Lease v. Buy a new car?

[radereb]

I am planning on doing the buyback. As is my wife because we both own TDIs. My wife and I looked at a Mazda CX-9 today as a replacement for her JSW, the salesman brought up the option of leasing the Mazda as opposed to buying it. I have never leased a vehicle but I know that there are downsides like having a limit on mileage and often you end up paying more for a lease than actually buying the car. The salesman said that if my wife leased the car and decided to buy it at the end of the three year lease then there would be no mileage penalty or wear and tear penalty.

TL;DR should my wife buy or lease a car?

 

[CSR Penfab]

Do some research. Leasing works for me since I change vehicles every few years and with a generous company car allowance I can afford a high lease. You are correct that if you buy at lease end there is no mileage or wear penalty, but if you're buying at lease end you should not have leased in the first place.

 

[Basenji]

I agree. I used to lease, but even with a car allowance I had some problems. I was a high milage guy and actually ended up paying a $3500 milage penalty at the end of my last lease. Additionally, if you have some body damage on the car it can hurt you. I'd be very careful.

 

[GetMore]

First of all, you can negotiate the mileage on a lease, so if you really want to lease the car, and drive 20,000 miles a year, you can make it work, so that you don't get hit at the end.

I know someone that likes leasing. I think they are within "normal" mileage, so that doesn't hurt them. What they do, is at the end of the term, if the actual value of the vehicle is higher than the "residual" value (and they like the car) they buy it out. On the other hand, if it depreciated more than expected they let the car go.
It let's you drive the car for 3 (or so) years, for the cost of depreciation, and if you choose to buy it at the end your loan amount is lower than the original price, so the monthly cost is low. Yes, you are paying longer, but if you plan on keeping the car then it doesn't really matter.
My credit union had a "financing" offer like that: You leased the car through them, and then at the end you could let the car go, or keep it, and finance the remaining balance for up to 5 years. So, you could spread the financing out over 8 years.

Some tips:
ALWAYS get GAP coverage. It doesn't cost much, but if the car were to be totalled or stolen, and the insurance company pays you less than the remaining balance on the car, the GAP insurance makes up the difference.
Negotiate the price of the car, same as if you were buying it. Rebates, holdback, any incentives, use everything you can to bring the price down. You are paying for the car one way or another, why pay more than you have to.
Make sure the lease has a predetermined residual value. Most do nowadays, but some were open-ended (I think that is the right term), and if the value of the car at the time you returned it was lower than the market value you had to make up the difference.
You probably shouldn't get a lease with a term longer than the warranty. No reason to be repairing a car that you are going to return, and they will want it repaired before you return it, or they will charge you.
Find out what is considered excess wear and tear. Small dings, light scratches, a marred interior, are all normal. Some leasing companies are more forgiving than others. Don't get one that expects the car back in showroom condition.
Find out what the "money factor" they are using is. Multiply it by 2400 to come up with the percentage. This is the interest rate they are charging.
If needed, negotiate the excess mileage. You can usually negotiate the rate, so you are not paying 25 cents per mile. A lease works off depreciation, they do want the cost of the extra depreciation due to mileage, but that is usually much less than 20 to 25 cents per mile.

The great thing about leasing is that you are always covered by a warranty, and the car is always new or newish. If the manufacturer covers maintenance during that period then you never have to worry about unexpected expenses.

 

[BuyMeBackSoon]

Leasing makes for easier business write offs, no depreciation calculations or recapture at sale. Just expense it!

 

[BlueGruff]

Check out Edmunds.com car forums for Madza CX-9 Lease questions. It will provide information about the money factors for different mileage allowances. Also, it gives info about lease incentives. Some posters even share this numbers so you can get a idea about whether the dealers lease offer is any good.


Sent from my iPhone using Tapatalk

 

[2015vwgolfdiesel]

I am planning on doing the buyback. As is my wife because we both own TDIs. My wife and I looked at a Mazda CX-9 today as a replacement for her JSW, the salesman brought up the option of leasing the Mazda as opposed to buying it. I have never leased a vehicle but I know that there are downsides like having a limit on mileage and often you end up paying more for a lease than actually buying the car. The salesman said that if my wife leased the car and decided to buy it at the end of the three year lease then there would be no mileage penalty or wear and tear penalty.

TL;DR should my wife buy or lease a car?

If there is no business use of the unit, stay away from leases.

The best of all worlds is to own it, take good care of it, then sell it on your curbstone.

2-4 year old nice garage kept, low mileage cars can be sold at or near full bore dealer retail. Many many buyers would much rather buy it from the ORIGINAL owner.

Use a starting price above full dealer retail and state motivated seller, and OBO in the ad.

If you dog out a car --- I just don't know what you should do.

Good luck

 

[solBLACK]

My mother has been leasing vehicles for her past two cars. As long as you don't drive that many miles it's a great option. So many people purchase new cars only to sell them 3-4 years down the road anyways. Typically your monthly payment is lower leasing than purchasing too.

 

[IndigoBlueWagon]

There are two ways to look at leasing. If you drive less than the mileage allocation, which usually tops out at 15K/year, and you take good care of your cars, leasing can be a good option. If you plan to buy the car at the end of the lease term it doesn't matter how much you drive or how you care for it. You just have to be aware that if you change your mind it may cost you.

The important aspect of deciding whether or not to lease is the interest, or "money rate" the lease charges. If it's significantly less than a loan interest rate (assuming you were going to borrow money) a lease can be less expensive. Also, you don't have to tie up any cash in the car if you don't want to.

I first leased a car for my wife because the money rate on the lease was nearly 0, and buying the car outright would have been a stretch. We bought it out with cash at the end of the lease term, and ended up keeping the car 10 years.

I next leased an Audi A4 because the residual buyout was significantly less than the value of the car at the end of the lease term, and, again, the money rate was low. I leased it for 39 months, ended up keeping the car nearly 7 years.

I've leased three VWs recently, all paid off early and sold (one wrecked). Paying off most leases early no longer incurs a penalty as it did in the past, but I'd make sure before you sign anything. And VW Credit includes GAP insurance in their leases. See if Mazda does. You may not have to buy it separately.

Ask the finance guy at the Mazda dealership what the money rate on the lease is and how it compares to an interest rate you can get, either from them or another institution. And factor in the benefit of having to put no money down. Then make a choice.

 

[CSR Penfab]

All good points, and yes VWAG includes GAP in all of their leases. I've leased an Audi Q5 and a Touareg, and GAP was already in the pricing.

 

[Mark SF]

At least in California, leasing has tax advantages. The sales tax is on the lease payments, not on the car value.

For example, I just leased a Volvo V60. The total lease payments, including downpayment, are $13k, so sales tax comes to about $1200 altogether, most of which is paid on the payments over the 3 years. The car's sale price was $35k, on which I would have paid $3150, right away, if I had bought the car outright.

 

[IndigoBlueWagon]

I think that's true everywhere. Basically a lease finances the car's depreciation over the lease term. If you buy at the end of the lease you pay sales tax on the residual buyout price. Sales tax is a percentage of each lease payment, as set by the state.

My most recent lease was a Jetta for my daughter in LA. One reason we leased instead of buying outright was the 9% sales tax (Pasadena). Not insignificant, even on an inexpensive car.

 

[2015vwgolfdiesel]

My mother has been leasing vehicles for her past two cars. As long as you don't drive that many miles it's a great option. So many people purchase new cars only to sell them 3-4 years down the road anyways. Typically your monthly payment is lower leasing than purchasing too.

Lower payments -- yes.

But if you need to pay (say) $2,995 up front, the real payments are 'bout $80 to $120 more (on 2 and 3 year leases)

 

[IndigoBlueWagon]

Rule of thumb is that every $1K you pay up front saves about $20/month on a 3 year lease. IMO there's no point in putting money down on a lease. You're just prepaying for depreciation.

 

[Mark SF]

There is a point, which is that the money down is not subject to the interest (money factor). If the money factor is not really low, it is likely that you'll be better off making a substantial downpayment, as the return will be a lot more than you're getting from any savings account.

What's wrong with pre-paying for depreciation? What are you doing when you buy a car?

 

[dgoodhue]

I looked into leasing for my wife TDI with the intention of buying it out, because my wife and I were going to have overlapping car payments for 3 years on top of child care expense. I buy car with the intention driving them 10+ years.

At least in my VW TDI, the interest on the lease was more expense (you can calculate it from the money factory) at ~3.5% and I had to pay an additional $695 acquisition fee, if I turned it in their was also $350 deposition fee. It was going to cost me more $1000 more to lease/buyout vs buy over the same time period. If you fall within the leasing parameters and plan on buying a new car every 3 years then it may make sense.

 

[IndigoBlueWagon]

People smarter than me can do a time value of money calculation and show how much more it costs to spend, say, $5K now versus over the next three years. But you're right, if the money factor is high then it might be better to put some down.

I used to work with a banker who always said "buy what appreciates, lease what depreciates." His point was to not tie up funds in an asset that has a declining value. Makes sense in theory, but some of us like to own things. I prefer to pay cash for my cars. Last car I leased for myself was because I was writing it off, and as others have noted, it's much easier from an accounting standpoint. When I switched paying for the car to me personally I bought out the lease.

dgoodhue, on every lease I've done I've gotten the dealer to not charge me the acquisition or disposition fee. Those are usually pretty easy to make go away.

 

[GetMore]

Two things:
Many times, if you turn in your lease for a new one they will waive the disposition fee.
If you put money down on the lease, and something happens (theft, total loss) you do not get that money back. Since the majority of the depreciation is once the car rolls off the lot, but the lease is only charging 1/36th each month, you would be way ahead if the unthinkable happened, and the car got totalled near the beginning of the lease. Toward the end, it is just starting to equal out. In other words, in a no-money-down lease, you will never pay down the car to it's actual value until the very end.

Regarding taxes, I would be surprised if the lease did not have tax on the vehicle "selling" price. Whatever you put down is after tax calculations on a new car. I would be shocked if the State let you get away without paying taxes on the down payment.
It's not impossible, but I find it improbable.

 

[Mark SF]

"If you put money down on the lease, and something happens (theft, total loss) you do not get that money back."

What happens is that the insurance payout is subtracted from the payoff amount. As the money down lowered the payoff amount initially, you do get it back.

"Regarding taxes, I would be surprised if the lease did not have tax on the vehicle "selling" price. Whatever you put down is after tax calculations on a new car. I would be shocked if the State let you get away without paying taxes on the down payment.
It's not impossible, but I find it improbable."

It doesn't matter what you find surprising, shocking, or improbable. What matters are the facts. In California, you pay tax on the lease payments, and on the initial downpayment, not on the sales price.

 

[GetMore]

Okay, so you can get some of the money back. You will not get it all back. The value drops 20% as soon as the car leaves the lot, according to the old adage. You would not have made that many payments, so you will lose some of the down payment. Perhaps not all, but still...

I may have misspoke (mistyped) regarding the taxes. I meant to say that you are paying tax on the value of the lease. If the price of the car, minus the residual value is "X", you will pay tax on the "X". You are correct in that you don't pay taxes for the residual amount.
My point was that there is no significant tax savings involved in putting a large payment down on the lease. What I got from your post was that the down payment saved on the taxes, which you just said is wrong. (I may have misunderstood, I won't rule out that possibility.)

 

[Mark SF]

Okay, so you can get some of the money back. You will not get it all back. The value drops 20% as soon as the car leaves the lot, according to the old adage. You would not have made that many payments, so you will lose some of the down payment. Perhaps not all, but still...

You get it all back, in the sense that what you will end up losing is less, by the downpayment.

What you owe is : (Lease payoff amount) minus (the cheque the insurance company writes.)

The lease payoff amount is the pre-determined value at the end of the lease, plus the total financed (before downpayment) on the lease, minus all the payments made so far (simplifying to ignore the effect of interest)

So the final equation is : Final value + finance - payments - insurance cheque

Surely it is obvious then that the amount owed is directly reduced by the downpayment, not by a percentage of it, as the payments includes the downpayment. In fact, a larger downpayment is better, in the sense that you are less likely to end up severely upside down.

 

[IndigoBlueWagon]

Not true, because of GAP insurance. Here's an example: 30K car, no money down, total it before you make the first payment (easier math). Car drops 20% in value when you drive it off the lot. So insurance payout is $24K. If you have GAP insurance then the $30K lease is paid off, you're free and clear.

If you put $5K down and the lease is for $25K, GAP only covers the $1K difference between the $24K insurance payout and the lease value. So you've lost your down payment.

Of course the examples can look different, but that gives you the idea. I don't buy cars to wreck them so I don't worry about that kind of thing a lot.

 

[S2000_guy]

Years ago, on a Honda S2000 discussion board, a CPA analyzed the lease/then buy option vs. an initial purchase. The lease/purchase option was a couple of hundred dollars more, but had the advantage of the chance to return the car and walk away if it was problematic. It's probably a good option when buying new technology: lease, and if it's reliable purchase at the end; if it's a problem, turn it in and walk away.

The numbers may skew differently now, but it's something to think about.

 

[grwoolf]

I've never leased since I typically keep cars 6-7 years, but I could see it making sense if you are swapping cars every 3 years. Either way, you are paying for the first few years of depreciation, but I can see the advantage of knowing what the value is going to be at that time. As far as the "money factor", I don't know how that works, but money has been almost free since 2008. If you have decent credit, auto loan rates have been 1.x% for up to 72 months as long as I can remember.

 

[bizzle]

I may have misspoke (mistyped) regarding the taxes. I meant to say that you are paying tax on the value of the lease. If the price of the car, minus the residual value is "X", you will pay tax on the "X". You are correct in that you don't pay taxes for the residual amount.

In California, at least, you pay taxes on the leased amount each month. That's the amount of "use" you have of the vehicle, hence the amount of use tax.

My eGolf lease is $199 per month and we pay about 11 bucks in taxes each month on that amount.

If you buy the car outright you have to pay taxes on the MSRP of the vehicle and you have to pay the entire thing at once, up front, as opposed to each month you use the vehicle. If you sell the car at 2 years or 6 years you don't get that amount back. So if you have a short term loan you end up paying a lot of taxes that you don't utilize whereas if you keep the car long-term you could spread your tax liability over that span.

 

[Mark SF]

That tax calculation seems low. It should be about 9% in California, which would be $18.

 

[bizzle]

We pay 8% down here. I think our total payment is $213.xx per month. The point of that example wasn't about a few bucks one way or the other but to explain in California we only pay use tax on the lease payment each month.

 

[conejo_a_cuatro]

What do you all think of security deposits vs. putting money down? I read recently that you can put down a security deposit, it lowers the money rate, and you get it back when you turn in the car?