Leasing a Car; starting with a Trade-In - Guidance Appreciated

In My Humble Opinion
1

So, it is time for me to get a new car - but it has been 6+ years since the last one, and last time, I bought the car. This time, I think I will lease it for a variety of common-sense reasons.

After a bit of research online, as near as I can tell, I should:

  • choose a make and model
  • choose a dealer (online, a local person, whatever)
  • figure out terms of the lease - amount per month, amount required up front, etc.
  • then get a quoted trade-in value for my current car.

I would then use the trade-in value to apply to any Lease Initiation fees or requirements (e.g., if they require a few months payments up front) and/or to apply to monthly payments for as long as the “trade-in bank account” can cover those.

Do I get it? It feels reasonably straightforward - I am thinking I have to be missing something :dubious:

If I do get it - any tips or recommendations for any of the steps? Any major changes due to the interwebs - i.e., sources of great information or new ways to lease cars online that provide clear, superior value that I should know about?

Fwiw, I currently drive a Nissan Altima (quick, efficient commuter car for a non-Car Guy) and will probably get a similar-sized car but perhaps a step up - e.g., Acura/Lexus/Infiniti/BMW/Audi, etc…

Thanks!

2

How long do you plan to drive your next car? If it’s 6 years like your current Altima, you don’t want to lease, you should purchase it. Leasing is primarily for people that like to switch new cars every few years. This way they avoid the loss on the depreciation they would lose from the heavy depreciation in the first few years. But if you plan on owning and driving the same car for more than 3 years, you will pay more through a lease arrangement than by purchasing.

Why not buy a used car that’s 2-3 years old that is coming off lease. You benefit from a new model car, but at a significantly reduced price.

3

I hear what you are saying about timeframe. I would also consider buying a recently-used car - although from a cashflow standpoint, doesn’t leasing lead to lower monthly payments? Do you have to buy a recently-used car (I hate the word “pre-owned”)? Can I take on the lease of one of those?

4

As you point out, another advantage of leasing is that it allows you to drive a car that would normally be out of your price range. It’s also a trap for people that want to live outside of their means.

You will make payments for 2-3 years and have nothing at the end of the lease. Not really a wise financial move.

5

How many miles per year do you drive? That’s something to consider as most leases have mileage limits and if you exceed them you end up paying huge penalties.

I am strongly opposed to leases as you’re pouring money into a car that you’ll never own. You end up in a cycle of perpetual car payments. Better to get something you can afford (if you’re worried about how much the monthly payments are) and that you’ll eventually own. A leased car will never be an asset unless you decide to buy it at the end of the lease… but if you do that, you end up paying a lot more than if you’d just bought one in the first place.

We just bought a 2009 Mazda 3 w/ only 22,000 miles on it and it looks and drives like new.

6

I will put on an average amount - I doubt I will push any lease limits.

But, hmm, that’s the only two posters pointing at owning. Obviously I appreciate what you are saying - I bought last time. I need to figure out what I am looking for - the situation I am in currently and which you recommend I repeat (own the asset) vs. lease the car for a couple of years - no asset, but lower payments and easier couple-year upgrades. It depends on how much I need the value of the asset, I guess.

With regards to the OP - since I am trying to clarify my thinking - does it work the way I describe?

7

Yes, you’re thinking it through correctly.

I’d also add that just about everything is negotiable, including interest rate. The dealership makes profit on the difference between the rate the bank buys the contract for and what they can get you to agree to. Sometimes it seems like they’re taking a bath on the sale of the car, but they’re actually making a load of cash on the back-end. Know your credit score going in, to help your negotiating power.

Also, have a really good idea of what the trade-in value of your current car is. If the appraiser for the dealer values it at $5,000 - and they get you to accept $4,800 - that’s an extra $200 in profit (that the salesman gets commission on). If you aren’t in a hurry and can make it work, it would be beneficial to you to sell the car to a private party on your own for closer to a “Retail” price, and then use that money for your lease fees.

8

What you are saying makes sense all around - thank you.

And since, with the Japanese disaster, I am hearing reports that used car prices are increasing, too. Maybe I should wait a month or two…sigh.

9

I’ll also chime in to say that leasing, for most people, doesn’t make financial sense. You do have lower payments, at the end of the lease you have nothing to show for it, there are risks to leasing (like mileage overcharges, worry about the condition of the car, etc.). Sometimes it’s appropriate for business purposes, and of course the “want a new car every 3 years” argument (though that in and of itself is bad, financially).

What you might do, numbers-wise: Look at what, say, a 2007 Altima is going for via the various car-pricing sites. See if you can find out what it sold for in 2007. Figure out what the payments on such a car would be today, leasing - using whatever terms you can find out there right now.

Figure out what the payments would be on a loan for such a car.

Say the car was 20,000 new and is now worth 12,000. At 5% interest, a 4 year loan would have a payment of 460.59. Your total spent is 22,108.12 - but you have an asset worth 12,000 so your net cost is about 10,000.

A lease (assuming that you’re basically financing the 8,000 dollars at the same rate) would have a payment of 184.23. So you’re spending a lot more over 4 years buying vs leasing. Your net cost is 8843.25 (48 x 184.23). And your net cost there is the same, 8843.25.

Look at the next 4 years. With the purchased car, your only cost is maintenance. Let’s say that’s 120 a month or 5760. Lets guess that the car, at 8 years old, is now worth 6,000. Over 8 years, you’ve spent 27868 dollars and own an asset worth 6,000, so your net expense is 21868.

With the leased car, lets say a replacement would be 22,000, it would be worth 13,000 after 4 years, you’re paying on a loan of 9,000, the payment would be 207.26 or a total of 9948.65.

So over 8 years of leasing, you’ve spent a total of 18,791.70.

Which happens to be less than 21,868 so leasing makes sense, given all my assumptions, but I don’t think my assumptions are correct.

What are lease payments really like? Would you get the same interest rates on a lease vs a purchase? Are you paying other fees etc.? All in all, what are your real out-of-pocket costs for a lease? Do you pay property taxes on a leased car? Once you’ve done your research, that will really help address these questions.

Neither of my scenarios takes into account down payments (or maintenance, except for the second 4 years on the purchased car).

10

MZ, all of your thinking works, even if the variables in your math didn’t yield the result you meant to point to; I get the gist. Thank you very much!

Sounds like I get the basics of the moving parts; what I need to do is research to determine what the actual numbers are in my particular case and then run the math, per MZ. From there I can make my decision based on the trade-off between value of owning and convenience of leasing.

Now I gotta wait for school to let out and camp to start so I actually have the time to research this! :wink:

Thanks again - and any other comments, please keep 'em coming.

11

LOL - you’re welcome :). And as I said, my numbers / estimates / rates etc. for leasing may have no bearing on reality as I don’t know what those charges might be. And the maintenance estimates are real WAGs as well - not out of line for what we’re paying for our two not-new cars (even the 12 year old Civic), but who knows what your car will want.

Of course, it helps if you have an accurate crystal ball and therefore know what your maintenance, trade-in, and excess mileage costs will be :D.

12

This is not really an accurate description of how a lease works. You don’t pay interest on just the depreciation, but for the entire value of the car. A more thorough treatment of how leases work can be found here.

13

Interesting reading! Like I said, I wasn’t sure how lease payments worked - thanks!!

Using that example above: car #1 for 20,000 with assumed residual value of 12,000. Second car 22,000 with residual value of 13,000.
For car #1, the depreciation fee is 8,000. Let’s assume that 20,000 includes all the up-front fees, rebates etc. So the “depreciation fee” is (20000 - 12000) / 48, or 166.67.
The finance fee is (20000 + 12000) * money factor, or 32000 * money factor. Let’s say the money factor is the .00375 cited in the link. That’s 120. So the monthly payment would be something like 280.00. Compared to the 460 a month (or thereabouts) for purchasing.

The “lease vs. buy” calculator from the linked page, assuming 20,000 / 12,000, no sales tax, 7% interest, shows a monthly cost of 260.01 vs. 478.92 for the same car. So it’s a substantial monthly savings - but at the end of the lease, you have nothing to show for it.

14

**MZ **- can I just do my research, feed you the numbers and you tell me what to do? :wink:

15

One other thing to consider - we leased once and the leasing company required more insurance with lower deductibles than we normally carried on our vehicles. Just FYI…

16

I spent 10 years in auto sales working almost exclusively for Audi. I can offer a few tips.

The first thing to remember is that a car you use for regular daily transportation (and regardless of the method of acquisition) is a depreciating asset. A car will not make money, it will always be an expense.

The rate of depreciation will be based on the mileage, the condition, and the vehicle’s history (an accident does decrease it’s value slightly). Market factors will be out of your control, aside from these.

Since depreciation is essentially a constant, you need to look at the methods of purchase available.

  1. You can pay for the car in full and incur no interest. This assumes that you will not need access to the cash you have tied up in a vehicle. Access to capital has a certain value even to those who have plenty of it.

  2. You can finance the vehicle through a traditional loan. These loans are most frequently simple interest and pre-payment penalty free. The interest you are charged will be based primarily on your credit history. If you pay the loan off early or pay more than your monthly payment your overall deferred price decreases due to less interest being accrued.

  3. You can lease the vehicle. A lease is essentially an agreement to buy a portion of the vehicle. Leases can be good deals, but are not easy to get out of early. Leases can seem complicated, but often provide an “interest rate” lower than the traditional loan option.

Some tips on leasing. Just like the methods of purchasing, the sale price of the vehicle is negotiable in a lease. The residual value and money factor (essentially the interest rate on the lease) are set by the leasing institution. A dealer can mark up the money factor and make a profit on the interest portion of the equation. The residual value will be dependent on the mileage you intend to drive and is a set value. Most leasing companies charge an acquisition fee and this will likely be “rolled into” your monthly payment. Most leasing companies also have a disposition fee that is assessed at the end of the lease. Often if you purchase the vehicle or stay in the same brand this disposition fee can be waived and is a point of negotiation on your next vehicle. All of these fees will be disclosed on the lease agreement.

Once the negotiable pieces of the lease are settled (purchase price, money factor) the overall cost of the vehicle is pretty well set. Any money you put down upfront does lowers your monthly payment but does not decrease your deferred price. It does provide the psychological benefit of a lower monthly payment.

Your trade-in is essentially a cash value that can or can not be applied to the lease. On a loan it will lower your overall interest charge due to a lower total amount financed. Your overall lease cost will remain unchanged even if you apply a substantial amount of upfront equity. In a traditional loan arrangement or cash transaction the trade-in does have a tax incentive since it lowers the taxable amount of the transaction. Some states do allow a tax break for trade-ins on a lease but ymmv.

I understand the sentiment of owning. But I think it is misplaced when it comes to cars. Owning something that is guaranteed to depreciate is not sound investment strategy. That’s because cars are not investments, they are expenses. Since depreciation is essentially equal, the biggest factor we can control is the cost of money. You have to look at whether you can take the money you save from not paying cash and make more than the cost to borrow it.

Through internet requests you will be able to find dealers who will be upfront with you regarding the lease or purchase info. Simply tell them what information you need (sale price, residual value, money factor, acquisition fee, disposition fee) and tell them you are shopping. Some will be opaque, but the best ones will be upfront and disclose fully. That’s who I would recommend doing business with.

As always, unless the tax benefit outweighs the difference in value, you are almost always going to do better selling your car by yourself.

17

Wow, what a great post. Thank you mauxlicious. I can’t even think of any questions right now. The POV you share about car as cost is why my wife is advocating shifting. I see it.