math.”
I do understand you number crunching, but I simply DO NOT borrow money. As a result I may miss some opportunities to maximize investments; that’s OK, I will gladly accept that trade-off to avoid the risk. I understand that you don’t agree, that’s OK too. If I need more cash to pay for my toys, I’ll just go earn a little more (which is usually more fun than playing with the new toys anyway). Keeps my life nice and simple, just the way I like it.
Wow, good info and personal attacks, all in the same thread. What a world! I am a big fan of leasing. Do I save money - sometimes, compared to what I would do otherwise but that isn’t the overarching goal.
To the OP:
I had six cars in my drive until last month when I turned in a leased Saturn. I’d leased it for my son for $149 a month, nothing down, no first or last payment. He drove it to college for three years and I didn’t worry one day when he was on the road. Now that was a great deal! Can’t say that for the old Merc I’d paid cash for and already put some bux into repairing, yeah, I had a mechanic look at it first even tho I’m a shade tree one…
Paid cash for my '41 Chev pickup, a '97 Honda Accord and my '92 hot-rodded Miata - but - other than a truck or a classic I don’t think I’d keep a car over six or seven years. ARGHHH, I can hear the ‘lease-haters’ groaning now. I guess then I won’t say that my wife doesn’t want one without the original bumper-to-bumper warranty, she is so afraid it’s going to “stop in the middle of an intersection.” Don’t even try it, I quit trying to talk her out of that thought years ago. Try trading those in without taking a financial hit!
Oh, my other two cars are leases, an Acura that we paid a grand down on (national cost was two but the dealer wanted to get rid of some) and is $259 a month, hmmm, where else can you drive a $32K car for that much? The other is a Nissan pickup (REALLY a dumb idea to lease a truck given the usual nature of their use) that I got into to get out of an Avalanche. Geez, I’m rambling here…
I’ve already turned in several leases and usually hear the same thing, “we hardly ever get them back in such good shape.” I don’t keep them longer than the original warranty. I treat them like all my cars, parked way out in the parking lot and do my own maintenance. While my parsimonious friends are worrying about maintenance in year seven I’m on my third new car. I don’t even consider keeping them. No leasing isn’t for everyone but I have the money and that’s what it is for isn’t it?
Oh yeah, did I mention that with leases I always have complete leverage over the car salesman? I’ve never gotten over the fact that for them to do well, or better, financially, they must ‘screw’ me in some way…
but what about those that lease something low end like a Civic? How horrible is that for a financial disaster
OK, I have the paperwork in front of me now so I can give you the actual numbers
Gross Capitalized Cost: $31,092.48 (this includes tax, etc)
Residual Value: $15,746
Monthly payment: $439.40
So, my total amount paid is $439.40 x 36 + $15,746 = $31,564.4
The “Rent Charge” (aka interest) ends up being $471.92, higher then my earlier numbers but I still much lower than the interest I can make on that $15,746 I keep in my pocket for 3 years. Also, just to give you all of the information this is a fully loaded car, not some stripped down advertising only car.
Edit: I just realized that I forgot to take the lease acquisition fee into account for these calculations. I took that into account when buying the car but had forgotten it until I looked over the actual numbers again. That inflated the gross cost by $550 putting the total cost of the lease over a cash transaction at $1,021.92. Now, if I actually had that much cash (which I don’t) I could have made $3968.76 in interest by the time the lease was finished out. The way I have it planned out, I will have made $1,200 in interest. Granted, that means my profit is only about $110 after getting a new title but it is a profit.
Sorry I don’t believe it…You’re telling us that a dealer is basically selling you a car INTEREST FREE. No way in h*ll.
Granted, that means my profit is only about $110 after getting a new title but it is a profit.
$110 compared to the total cost to own or lease is statistically insignificant. That’s less than a 1% profit. That’s because you didn’t “save” that $15,746, because you likely leased a car that you couldn’t afford to buy.