Car Leasing.Win/Win for dealer?

I just recently returned a Camry that I had leased for the past 39 months. Except for the fact that I obtained this car brand new, and paid a cheaper monthly payment than if I had bought it, what other advantage is in it for the consumer? My experience with scheduled maintenance was a horror…one in particular comes to mind; I brought it in for the 30000 mile service and was charged $290.00 for parts and $250.00 for labor (at the dealer) and I’m thinking at the time, I am RENTING this vehicle, why doesn’t the dealer pick up the cost? If I was renting from Hertz, I certainly wouldn’t be replacing belts and filters at my expence. Secondly, the 39 month lease. It finally dawned on me about a year into the lease, that if I went over the 36000 miles they allowed me, what happens if the tranny drops out of this car, because between 36 and 39000, the warrenty is over. Guess who would pay for it. Does the consumer ever win on a lease?

and paid a cheaper monthly payment than if I had bought it

Ahhh, you answered your own question. This is the only place the consumer wins.

Leasing is usually used by people who’s primary concern is the up-front expenses. In 90+% of the cases, leasing is more profitable for the dealer. That’s why they do it.

At the end of a three year car loan, you have a used car that has value. At the end of a 3 year lease, you have nothing.

The lease is between you and the leasing company, not the dealership. (unless the dealership does it’s own leasing) The dealership should have asked you how many miles do you drive. Did you go in on an advertised lease? When you lease a car it’s yours for the entire term. That means you put in the gas, make the repairs (not covered by warranty), pay the insurance, etc. At the end of the lease you can buy the car, trade it in, sell it, or walk away (depending on any disposition fees). People say “On a lease I never own the car.” On a purchase you never own the car until it’s paid off. Leasing a car is for those who like a little more car for less money, or want a new car every 3-4 years. Never lease for 5 years and read the fine print.

Leasing is pretty much only for people who like to throw away money. Consumer advisor Clark Howard regularly rants on the disadvantages of leasing.

As to the dealer, leasing had been a big win for a while. But then they started getting a glut of cars back from leasing and not a big market for them. This is actually where a consumer can win some. Get a 3 year old car for less since the dealer has to get rid of them.

Note that the small “win” upfront turns into a double loss in the end. (You give them the car back and pay for “damage” repair.) Dealers rely on consumers not thinking it all out.

I know of no consumer advisor group or individual that has ever suggested that leasing is financially a good idea for the consumer in any common circumstances.

You can lease a car when your credit history (bankruptcy, etc) will not allow you to get a loan, and you can’t afford to pay cash. You can also get a much nicer car for the monthly buck.

That’s the real benefit. If this is not your problem, leasing is not financially wise. I’ve never leased a car myself, and would personally prefer a paid-off “old reliable” over an expensive ego-stroker.

If you qualify to lease a car, you can certainly get a nice slightly used car for less per month. “…nicer car for the monthly buck”??? I, I, I, … (bleep).

You always have to think long term in your finances. Thinking short term only is how people (and such) ruin themselves.

Well, yes, but that’s a bit of a misleading oversimplification.

At the end of a three-year loan, you own a used car that’s worth considerably less than what you’ve paid over the past three years.

(Making these numbers up): Say you purchase a $20,000 car and pay if off over three years. During those three years, you have use of the car, pay for maintenance, all that stuff. You pay $20,000 plus whatever interest on the loan, and after three years own a used car worth, say, $12,000.

Net result: you’ve paid some $8,000 (plus upkeep) for the use of the vehicle over the past three years.

Leasing that same vehicle for three years, you won’t be paying anywhere near $20,000 in lease payments (at least, I’d hope not!). It’d likely be something like (again, making numbers up) something like $8,000. So you’ve paid $8k over three years to use a vehicle, as well as paying for maintenance and such.

(Actually, this is kind of the idea in structuring lease payments. You should, in theory, pay roughly the depreciation costs, plus some profit for the lessor. In theory.)

Net result: you’ve paid some $8,000 (plus upkeep) for the use of the vehicle over the past three years.

I’m not sure I see a difference.

I realize that I made those numbers up and that they may not be very accurate. However, I’d really want to rebut the claim that leasing can never, by its very nature, be a good deal.

It’s entirely possible for a lease to be structured so that the lessee can come out ahead over buying. Now, good luck actually finding such a lease - the short-term benefits of leasing cause people to accept long-term foolish leases most of the time, and car dealers/finance companies know this.

Leasing is not necessarily a bad deal. It depends on the type of lease, and the type of vehicle you are leasing, and how you use it.

One important benefit to the consumer is reduction in risk. One risk reduction is resale value. To explain this, let’s be clear on what a lease is. A lease is simply a way to pay for the depreciation on a vehicle without owning it. The car company decides what the ‘residual’ value of a vehicle will be at the end of the lease period. The difference between that residual and the purchase price is what the lease value is set at. Divide by the number of payment, add in financing charges, and you have your monthly payment.

Now, if the residual was set exactly right, and the finance rate was exactly the same as loan interest, then there would be no difference between leasing and buying. Either way, you drive a vehicle, and the real cost of driving it is measured by how much value the vehicle loses over time.

So the difference between the two options depends on the details. Some companies tack extra fees onto leases. Leases these days seem to have a couple of extra points of financing charges over loans.

However, leases can have big advantages. For example, the car company is taking on the risk of judging the residual correctly. If they are wrong and the vehicle depreciates by more than they thought, they lose that money. On the other hand, if the vehicle depreciates less, the consumer has the option of buying it for the residual value.

I made out like a bandit on my last two leases because of this. Ford was setting the residual of their windstar vans outrageously high in order to lower lease payments to attract the demographic they wanted and move the vehicles. I’m about to turn in my Windstar in two months. It’s residual value is $20,000, but the ‘market’ value of that vehicle right now is more like $16,000. If I had purchased the van instead of leasing it, I’d owe $20,000 on a vehicle that is only worth $16,000, and I’d be ‘upside down’ by $4,000.

Another risk reduction for the consumer is protection against ‘lemons’. The Windstar I leased turned out to be a piece of junk. It’s got a TERRIBLE maintenance record. In the first 18,000 miles it had already gone through a transmission, a front end rebuild, a faulty power seat, faulty power door, inoperative horn, several major fluid leaks, and numerous other fit and finish problems. If I had purchased this vehicle, it would be hard to get market value for it after disclosing the numerous issues it had. Instead, I get to hand the keys over to the dealership and say, “Tow this piece of junk away.”

Another advantage of leasing is that you avoid the hassle of having to sell the vehicle yourself if you want to drive a new vehicle every few years.

But that brings me to the main point - the financial difference between leasing and buying is TRIVIAL compared to the incredible cost of driving a new car. The worst financial decision you can make is to buy new instead of buying a good, clean, used car. We’re talking about a difference of thousands of dollars a year.

If you’re concerned about making the right financial choices around buying a car, don’t even consider buying a new one. Go find a nice two or three year old car that is still under warranty, but which has gone through the steepest part of the depreciation curve on someone else’s nickel.

I work in auto leasing on the financing side, and Sam is exactly right. You don’t want to lease a car without making lots of research into the market three years down the road. We don’t lease many Windstars, but our Plymouth Voyagers from 1998-2000 have been horrible losses. Not only were the projected residuals off wildly, but as a result our resale dealers won’t touch them, and we take a bath at the auto auctions. Each Voyager ends up costing us about $2000-$4000.

On the other hand we’ve made a killing with our Lexus models due to the very high resale value. Like Theobroma said, the advantage for the lessee is significant when you really want to drive a higher-end car that’s just out of your financing-to-buy reach. Conversely, you would definitely want to lease something like a Kia or Mitsubishi rather than buying one, since you’d be upside-down until the last six months or so. Leasing a mid-range car like an Accord or Camry is probably stupid.

The end-lease fees aren’t as bad as some people might think. Our termination fee is $300, the over-mileage fee is between 0.10-0.20 a mile with the total averaging about $100, and our wear-and-tear allowance is very generous. Unless the car looks like it’s been used as a battering ram, the lessee usually ends up paying nothing in repairs. So yes, you pay ~$400 for the privilege of returning the car, but if you didn’t want to own it in the first place, it almost always factors out to your advantage. Not to mention that it can be a huge improvement to your credit rating if your payment history was decent.

Here’s another big advantage leasing can have over buying: If you live in an area where sales tax is applied to the purchase price of the vehicle, you’re taking a huge loss when you buy the car, because the sales tax isn’t really recoupable when you sell the car. In addition, if you are financing you pay interest on the tax money, since you had to pay it up front.

But on the other hand, when you lease, you only pay tax on the lease payments. That means you only pay maybe half the tax in the first place, and the tax you pay is paid monthly so you you aren’t paying financing charges on the tax.

Look at a typical situation: A car on a 3-year lease, with a 50% residual value. Let’s say the car costs $20,000, and there’s a 6% sales tax, and 7% interest.

The lease payment in this case would be $390.85. Your total cost would be $14,070, and you walk away.

Now, let’s say you buy the same car, and finance it over 36 months, at the same interest rate.

The car costs $20,000, + 6%, or $21,200. You’d pay $654.59/mo, or a total of $23565.24. And at the end, you have an asset worth $10,000. If you sell it and recover that $10,000, your total cost would be 13,565.24

So, it looks like the lease in this case cost $500 more than the loan, over three years. But even that isn’t really accurate, because you’re losing the time value of money as well. In other words, if you took the difference between the lease payment and the loan payment, 263.54, and invested it in something that earned 5%, at the end of three years it would be worth $10,231.

So in the end, the lease cost us maybe $250, and we didn’t have to go to the trouble of selling the car, and we eliminated the risk of the auto market changing and destroying the resale value of the car.

These amounts are so small one way or the other compared to the thousands of dollars per year that the car will cost, that usually the decision to lease or buy should not be made on the basis of which is ‘cheaper’, but on other concerns. Do you want to buy a new car every two or three years? Do you drive under the lease limit, but not so much under the limit that the car won’t depreciate as much? Are you secure enough financially that you don’t have to worry about the heavy penalties of an early lease return? These are the questions that really matter.

But consider the extreme cost of buying new in the first place. And that’s where leases can really kill you, because they often cause people to drive cars that they really can’t afford.

Consider this difference:

Person A buys a new $20,000 car every three years. He loses about half the value of the car in those three years. So he drives, on average, a car that is 1.5 years old, and pays $3,330 per year for the privilege. After 30 years, this person has spent $100,000 for his cars.

Person B buys cars that are three years old, and drives them for three years. The average age of his cars is 4.5 years. But cars typically only depreciate by about half the amount in the second three years as they did in the first three. So he drives the same cars, but just slightly older, and he spends only $50,000 over 30 years for his transportation.

But even better, this person takes the money saved, and invests it in a 10% investment. At the end of 30 years, he’ll have $314,601!

That’s quite the premium to pay for the privilege of owning a slightly newer car.

Obviously, there are extremely “bad judgement” ways of buying a car outright that are much worse than leasing. E.g., buy it, drive it into a wall without insurance.

But, in the context of intelligent car buying strategies, you can clearly rule out cases where you do a 3 year comparison. People who care about their finances don’t do stuff like that. Clearly, people who don’t care about their finances will do careless things. Hey, it’s their money.

The goal of buying a car when you care about your finances is to get one that you can drive for 7+ years. What the financial situation will be 3 years into that shouldn’t matter to most people.

(I keep forgetting other people finance cars. Never done that myself. Doesn’t seem to look very smart given the numbers people are posting. Oh well.)

If you’re strapped enough for cash that you think leasing is the only way to go, you’re making a pretty big mistake. There are a lot of other options that will help you be “unstrapped” for cash down the road.

I paid $7k cash for my 323 15+ years ago. I’d like to see someone run by a leasing argument that would beat that.

Dude, people are different. Some folks like driving old cars they own outright, some people like driving a new car every year. Doing one isn’t necessarily better than doing the other.

And there’s nothing immoral about financing cars, for all you no-debt evangelical Dave Ramsey-listening types (sheesh).

That’s absolutely correct. But my point is that if you’ve already decided that a new car is what you want, and you’re willing to pay the huge premium for that, then the decision to lease or buy is trivial in comparison. People spend a lot of effort agonizing over those choices, and then shrugging off the truly huge financial choice implicit in buying a new car in the first place.

Lots of good knowledge above on leasing versus purchasing (not a sentence fragment; “there is” is implied). I’ve done both, and can say that in either case it’s buyer beware; you know, watch out for your own and you can’t really lose doing either one or the other.

Despite the fact that I work for the auto industry, I’ll probably never purchase a new car again, and continue leasing new cars or just buying used company cars (which is awesome if you can do it). Well, maybe I’ll purchase when I get ready to retire, since I don’t think I’ll be swapping cars every two to three years at that time. You know, assuming we’re not all flying around in personal jet-packs by then.

Car leasing can be a great deal…but you have to do your homework. I’ll use our lease car as an example. We are leasing a 2002 Nissan Sentra, our cost is $229/month for 5 years. To buy this car our payment would have been around $375…that’s $146/month more. Here’s the kicker…our residual is only $5000. The residual is what decides if you get taken…or your are the taker. I did my homework and noticed that 5 yr old Sentra’s are selling for 7-8K. So at the end of the term I have 4 options…

  1. Give the car back. This is where the lease company makes their money.

  2. Trade up to a new vehicle…similar to giving the car back…the company has a car worth more than they owe the bank.

  3. Buy the car. I only have to pay 5k for a car worth 7-8K. Pretty good deal. And in many cases you can bargain the bank down and pay less than the residual because it’s going to cost them money to sell it.

  4. Or I could buy the car for the residual and sell it keeping the difference. Profit.

Now think of this…If I save the $146 I’d have to pay to buy the car…$146 X 60 months = $8760 that’s collecting interest in my savings account or in the market. So in a best case scenerio I can buy a 7-8K car for 5K (out of the $146/month I put away) and get and extra $3760 at the end.

I’ll make money as long as I don’t just give the car back.

…one more point…you don’t have to put up with high pressure annoying “let me talk to my manager” car salesmen.

Full disclosure…we are also leasing a 2003 Dodge Ram that we will not come out as good as the Sentra. But I knew it going in and made an informed decision.

About the credit implications of leasing, Max… is it any better or worse than, for example, financing your car for say 3 years, and making diligent payments?

Your credit really won’t change from making good payments on your car (finance or lease). Missing payments will certainly kill your credit though.

From what I can see when I pull up credit checks on people (I work in the credit department at a cell company) only credit cards give you credit. Mortgages, leases, finances and cell phone/regular payments don’t give you good credit, only prevent you from getting bad credit.

FWIW: I bought my car and decided against leasing. I think the lease/buy issue really depends on what kind of owner you are. I want to keep my car until it’s dead. I also want to lease a cheap Echo for A-B driving (my Matrix uses premium and isn’t very efficient the way I drive). Since I don’t want to buy an Echo, it makes sense to lease it (for $180 a month! a third of what I pay for my Matrix!). [And before you freak, that’s in CAN].

My friend, though, made a (IMO) mistake leasing his WRX. He wants to buy it but is leasing it for $800 a month. Pretty crazy. His buy out is 18K! That’s the price of the mid range Matrix!

I repeat, yes, if you don’t care at all what happens to your money, then leasing is certainly an excellent way of getting rid of it. My posts have been focused on the financial issues involved. If you think in terms of “but I like getting a new car every 3 years” and stuff like that, then the financial question is not a major concern to you, my posts don’t matter. So please don’t respond to them if you are in this category. Responding to posts that aren’t intended for you seems pointless.

But if you think you can have your cake and eat it too, you are quite mistaken.

No one has addressed the second part of my question. The lease hasn’t run out yet, but you have gone beyond the manufacturers warranty. A popular lease is 39 months, meaning three months in your driveway without warranty protection.