Lease vs Financing - Hardcore financial calculations

goel_ar1

Hi - I've ordered BMW X7. I live in NJ. I can either lease or finance or purchase cash. From pure financial perspective, I am trying to see what is the actual $$ difference between financing vs lease. Please note that I am not talking about monthly lease payment or monthly financing payment.
Assume Purchase price is $100,000
Residual Value is : 52% , 52,000
MF = 0.00093 i.e. 0.00093x2400=2.232% APR
Financing rate is : 1.9% for 5 years
Hold period of vehicle : 3 year.
My thought process is that leasing is better than purchasing/financing (financially) because:

1. Lease sets up the residual value of your vehicle so basically you are paying (Purchase price - residual value) $48k + 2.232% APR on 48k.
When you purchase, you automatically start paying interest on full value of vehicle i.e. 100k . If you sell vehicle at end of year 3,say at residual value of 52k, you are not going to recover the interest paid on 52k in year 1-3.

2. Next argument is that when you purchase then you can sell higher than residual value of 52k. I understand that Lease gives you an option to buy at residual value of $52k. At end of year 3, you check market value of your car : if it is more than 52k then you have an option to buy it, if it less than 52k then you can do lease return. I am assuming either you stay in allotted mileage or include overage mileage payment in calculation.
If you purchase and then technology changes rapidly or car value depreciates to say 40% in 3 years - then you have used 60% of the depreciation as opposed to 48%.
So, lease gives you FREE option (like put/call options) to cap your vehicle's depreciation at 48% whereas you don't have that option when purchasing.


What am I missing? i tried to read online articles - everyone is saying buy not lease.. why?? I think i have made it look like too simple.

Michaell

goel_ar1 said:

Hi - I've ordered BMW X7. I live in NJ. I can either lease or finance or purchase cash. From pure financial perspective, I am trying to see what is the actual $$ difference between financing vs lease. Please note that I am not talking about monthly lease payment or monthly financing payment.
Assume Purchase price is $100,000
Residual Value is : 52% , 52,000
MF = 0.00093 i.e. 0.00093x2400=2.232% APR
Financing rate is : 1.9% for 5 years
Hold period of vehicle : 3 year.
My thought process is that leasing is better than purchasing/financing (financially) because:

1. Lease sets up the residual value of your vehicle so basically you are paying (Purchase price - residual value) $48k + 2.232% APR on 48k.
When you purchase, you automatically start paying interest on full value of vehicle i.e. 100k . If you sell vehicle at end of year 3,say at residual value of 52k, you are not going to recover the interest paid on 52k in year 1-3.

2. Next argument is that when you purchase then you can sell higher than residual value of 52k. I understand that Lease gives you an option to buy at residual value of $52k. At end of year 3, you check market value of your car : if it is more than 52k then you have an option to buy it, if it less than 52k then you can do lease return. I am assuming either you stay in allotted mileage or include overage mileage payment in calculation.
If you purchase and then technology changes rapidly or car value depreciates to say 40% in 3 years - then you have used 60% of the depreciation as opposed to 48%.
So, lease gives you FREE option (like put/call options) to cap your vehicle's depreciation at 48% whereas you don't have that option when purchasing.


What am I missing? i tried to read online articles - everyone is saying buy not lease.. why?? I think i have made it look like too simple.

Your assumptions are correct.

One other factor to consider is: do you plan to keep the car for longer than 3 years? If not, then lease, for exactly the reasons you describe.

goel_ar1

Thank you. If I want to keep car longer then I have an option to purchase at residual value - in that case also , I am not paying anything more than I would for purchase new car. I paid depreciation + residual value - which is total value of car.

kyfdx

goel_ar1 said:

Thank you. If I want to keep car longer then I have an option to purchase at residual value - in that case also , I am not paying anything more than I would for purchase new car. I paid depreciation + residual value - which is total value of car.

1) Leasing adds $925 cost for the acquisition fee
2) The money factor applies to the full cost of the vehicle, as well, just like a loan.
3) If you keep the vehicle for five years, then you'll have to finance the buyout amount, likely at a rate that isn't nearly as good as what is available new.
4) If you only want the vehicle for three years, then lease. Your costs are fixed.
5) If you plan on longer than three years, then buy.

goel_ar1

1) Leasing adds $925 cost for the acquisition fee : This is charged by BMW FS (Leasing dept)? Is it different from Dealer Doc fee of $799 ?
2) The money factor applies to the full cost of the vehicle, as well, just like a loan. : Are you saying that I am paying interest - rough calculation : 0.00093*2400*100,000/100=$2,232 (this is what I am paying roughly in interest charges on lease).
3) If you keep the vehicle for five years, then you'll have to finance the buyout amount, likely at a rate that isn't nearly as good as what is available new.: I agree.
4) If you only want the vehicle for three years, then lease. Your costs are fixed.
5) If you plan on longer than three years, then buy : My plan is to reassess after 3 years - whether technology has changed much , evolution of electric vehicles etc. I want to keep an option (if it is not overly expensive) whether to return or purchase after 3 years. Again, I am trying to calculate what is the cost of that option in lease v/s financing/purchasing now?

Michaell

goel_ar1 said:

1) Leasing adds $925 cost for the acquisition fee : This is charged by BMW FS (Leasing dept)? Is it different from Dealer Doc fee of $799 ?
2) The money factor applies to the full cost of the vehicle, as well, just like a loan. : Are you saying that I am paying interest - rough calculation : 0.00093*2400*100,000/100=$2,232 (this is what I am paying roughly in interest charges on lease).
3) If you keep the vehicle for five years, then you'll have to finance the buyout amount, likely at a rate that isn't nearly as good as what is available new.: I agree.
4) If you only want the vehicle for three years, then lease. Your costs are fixed.
5) If you plan on longer than three years, then buy : My plan is to reassess after 3 years - whether technology has changed much , evolution of electric vehicles etc. I want to keep an option (if it is not overly expensive) whether to return or purchase after 3 years. Again, I am trying to calculate what is the cost of that option in lease v/s financing/purchasing now?

1. Yes
2. Lease Calculations
3.
4.
5. See #4; if the market craters, and you've purchased, your resale value will be affected. You don't have that risk when you lease.

kyfdx

@goel_ar1

$5089 for finance charges over the 36 month of the lease.
+$925 lease acquisition fee from BMWFS

72 month loan at 1.9% (picked this term, as it leaves you with a loan balance very close to 52% residual)
$4367 of cumulative finance charges at 36 months of ownership.

goel_ar1

Thank you.

goel_ar1 said:

1) Leasing adds $925 cost for the acquisition fee : This is charged by BMW FS (Leasing dept)? Is it different from Dealer Doc fee of $799 ?
2) The money factor applies to the full cost of the vehicle, as well, just like a loan. : Are you saying that I am paying interest - rough calculation : 0.00093*2400*100,000/100=$2,232 (this is what I am paying roughly in interest charges on lease).
3) If you keep the vehicle for five years, then you'll have to finance the buyout amount, likely at a rate that isn't nearly as good as what is available new.: I agree.
4) If you only want the vehicle for three years, then lease. Your costs are fixed.
5) If you plan on longer than three years, then buy : My plan is to reassess after 3 years - whether technology has changed much , evolution of electric vehicles etc. I want to keep an option (if it is not overly expensive) whether to return or purchase after 3 years. Again, I am trying to calculate what is the cost of that option in lease v/s financing/purchasing now?

And this is also an option where I have setup my upper limit on depreciation in 3 years i.e. 48%. If for some reason, the car depreciates less, then I can just buy the car at 52k, fair than mkt value.