I don’t think you can buy a car every two or three years for what you can lease one for.
So you think the lease company is losing money on the deal?
I don’t think it is about the leasing company not making money. Let’s try an example. If you purchase a $20,000 car and put tax and tags down so that you finance $20,000, your payment will be around $370.00 for five years. If you lease the same car and put the same amount down (at least in Pa- they handle tax on a lease differently), then your payment would be around $240. So, you save $130/ month on the lease. Over three years, that is $4680.00 less. If you trade in the car, you will still owe around $8,200.00. You would need to be able to trade the car in for $12,880 in order to break even (which is where you would be in a lease). I don’t think I have ever traded in a 3 year old car with 36000 miles that could have been bought brand new for $20,000 for that much money. I might have shown someone that much, but some was coming from the price of the vehicle or a dealer incentive to move a vehicle. Therefore, if you really want a new car every three years (avg in America is every 2.5 years), then leasing might work out. All that said, I would never ever lease. You are always stuck with a payment, and it is in essence paying for the biggest part of the depreciation of the vehicle. Perhaps more telling, I have never worked with another salesman who leased. We all drove beaters that were traded in for almost nothing. Even if a $2000.00 car only lasts one year, it is still much less than a $270/ month payment and the money down. Leasing is basically for people who have a need for a new car every couple of years and who want the least amount of hassle when turning it over.
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OK, here’s an example from this morning’s paper:
Mazda CX7, 2007 Lease for 36 months for $310 per month with $0 due at signing + $0 security deposit. According to Edmunds and Cars Direct, you could purchase the car for $23,137. Here the tax is 7%. Assume $347 title, registration, etc. Total to finance is $25103. Assume 6.5% loan.
According to BankRate.com, your monthly payment would be $491 per month for 60 months. At the end of 36 months you would still owe $10595. Edmunds says it would be worth $13137, but let’s add $1000 because it will be in perfect condition. End value of the car is therefore $14137.
Your total payments if you buy it are $17,676. You can sell it at the end for an assumed $14,137 for a net cost of $3,539.
If you lease, your total outlay is $11,160. The difference is leasing outlay and purchase outlay is $6,516. Even applying the equity in the purchase scenario, you are $3,000 ahead by leasing. This does not include the additional earnings on your money if you had invested the difference.
Remember that the assumption here was that you wanted to get another car every 3 years. Buying will be cheaper if you buy and hold, which I do.
I understand the example, but all you are really saying is that this particular lease deal has a better effective interest rate, or they are using a higher residual value that the book value that you used for your calculation (the book value may be based on more miles than the lease allows). Either way, the lease company still has to buy the car from the manufacturer and resell it at the end of the lease period, and they are still making a profit on the deal. If you were willing to shop around for price and interest rate, you should be able to come very close to matching the lease deal without the risks of leasing.
IMHO, these are both very bad deals, I can’t imagine making a $491 car payment for 60 months for the privilege of driving a $25K car. I also can’t imagine why someone would want to lease a low end car. If it makes sense for anyone, it’s someone who “needs” a S100K car for business and would rather make a $1000 (deductible) lease payment than tie up his capital in a vehicle (because his return on that capital is higher than the effective interest rate of the lease deal). Unfortunately, many folks who actually lease cars simply cannot afford to make the down payment and are trying to drive something they cannot afford.
Regarding americans buying a new car every 2.5 years, that’s insane. Unless someone is paying cash for cars, they cannot afford to be buying new cars frequently. As a matter of fact, they cannot afford to be buying new cars at all. The folks who are buying the 2.5 year old used cars (hopefully for cash) are getting a much better deal. Using your example, I would much rather pay $14K for the three year old car than $25K for the new car. I could probably drive the used car for another 3 years and still sell it for $8-10K, my cost per mile would be about half that of the original owner. Even if I took out a loan (which I wouldn’t), my payments would be about half those of the original owner. Sometimes I really wonder about americans.
I totally agree that it is crazy to buy cars every 2.5 years. But many Americans value having the “latest” thing. They even see car payments as inevitable (hence, few people wait until the car is paid for). As a matter of fact, I can think of very rare instances where someone traded in a car that they owned outright. I would bet it is less than 10% of my deals. Therefore, for many people leasing is not as bad a deal as some would think. Is it economically worse than buying and keeping for 10 years. Absolutely. Is it worse than buying a 2.5 year old car economically, absolutely. But if you value those things, then you will do it. I have no need to judge what others value, I just know that I would never do it.
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First ask yourself this: Why do you need a new truck?
If, say, it costs $400/month for a lease, you’re paying $4,800/year for the lease. That much money can repair a lot of stuff wrong with your current truck.
Secondly: If you cannot afford a new truck, don’t get one. It’s like people who bought houses using the “interest only APR” loans—it just lets them put themselves much deeper in the hole. We’re seeing the results of that now with foreclosures going up.
If you are using a loan to finance the purchase, only purchase as much vehicle as you can afford.
Doing anything else is courting disaster. What happens if you lose your job? Or your wife gets pregnant? Or your refrigerator dies? Or your roof needs fixing? Life is always full of the unexpected—and putting yourself at your limits puts you behind the 8-Ball when anything unexpected happens.
In the Mazda example, the 60 month financing was just to get a lower monthly payment. There was no intent to keep it for the full 60 months. This was comparing a lease to purchase for a 3 year period. If that’s what you are going to do, leasing will almost always be cheaper by the month. Never said it made any sense for the long run. Doesn’t matter if the leasing company is making money. You know they are. So is the dealer. So is the manufacturer. All we are talking about here is monthly out of pocket, which will be less with a lease.
It’s still cheaper to pay someone to patch a beater together than to make car payments
Says WHO??? The reason I sold my 84 S-15 was because of the repairs it was costing me. Not so much the cost of the repairs…but because of the lost TIME/MONEY I wasn’t working. In a 3 month period I lost several thousand dollars in lost wages due to not being able to get to work. The repairs I did myself (it was easier).
Your total payments if you buy it are $17,676. You can sell it at the end for an assumed $14,137 for a net cost of $3,539.
If you lease, your total outlay is $11,160.
Perhaps my math is a little rusty. Isn’t the net cost of $3539 (total payments made minus sale price) less than the net lease cost of $11,160?
They forgot to add the amount still owed on the car back in- which was $10,595 in their example. Add that to the $3539 and you have $14134. And that assumes you can trade in a 3yo car for $1000 over what Edmunds says. Almost anytime we were at or above what Edmunds said, there was money coming from someplace else (ie, the purchase price, financing etc.). I think the $13137 number would be even more realistic and leave you with $15134 total outlay for the purchase.
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I have always been afraid to lease, if you go over their limit on milage per year you can end up paying .45 cents per mile on top of the penalty and what ever else is in the contract. I had a friend that sold cars and he swore he would never buy another car again. If you don’t drive very much then lease is the way to go because you don’t get caught up in depreciaction of the vehicle.
If you don’t drive very much then lease is the way to go because you don’t get caught up in depreciaction of the vehicle.
I hate to beat this dead horse any more, but I couldn’t stop myself.
If you lease, you are paying for the portion of depreciation associated with the period of the lease. The lease company calculates the deal based on the age/mileage of the car at the end of the contract. They are betting that the car is actually worth that value, or more. They are not wrong very often.
Another problem with leasing is that it’s sometimes hard to get out of the habit. Some people think they will buy the car at the end of the lease but this doesn’t seem to happen very often. Frequently the residual is higher than you could buy another one for, but more likely, when you go to buy the car, they will point out that for the same payment, or even less, you can lease a brand new car. Who wants to be making bigger payments on an old car that won’t be worth much after it’s six years old, etc. Very easy to just lease again.
Thanks for posting up why in some instances it’s better to lease.
I think the bottom line tho’ is that if you have to ask, then leasing is not for you 