Leasing vs. Purchasing

msindallas

My name is Mathias.
I'm happy we're friends.

Hello, Mathias
Sorry about mis-spelling your name. [shaking hands]
Good wishes, - MS.

steine13

Well, from one MS to another -- handshake returned.

What, an internet argument that was -- not settled perhaps, but at least amicably put aside? Who ever heard of such a thing!

Cheers,
-Mathias

cdnpinhead

Looks like we're all just going to "get along."

Excellent.

british_rover

Something about frictionless pullies & massless ropes comes to mind. Boundary conditions, and all that. . .

Ahhh fond memories of 2-D intro statics.

steine13

Enough to drive anyone to drink, really.

Not that it takes much driving...

-Mathias

british_rover

Yeah not so fond memories either.

Makes me shudder realy.

Oh and I bought a 2004 MY MINI and paid around 25,000 OTD then sold it two years and 30,000 miles later for 21,500.

tidester

Something about frictionless pullies & massless ropes comes to mind.

Yes, but Lagrangians and Hamiltonians are so much more intimidating!

tidester, host
SUVs and Smart Shopper

jlawrence01

I saw Hamlet this weekend.

Act 1:

There are more things on heaven and on earth, Horatio, than are dreamt of in your philosophy."

msindallas

Yup, good to get along, and nice to know I am writing to friends. Anyways, want to report this to yall, and ask for opinion:

This evening, I was watching Raymonds' reruns on TV, and there was this screamer ad - "Lease a 2007 Honda Accord for $199/mo for 36 months from your North Texas Honda dealer". They even have a website for this - http://www.ntxhonda.com

I thought about it - for Mathias, $200/mo for a Civic is a good deal, and this is an Accord! If you look up that web site, the advertisement is right there on the front page. If you read the disclaimer link, the drive-off fee is about $2,200, and of course, in fine print, TTL extra.

Here's the question: The ad is from TX dealers. They know exactly what the tax and title registration fees are for their base model. Why can't they publish the true cost of the lease per month? Isn't this a deceptive practice?

If you guys followed, in February this year, bmwusa.com was advertising an X3 lease for $379/mo, for the base model, $3K or something down. I wasted a few days trying to figure out which options I wanted, and estimated the cost to be $450/mo. When I went in, they wanted to sign me up for $700+/month, and even explained to me how they reached that number (you guessed it, TTL and a high MF). I called their ad deceptive but they countered that bmwusa could not publish TTL numbers because different states have different tax rates. I acknowledged my ignorance and walked out. (Incidentally, that is when I joined Edmunds forums and started car research and all the number crunching by myself, should have started 20 years back). What excuse will the Honda dealers give?

I can only guess what will happen. A bunch of idiots like myself (in February, now I am a smart shopper) will show up on the w/end. They will be told that the real cost is around $350/mo, for a car w/out A/C or AT. Quite a few of them will be PO'ed and most will leave in disgust. A few will bite the bullet for spending their time and sign the dotted line.

Question: Is this really a good way to do business? My guess is that if they were forthcoming, I'd do more business with them. The (potential) car leasing population doesnt change much - how many times do they expect to fool the same group of people?

cdnpinhead

number is often because the ads don't want to recognize anything other than list (sticker) price as the cap cost. If the car is negotiable, and of course most are, the cap cost reduction eliminates a goodly chunk of the drive-off.

Beyond that, it's absolutely essential to know how to run the numbers so bogus money factors and other fees can be detected. Leasing gives dealers a lot of ways to play the equivalent of the four-square game & it works most times it's tried. I don't know what percentage of the car-acquiring public goes into the dealer knowing how to calculate a lease payment, but I'm guessing it's way small.

qbrozen

For my numbers, purchase is a winner. From now on, they can put any amount of spin on the sales pitch, but unless they show me the numbers as to why leasing is more cost efficient I am not going to lease a car.

ummm... ok, well I guess here is a spin for you. Right now, Volvo is offering BIG cash on some vehicles ... but ONLY if you lease through an independent bank.

So, you could BUY an S60 T5 for a couple grand under invoice OR you can lease one for $9,000 under invoice!! Then, just go ahead and buy it at the end of the lease. I can't see how you wouldn't be throwing your money away by financing this vehicle.

this isn't a fluke. These things happen all the time. I got my brother-in-law into a mazda3 lease. He wants to buy the car, but the subsidized lease rate actually saves him a few hundred bucks over the life of a 5-year plan by leasing for 2 and financing for 3 rather than financing for 5 at the current available rates.

i leased my accord because the rate was just RIDICULOUSLY low. I earn more through my lousy money market account than I pay in interest to Honda.

kyfdx

Volvo is offering BIG cash on some vehicles ... but ONLY if you lease through an independent bank.

So... why do you think this is? Are they getting a kick-back from the independent bank that they use? Why offer $8000 dealer cash on a lease through an independent bank, but only $4000 if you buy? Why does it make a difference to them?

I'd be tempted to take the lease, then pay it off after 2-3 months. You'd be out the acquisition fee, but you would still be $3000 ahead. (unless the payoff reflects some sort of kickback to Volvo).

regards,
kyfdx
clown college graduate
(that is for you, Mathias)

msindallas

I'd be tempted to take the lease, then pay it off after 2-3 months. You'd be out the acquisition fee, but you would still be $3000 ahead. (unless the payoff reflects some sort of kickback to Volvo)

This is new to me. Can you pay off a lease after 2-3 months? I thought you sign a contract for 24 or 36 months and become legally bound to complete the term, and if you don't, pay a huge penalty.

british_rover

You can pay a lease off early anytime and you can trade out of it whenever you want. A lease has all the intrest calculated up front so you pay the full finance charge no matter if you take the lease to term or pay it off early.

kyfdx

A lease has all the intrest calculated up front so you pay the full finance charge no matter if you take the lease to term or pay it off early.


Not necessarily... and, not even usually...

Many, many finance companies (especially captive manufacturer banks) don't have any penalties for paying a lease off early, as long as the vehicle is being purchased by the lessee or traded into a dealership. Of course, if you want to turn it back in, that is a different story.

AHFC used to charge you 20% of the future finance charges, but I don't think they even do that any more.

regards,
kyfdx
(not the host here)

Kirstie_H

You're here now:
msindallas, "Purchasing Strategies - Questions & Success Stories" #3255, 1 Jun 2007 12:39 pm
Just click on my link to get to your post's new location.

qbrozen

good god, you couldn't pay me to go back to that forum!
;b

Kirstie_H

No fear - I wasn't planning to

asafonov

I can only guess what will happen. A bunch of idiots like myself (in February, now I am a smart shopper) will show up on the w/end. They will be told that the real cost is around $350/mo, for a car w/out A/C or AT.

Not to nitpick here, and I have not seen the particular ad you were referring to, but all Accord LXs have A/C standard. I have seen similar lease ads in other states, and they all explicitly mentioned AT.

british_rover

I wrote this big whole post explaning how Honda works their options, they basicly don't have options, and then the power went out and I lost it. With a Honda you just get a LX or EX and then manual or automatic. On some of the higher end models you have leather or NAV as an option and that is it.

I never bothered to retype it.

msindallas

Don't worry about it. I was only expressing my frustration that the car dealers never tell you what the cost is going to be, even approximately. True, there are factors like credit report, money factors, TTL, documentation, origination and all other kinds of fees. I think when they advertise, they should be close enough. To me, that is +/-5%, or add the words "at around". Sadly, the only purpose of those ad's is to get unsuspecting customers through their doors. But that's the nature of the biz, I guess.

steine13

I dunno, around here, the ads are pretty good about spelling it out. Of course, there's some fine print.

The thing to look out for is the ridiculous -- "with 2,000 cash or trade down!!!" -- as well as the questionable -- "+ destination" -- and the expected -- "+ tax, title, and registration".

Around here the standard is that the price is the price, destination included (except VW for some reason and some real yahoos), and TTL is extra. Invariably, DOC is not mentioned but also added. It's $60 to $180, depending on the store, so not that big a deal.

I find it useful to have the Honda dealers from 50 miles away advertise LX's at $16,700 + TTL & dest, because that gives me a good idea what the market is... silly me, I thought they were still at or close to sticker.

Would've told my friend who got an EX coupe at full boat + rust&dust... oh well.

BTW, when payments are quoted, they almost always say "7% interest for 72 months" and something like "not everybody qualifies for this low rate". That's reasonable.

-Mathias

british_rover

Yup and for leases everything must be spelled out by law. You have to list the terms of the lease along with the cap cost of the lease. In my area you have to list the options on the car as well.

msindallas

Hello again BR and Mathias,
I am not saying they do anything illegal. They do whatever is required by the law. All declarations they need to make gets printed on the paper, in fonts so small you cannot read. But they are legally covered. On these ad's on TV, for a 30sec segment, they paint all the rosy pictures and sweet numbers for 25secs, and in the last 5 secs they blurt out whatever is legally required. I doubt if anybody can make out what they are saying in those last 5 secs. May be I am hearing impaired, I dunno. To me, the dealers who do this lose my confidence and trust, thats all. Many a times in my life an honest salesman has told me, "Oh, that ad is only designed to get you to our dealership". Now I just laugh at those ads, make cynical comments, and dont even go to the dealership. IMO it is not a good business practice. Regards, - MS.

rajeshvaccha

Hello,

I am new to this board and new to car buying, thanks for this fantastic resource!

I am moving to Houston, will be living in the inner loop, so have a short commute to work which is in downtown, but still need a car for daily life.

I am a single professional, male, 30, and would like to learn the difference between financing and leasing a car. My driving record is very clean, but I have an average credit history.

Can anyone tell me where I can learn the basics of financing vs. leasing?

Thanks a lot,
Andy

tidester

Leasing essentially means you are renting a car (with a much more complicated contract!) and financing means you borrow money from a third party to buy the car. Here's a good article comparing the two in detail: Compare the Costs: Buying vs. Leasing vs. Buying a Used Car

tidester, host
SUVs and Smart Shopper

mbman2

I have just leased a car for the first time,
I am completly lost.
do a have to do anything differently than
a financed car?

I would appreciate aany help

joel0622

Drive it within the limits of the contract and make the payments every month.

mbman2

what is the difference between making monthly payments and one time pay?
My salesman asked me if i wanted to do that, but i didn't know what it was

thank u joel for the help

joel0622

what is the difference between making monthly payments and one time pay?

Normally on a one time pay they will lower the money factor up to 2 points. At least with Ford thats the way it works. If your lease rate is say 4.5 and you do a pre-pay they will lower it to 2.5 on a pre-pay. I can't really tell you how much it will save you because I don't know the term of the lease.

mbman2

I don't even know the terms of the lease, all iknow is that i'm paying $389/mo for a Mercedes E350 Premium 1 Sport with 10,000 miles a year and 2725 due at lease signing.

I'm taking delivery of the car next week.

joel0622

Do you know how long the lease is, or if the $389 includes tax?

I don't know anything about Mercedes but $389 seems awful cheap or $2725 sounds awful light for something with a long [non-permissible content removed] name like Mercedes E350 Premium 1 Sport.

dtownfb

Before you take delivery, find out the terms of the lease and do some research here on Edmunds about leasing. Once you sign the papers, you are locked in.

mbman2

Well it's 33 months
and all Mercedes vehicles in MI are cheap
$379/mo for a ML350
and $329/ mo for a R350

the $389 includes tax
and the $2725 does not include tax, title, and license

the Premium 1 includes DVD Navi, power sunshade, Bluetooth, and Sirius

and the Sport includes 18 inch wheels and a body kit

steine13

Am I the only one here who thinks this si a great deal...?

I can't lease a Corolla for less than $200 a month, and here we have a NEW (new, right??) $40k vehicle leasing for ~ $400 with nothing down. That's fantastic.

I gotta ask the wife if we think we need a Benz... I AM German, after all...

So you know nothing from nothing, and it shows, and you still didn't get taken for a ride. Kudos to the dealer. Next time, come asking questions before you sign, but it looks like you did great!

-Mathias

british_rover

Mercedes leases are stupid cheap. They have leases on 50,000 cars that are in the mid 400 range or less.

If you back into the lease and figure out how much money they have supporting it I bet it is more then the rebates on any of your left over Ford Trucks.

Mathias you are right Mercedes leases can be great deals. The E-class in particular is a good one to get and the Sport models have a bit more driving feel without being harsh. Still built like a tank too.

mbman2

so i took delivery of my new mercedes today.

I am completely satisfied with my first lease so far

I got the E350 in gray w/ black MB Tex interior

This looks like the start of a wonderful friendship

my fiancee and i are estatic. the car looks so nice in front of our house.

aepheme

mbman2,

Sounds like a great deal! Would you mind posting the details (residual, MSRP, capcost, money factor) either here or in the Mercedes Leasing thread? I'm very curious what it was... (And as a fellow Michigan resident, I'm kind of curious what the taxes / extra fees turned out to be, too!)

Thanks!

rajeshvaccha

Hello,

I am moving to Houston (TX) and would like to lease a new car. I am a single male, 30, so don't need anything to seat a family.

I have an average credit score (mid 600s), have financed a Lexus ES 300 from Toyota Financial Services many years ago and paid it off in full. Although, I am not looking to get a lexus again.

I can put up to 10k as a downpayment, and would like to pay $300-400 a month for lease payments, preferably closer to $300.

I would like to lease for 2-3 yrs to start with, not more as I am not sure how long I will be in Houston.

I am currently out of the country, thus cannot talk to the dealers directly, thus appreciate any help that you can give me.

Thanks,
Andy

qbrozen

well, most people will tell you to put down as little as possible on a lease. Plus, $10k down and $300 a month would get you ALOT of car. Probably more than you need.

BMW is offering 3-series leases a bit over $300 with, I believe, $3k down. I'm not too sure on all the details, but worth looking into.

rajeshvaccha

Hi,

Thanks for your reply. I am very unfamiliar with leasing, and don't even know how to determine how much a car would lease for.

Are there any good options on Mercedes E class or above or some other luxury brand?

I definitely would love to put down much less than 10k, maybe around 5k? to be reasonable....

Any tips on how I can proceed with this search online?

Thanks,
Andy

qbrozen

Sure.

There are several ways to go about it. One way is to click on the new cars tab on the edmunds.com home page. Then you can click the Incentives link. There you will see a list of all new cars being sold and next to it will be either no links, a link for cash incentives, a link for special APR, a link for lease deals, or any combination of the above.

The alternative, since Edmunds isn't always up-to-date, is to visit each manufacturers own website and look for a link to their special offers. I know BMW has theirs up, I'm not sure about Benz.

One more thing, there is a lease calculator here on Edmunds, too. So surf around this site and you can dig up all kinds of information.

aepheme

Andy,

I'm in a similar situation. I'm not particular about the car I get, but I just wanted one that was a "good deal" (as in, you get a lot of car for a low payment).

BMW and Infiniti seem to be the only brands with exceptional deals this month. Everyone else (even the lower quality GM/Ford/Etc brands) is more expensive.

You may want to consider the BMW 3-series or the Infiniti G35. Or if you're looking for an SUV, check out the BMW X3 or Infiniti FX35. Both are going for around $500/month with 0-down for 24 months. It's the best deal I've seen.

Also, I've wandered into the Honda Accord Leasing forum, and it doesn't look like that rate is so bad either. Might be worth checking out if you're interested in that car.

kyfdx

Keep in mind that Texas has onerous tax regulations in regard to leasing... You have to pay sales tax on the price of the car..

I don't think I'd lease, if I were in Texas, but that's just me..

The 3-series lease is just okay... If you like SUVs, the X3 has a better deal..

qbrozen

You have to pay sales tax on the price of the car..
I don't think I'd lease, if I were in Texas, but that's just me..

I'm not sure why I see that should matter.(?) You lease it in Texas, pay the sales tax on the car, turn it in a lease end. OR you buy the car in Texas, pay the sales tax on the car, and trade it in 3 years anyway. Either way, you lose the tax, right? Unless they give a tax credit on trading one you've financed? In which case, I guess it all depends on the lease support and whether than makes up for it.

kyfdx

If you own it, you get a credit on the next one.. If you lease, you are paying the full tax, every three years...

A lot of banks do balloon financing in Texas because of the tax laws... But, the rates are never that great..

Ditto for Illinois

rajeshvaccha

Hi friends,

Thanks so much for your replies! Maybe I will need to hire a auto consultant to help me through the car buying/leasing process!

Is there somewhere I can learn about the terms such as money factor, baloon financing etc

Any suggestions on dealers that I should reach out to in Houston (I will be in zip 77007) if that matters.

Thanks,
Andy

delta737h

msindallas,

Your May 29 post stated, in part,...

"Here is yet another perspective on this 4 year long debate -a mathematical description of the differences between the 2 modes of financing a car. I am a fairly recent member here, and wonder why someone has not done this analysis already on this thread.

Disclaimer: I am not employed by Edmunds, or affiliated to any auto manufacturer or dealer. This article is not a solicitation for a sale or a lease of a vehicle.

Summary: Do not lease, always purchase the car, and with cash.

Target: Want to be behind the wheels of a new car every few years.

Constraints/Assumptions: We want to
(1) Buy only what we can afford.
(2) Spread the expense evenly over the months we will be driving the car
(3) Interest in a bank account is compounded every month
(4) Have a car all the time for commuting and personal lifestyle (visiting family and friends, getting groceries, going to church, taking kids to school, etc)."

I make no apology for resurrecting an old issue and certainly have no desire to torch your mathematical treatise but I do have some concerns. Risking pompousness, your analysis appears somewhat skewed triggering flaws due to asynchronous time lines and cash flow issues.

Here are my observations...

1st. Your claim that one should always purchase with cash and never lease is seriously flawed. NEVER SAY NEVER. The way to do a credible lease v. buy decision is to examine incremental cash flows. There are many good capital budgeting textbooks available that discuss various methodologies (e.g., FV, NPV, IRR, MAPI, etc.) for analyzing competing alternatives.

2nd. Please remember that you will need to create a sinking fund in anticipation of making that very FIRST car purchase. This is very crucial. And so, while you're saving for that FIRST car, it is reasonable to conclude that you may not own a car although you may have access to one (that "old clunker" as you so eloquently describe). And so, at this stage, you can't use those monthly savings to compare to lease payments because they simply don't exist. Afterall, you're driving that "old clunker". When it's time to make that FIRST cash purchase, you should evaluate the cash purchase price (i.e., FV of the previous period's cash flows) v. the lease cash flows for that FIRST cycle. At this stage, the relevant question is: Which is cheaper; paying cash for the car or leasing it? It's probably best to disregard common costs (registration, tile, tages, gas, maint., etc). These, presumably, will be the same whether you buy or purchase. For all succeeding cycles, the money market streams can be compared with the lease cash flows.

3rd. I realize that you have proposed an exponential function with a negative growth rate (k) (decay/depreciation) of the form: V = Ce^-(kt) for illustrative purposes only and so I won't belabor the point other than to say that statistical estimation techniques (e.g., regression analysis) are generally deployed where historical data reflecting depreciation time line profiles are collected and analyzed in order to arrive at a suitable mathematical model.

4th. Another area that I take issue with is the "spreading" of taxes and fees over the holding period (q). Generally, these items are either (a) paid up front or; (b) amortized over the holding period. However, this is rather minor and so I won't belabor this either.

5th. It appears as though the right-hand side of your equation...

M + M * (1 + i/1200) + M * (1 + i/1200)^2 + ... + M * (1 + i/1200)^(q-1)
= M*q + (i*M/1200) * [q*(q-1)/2]

which simplifies to...

M*q * (1 + (q-1)*i/2400)

was derived by using a power series expansion to find an approximating polynomial of degree 2 for (1 + i/1200)^q. Note that...

(1 + j)^N = 1 + Nj + (j^2)N(N - 1)/2! + ... + j^n.

Obviously, 1 + Nj + (j^2)N(N - 1)/2! bolded polynomial is substituted for (1 + j)^N in the equation for the sum of a geometric series, the right hand side of your equation is necessarily less than the left-hand side but not by very much.

6th. As I indicated above, it seems clear to me that the appropriate way to do a lease v. purchase analysis is to compare cash flows from both alternatives. In layman's terms...

If the value that the consumer places on the future value of the dollars saved (invested at some oppotunity rate of investment or invested in durable goods and services) by leasing (usually, lease payments are lower than buy payments given identical holding periods) exceeds the net terminal value of the vehicle, then the financials say that it's best to lease.

To reiterate, your buy strategy involves a savings provision where a sinking fund is established in anticipation of the next purchase. Payment streams for the next cycle's purchase are compared with the current lease payment streams. You seem to have forgotten that you must save for the purchase of that FIRST vehicle. Your analysis does not capture that initial stream of payments when you're still driving that "old clunker".

7th. Your mathematical expose is not a valid mathematical proof that buying is ALWAYS the better alternative to leasing because it only examines one particular case; which has a few flaws.

FINALLY... Although not a bad idea, most people are not going to establish a sinking fund to purchase their next car. Money market rates haven't been that great (although they're starting to show some promise at the expense of higher borrowing rates) and are always in a constant state of flux. The high degree of uncertainty surrounding interest rates makes them very difficult to predict over a period of six months let alone one year. And so, it makes it very difficult to create a well defined savings plan for those big ticket items three or four years down stream. A reasonable expectation is that both payment streams and interest rates will vary over the planning horizon.

John
Medina, Ohio

delta737h

I also find it rather peculiar that you would account for the depreciated value (equity) of the purchased vehicle but totally ignore the equity position of the leased vehicle. Yes, it is possible to have equity or trade value in a leased vehicle at lease end; especially those vehicles that have a good track record of retaining their value (i.e., low rate of depreciation k). Therefore, your equation needs to include an equity term for leasing. In fact, your equation doesn't even consider any of the leasing variables. The only thing you have on the leasing side of the ledger is a $773 lease payment and nothing more. And so, your analysis is heavy on the buy side but light on the lease side and fails to consider the lease equity position, associated transaction costs, and any applicable tax benefits.

Another thing that needs to be clarified...

According to your model, you should be comparing the FV of the money market cash flows (CF's) (which can be annuitized or levelized so that CF's can be compared directly) at the beginning of each cycle with the lease cash flows for that cycle. You have created a mismatch between the two competing cash flow sequences as the time lines are out of sync. Your comparable money market cash flows will always be lagging one cycle behind the comparable lease cash flows.

Assumption #2 is unrealistic but, as I indicated in my previous post, I won't debate that.

In addition, I have a slight problem with assumption #3. Banks seldom use monthly compounding for money market accounts. So, in most cases, you'll need to covert their Annual Percentage Yield to its nominal equivalent compounded on a monthly basis. For example, an APY of 6.13% on a suitable money market account is equivalent to 5.96% compounded monthly. And then, you'll need to consider one's marginal tax rate and convert the result to an after tax ROR. It appears as though you have considered the after tax issue on the money market side but not on the lease side. You'll also need to convert the annual inflation rate to its equivalent monthly compounding rate. For instance, a 2% annual inflation rate equates to 1.98% compounded monthly (not really that big a deal considering inflation rates are estimates anyway).

Your post...

"#423 of 459 Paying off a lease by msindallas Jun 01, 2007 (11:49 am)
Bookmark | Reply
Replying to: kyfdx (Jun 01, 2007 8:40 am)

I'd be tempted to take the lease, then pay it off after 2-3 months. You'd be out the acquisition fee, but you would still be $3000 ahead. (unless the payoff reflects some sort of kickback to Volvo)

This is new to me. Can you pay off a lease after 2-3 months? I thought you sign a contract for 24 or 36 months and become legally bound to complete the term, and if you don't, pay a huge penalty."

contradicts your original premise that leasing is never a viable alternative. To wit...

"Summary: Do not lease, always purchase the car, and with cash."

Make sure you have collected all relevant and factual information. Gotta watch what you hypothesize. And, those universal all encompassing claims and assumptions can really bite you in the [non-permissible content removed], fella. There are plenty of "gotchas" waiting to ambush you as one poster has already proven using the Volvo lease example. They can really leave permanent bite marks (kinda like egg on your face). You don't want any of that; do you?

It's impossible to construct a mathematical proof that supports the fact that purchasing is always the better choice when compared with leasing because it just "ain't" so.

I think what you're trying to do is impress everyone because you crave attention. However, it seems as though that you're the only one that is impressed. I can only hope that I'm not coming across that way. We have some very sophisticated folks participating in these forums. When people mention things like Hamiltonian dynamics (what's his name? tidewater?), LaPlace Transforms, Lagrangian multipliers, boundary layer conditions (from fluid mechanics/aerodynamics), third order non-linear partial differential equations, and the like; they're telling you something.

Your equations do have some merit, though. I just think you need to (a) tweak your assumptions as well as your equations and (b) make sure that the time line profiles are aligned properly and you'll be fine.

John
Medina, Ohio

joel0622

Ya, I caught that to but didn't want to mention it.