# Financing vs Lease



## kurichan (May 1, 2004)

James said:


> I found the best deal for me was to get a CPO'd 2001. It still has some warranty (6 year, 100K miles on some things ) and someone else took the 30% kick in the pants drop in the first few years. As it happened I got a car for a few grand under blue book and in 5 years when I plan to trade in on a 2006 (in 2009) it will only have depreciated about another 15% - 20%or so. This means the equity I have in the car will serve as the down payment in 2009. I know it's bad to have equity in a car but I found in a lease the amount you pay for the first few years depreciation plus lease fees was greater then the total cost of a car that is a few years old once you factor in the fact that most of the rapid depreciation has happened.
> 
> My thinking was this: 1999-2001 was a boom time in the economy. Everyone and their brother was out leasing new BMW's. Now the economy is not as good and the market is flooded with off lease BMW's. To get rid of this glut in inventory BMW was offering 2.9% for 60 months. To me that is almost free money. With the bloated inventories of off lease BMW's they were really willing to negociate on the price while still offering a great interest rate. A win/win for me .<O</O
> 
> ...


Good points! If you don't mind the risk of driving a BMW out of warranty (something that I don't think I'd ever do because of all the problems and the high price of repairs) pre-owned is probably the best way to go in terms of value. But for new car acquisitions, lease w/minimum down.


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## James (Jun 30, 2004)

kurichan said:


> Good points! If you don't mind the risk of driving a BMW out of warranty (something that I don't think I'd ever do because of all the problems and the high price of repairs) pre-owned is probably the best way to go in terms of value. But for new car acquisitions, lease w/minimum down.


Agreed :thumbup:


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## eelnoraa (Oct 13, 2003)

shabbaman said:


> I'm curious about how you got $500 payments. What money factor is this based on? I used the calculator on Leasecompare.com and plugged in a 40K car at 6% tax with 0 down at 4% interest and came back with a payment of $606.
> 
> Also, is $40000 the MSRP of the car, and if it is what would be the agreed discount to the car for your example? $2500? I ask this because this plays into the residual question later.
> 
> ...


Yes please use this as standard. Run the lease vs buy again. I want to learn something about leaase too.

While I sound like I am pro buy, I have never said buying is better than leasing for vice versa. In fact, I haven't leased before and I know very little about it. Hopefully I can learn enough here so on my next car decision, I can consider both options.

eel


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## brkf (May 26, 2003)

shabbaman said:


> came back with a payment of $606.


6%?!! Egad. I pay $485 a month on my ZHP.



> Also, is $40000 the MSRP of the car, and if it is what would be the agreed discount to the car for your example? $2500? I ask this because this plays into the residual question later. Actually, if 40k wasn't the msrp but the agreed upon price this would HELP the lease


We went off the straight numbers.



> Thirdly, I still don't completely agree with your argument to not purchase for cash. In today's economy 5% is considered a good return. While spending $44000 cash on a car may not sound like a smart move (hell, I wouldn't do it), you save approximately $4000 on a $40000 car over 4 years at 4%.


BMW's are currently going at 2.9% interest for 60 months. Beating 3% is cake.



> In other words, had you financed the $40000 over 4 years at 4% you would have to pay back $44000. If you are a pessimist and don't think that you will make 5% on your money, then SAVING 4% may be a viable alternative.


I actually dumped $10k into a brand new house, rented it and at this point I've got a fat tax deduction coming for 2004, plus the house has appreciated almost 80k in less than a 9 months. i'll flip it in 2005 and buy another, cheaper property.



> Can you rerun your numbers with the following changes:
> Let's establish 5% as the milestone interest rate whether you lease/finance/buy a car.


Go ahead and run them.


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## kurichan (May 1, 2004)

> I actually dumped $10k into a brand new house, rented it and at this point I've got a fat tax deduction coming for 2004, plus the house has appreciated almost 80k in less than a 9 months. i'll flip it in 2005 and buy another, cheaper property.


I play in this market too. It's made me a lot of money. Don't sell!!!! HOLD HOLD HOLD!! That tax deduction is good for 27.5 years! Let your renters pay your mortgage baby! The only property I've EVER sold was because the neighborhood was going bad. Take out a home equity line of credit on the first house to make the downpayment on the next one!


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## shabbaman (Dec 16, 2002)

blueguydotcom said:


> 6%?!! Egad. I pay $485 a month on my ZHP.
> 
> We went off the straight numbers.
> 
> ...


Are you talking Generally or Specifically? I thought you were talking in general terms. When making comparisons I think it's important to standardize the numbers so that any comparisons are even across the board. Apparently you don't feel that way since you are mixing and matching numbers.

I won't bite. Your example is not valid since it doesn't include all the factors. I reran the leasecompare.com calculator. On a $40000 car with 0 tax and 1% interest and 58% residual for 36 months the monthly payment is $492. You must have gotten some deal on your car but not figured that into your example.


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## brkf (May 26, 2003)

I know when I bought my ZHP it's MSRP was 43k. I paid 40k for it. 

On a loan of 44k at 2.9% for 60 months I'd pay 788 a month for 47k total. Over 36 months that's 28k. Even if BMW was right about the 58% residual (which is total BS as the car will be worth at best 53% in 2006) and it's worth 25k I would have lost serious dough.

Had I paid cash, the POS ZHP would be worth 25k and I'd be down 19k.


The lease of my ZHP will cost me 18k total - everything. Add in how I used my cash on hand to make money and well...there's no contest.


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## swchang (Oct 5, 2003)

What's a typical fee for gap insurance?


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## brkf (May 26, 2003)

shabbaman said:


> Are you talking Generally or Specifically? I thought you were talking in general terms. When making comparisons I think it's important to standardize the numbers so that any comparisons are even across the board. Apparently you don't feel that way since you are mixing and matching numbers.
> 
> I won't bite. Your example is not valid since it doesn't include all the factors. I reran the leasecompare.com calculator. On a $40000 car with 0 tax and 1% interest and 58% residual for 36 months the monthly payment is $492. You must have gotten some deal on your car but not figured that into your example.


Even at $600 a month for a lease (aka highway robbery) that you came up with do the math.

Car = 40k
Out the door = 1100
Left over cash = 42,900
Subtract 7200 for 1st year payments. 35,700 is left over and after 1 year you'd have 37,485. Subtract another 7,200 for 2nd year payments. After 2nd year investing you'd have $31,799. Finally, subtract 6,600 for the last year of payments. And after the 3rd year you'd have 25197.

Option 2:
40k + ttl = 44k out the door.
58% residual of 40k is $23,200.
44k - 20,800 = 23,000.

I still see a 2k savings on the lease with a high money factor. And the investment that only generated 5% a year seems scary low.


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## brkf (May 26, 2003)

kurichan said:


> I play in this market too. It's made me a lot of money. Don't sell!!!! HOLD HOLD HOLD!! That tax deduction is good for 27.5 years! Let your renters pay your mortgage baby! The only property I've EVER sold was because the neighborhood was going bad. Take out a home equity line of credit on the first house to make the downpayment on the next one!


I'm dumping that house for two reasons:

1. It's located in an area I detest (Temecula/riverside county)
2. I did a two year interest only so I could, with no real outlay, get the quick profit from a new build to fold into an existing property located more locally. The local rental properties I plan to keep for as long as possible.

After that, then I can play leapfrog to other pieces. The second house was a quick generator as Riverside county is exploding. I'd rather settle into a market that I can oversee the property more easily (like on the drive home!) and then just coast with it as a deduction/revenue creator.


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## Andrew*Debbie (Jul 2, 2004)

Cactoes Gel said:


> I need advise - X5 in mind. I've never leased a car before. A lot of the dealers I've talked to say that leasing is better than financing a car these days. What do you guys think?


50 posts later and no one pointed out one downside to leasing. If you or your family are hard on cars, leasing may not be a good idea.

If you turn-in the X5 at the end of the lease, you will be charged for anything that exceeds "Normal wear and use". 
Take a look at the BMWFS Wear and Use Guide

With BMWFS you get a pre-inspection and a chance to fix problems before turn-in. Anything that is not up to standard at turn-in will get charged at delear repair rates.


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## marcio (Apr 29, 2004)

kurichan said:


> On a house, perhaps. On a car, I disagree. Tying up money in a depreciating asset (remember, unless it's a classic car, a car is NEVER an "investment") is illogical and bad personal finance policy. Just because you are liquid doesn't mean sinking it into a car is a good financial decision. I am very liquid, didn't sink money in my lease, and stand by the decision.


What is illogical is saying not to tie up money in a depreciating asset while at the same time advocating perpetually paying for the depreciation of an asset for the period it depreciates the most (first 3 years). :thumbdwn:

I find it amusing how the leasing proponents make sure to show the best case scenarios of leasing and the worst case scenarios of other options. Someone who is financial savvy understands that leasing and financing are just financial tools. One is not always better than the other. Use one or the other depending on individual circumstances.


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## kurichan (May 1, 2004)

marcio said:


> What is illogical is saying not to tie up money in a depreciating asset while at the same time advocating perpetually paying for the depreciation of an asset for the period it depreciates the most (first 3 years). :thumbdwn:


The problem in your above statement is that you've neglected to mention that regardless of loan or lease, if you acquire a new car (the assumption in this thread) you take on the burden of the asset depreciation. Your statement is also fundamentally flawed by even comparing the cost of usage with opportunity cost (if we're talking logic, we might as well be stringent and stick to the rules of logic).



> I find it amusing how the leasing proponents make sure to show the best case scenarios of leasing and the worst case scenarios of other options. Someone who is financial savvy understands that leasing and financing are just financial tools. One is not always better than the other. Use one or the other depending on individual circumstances.


Glad you're amused. You might go back and read, then you'd see that the lease proponents have stated just what you've said about individual circumstances and agree with you fully, so I'm not quite sure what you're up in arms about. 

In fact, to make the point even more clear, we own one of our cars, a 2003 Honda Pilot. Why would a lease proponent BUY a car? What a hypocrite! :rofl: Well... because we plan to drive it into the ground... 10 years? 15 years? Maybe. In that case, it makes sense to buy, which we did...


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## brkf (May 26, 2003)

marcio said:


> What is illogical is saying not to tie up money in a depreciating asset while at the same time advocating perpetually paying for the depreciation of an asset for the period it depreciates the most (first 3 years). :thumbdwn:
> 
> I find it amusing how the leasing proponents make sure to show the best case scenarios of leasing and the worst case scenarios of other options. Someone who is financial savvy understands that leasing and financing are just financial tools. One is not always better than the other. Use one or the other depending on individual circumstances.


That's very true. On a 0% loan it's tough to pass that up. 7% loan presents new issues. Just like a MF of 0.0034 isn't the least bit attractive. My friend i'm helping to get a car has owned her Legend for about a decade. She's not a lease person. I on the otherhand would never own a BMW out of warranty.

You gotta break down the numbers for every option and find what works best for you. In this climate with super low lease and loan rates it's tougher.


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## shabbaman (Dec 16, 2002)

blueguydotcom said:


> That's very true. On a 0% loan it's tough to pass that up. 7% loan presents new issues. Just like a MF of 0.0034 isn't the least bit attractive. My friend i'm helping to get a car has owned her Legend for about a decade. She's not a lease person. I on the otherhand would never own a BMW out of warranty.
> 
> You gotta break down the numbers for every option and find what works best for you. In this climate with super low lease and loan rates it's tougher.


In reality, anything time you get auto financing under 5%, to me it makes no sense to pay a car off with cash. The cost to borrow $40000 for 5 years at 4% is $4200. Amortized, that's $840 per year.

When there is 0% financing then you really need to come up with a helluva lease deal to beat that

Since I believe this topic was actually lease vs. buy, I'd like to run a scenario here.

Lease 2 bmw's for 3 years each or buy 1 bmw and keep it for 6 years with the addition of BMW maintenance and warranty coverage for 6 years/100000 miles. From a financial perspective it makes sense to keep a car as long as it's able to run but at some point in time the cost to maintain that car becomes excessive beyond the point of financial reason. In light of BMW's recent program announcements, it's now possible to buy a new BMW and hold on to it for 6 years/100000 miles and not put down a red cent for anything but tires so let's use your example

Remember, this is just for fun. In both examples let's say that in year 0 a buyer has $43000 and is considering a $43000 car that he will purchase for $40000. The out the door cash price of this car is $43000 (40000 +2400 tax +600 tax and title). In each case the car has a 58% residual value after 3 years and a 29% residual value after 6 years. In each case the finance/lease rate is 4% and in each case 0 money down is assumed. Tax will be set at 6% (this is a NJ example  ) and the tax will be rolled into the lease payment.

Also, the portion of the $43000 that's not being used will sit at 5% and money will be taken out for one year at a time.

Also, let's assume the car you lease the 2nd time around is financially under the same constraints as the first (meaning all the numbers mentioned above are the same)

According to leaseguide.com my monthly payment will be $558. Let's assume that there is a $400 bank fee so that in addition to the 600 Title/lic. fee that makes a clean $1000 

Lease
year 1: 43000-7696 (12 payments of 558 + 1000 TL cost)=35304 X 1.05=37069
year 2: 37069-6696=30373 X 1.05=31891
year 3: 31891-6696=25195 X 1.05=25195 
So to lease 1 car for 3 years will cost you($43000-$25195=$17805)
Let's keep going. You turn your car in and get another. Since you didn't sell your car you don't have any equity from it.
year 4: 25195-7696=17499 X 1.05=18373
year 5: 18373-6696=11677 X 1.05=12261
year 6: 12261-6696= 5565 X 1.05=5844
So 2 leases will cost you ($43000-5844=$37156)

Based on a 3 year loan, the monthly payment is $1269/mo
Finance
year 1: 43000-15288=27712 X 1.05=29097
year 2: 29097-15288=13809 X 1.05=14499
year 3: 14499-15288=-789 X 1.05= -828 (yes, our customer is 'borrowing' more money)
year 4: -828 + 3500 (cost of maint and warr)=$-4328
year 5: -4328 X 1.05 = -4554
year 6: -4544 X 1.05 = -4771 + (12470 sold car for 29% of 43000)=$7699
Total cost over 6 years is 35301.

Take the numbers for what they're worth


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## aaronu (Aug 1, 2004)

With all due respect, there's more to it than the "cold hard facts" of personal finance.

I could have leased a brand new 330Ci but I bought a low mile CPO 325Ci.

1. I drive too many miles annually.
2. I keep my cars. Once it's paid off, it costs gas and maintenance to run it; no monthly payment.
3. I am not the sort of person who has to have a brand new car every few years.
4. BMW CPO financing: 2.9%. It isn't zero interest, but the car cost a TON less than a 2004 new car.
5. Time permitting, I like to tinker. I'm new to this board but my main activity is lurking & reading posts to figure out what I want to do to my car first!

If you don't drive a lot of miles, don't plan a bunch of mods to your car, and like something new every few years, then by all means lease the car. If I lived closer to my work, I would have leased a new 330Ci or M3 and likely would not have responded to this post at all. 

OTOH if you plan on keeping the car long term, want to mod the heck out of it or if you put lots of miles on your car, then finance it or buy it outright.

After it's paid off, I can drive my 325Ci or give it to my kid to drive when he gets his license. It will have lots of life & reliability at that point.

Most folks are not as financially secure enough to have tons of spare cash for investments, etc. Leases can be a trap for those people. Once you lease, it's hard not to do another lease. And another, and another... because at that point it's either get another car or take the bus.

One more thing: if leasing doesn't work for you, then it is better to pay cash than to pay interest for the life of the loan.

Sincerely yours,

Aaron

Suggested reading:

Edmunds.com -- Strategies for Smart Car Buyers


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## kurichan (May 1, 2004)

aaronu said:


> One more thing: if leasing doesn't work for you, then it is better to pay cash than to pay interest for the life of the loan.


As you say above, wouldn't that depend entirely on the individual's situation? Doesn't it depend on the person's personal discount rate?

I'd be interested in hearing your explanation of why it's better to pay cash since it defies all personal finance fundamentals.


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## kurichan (May 1, 2004)

aaronu said:


> With all due respect, there's more to it than the "cold hard facts" of personal finance.


Aaronu,

Please take a look at the first two replies to the original post. You'll see the key phrase "depends on many factors" in both those posts. That's been an assumption all along.

However, the discussion has drilled down into the why's of opportunity cost, best use of cash, equity, depreciation and other details. To discuss THESE issues, it DOES end up being about "cold hard facts."

But of course all of this is predicated on the fact that people have different situations.


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## WBear (Aug 30, 2003)

kurichan said:


> As you say above, wouldn't that depend entirely on the individual's situation? Doesn't it depend on the person's personal discount rate?
> 
> I'd be interested in hearing your explanation of why it's better to pay cash since it defies all personal finance fundamentals.


That's not entirely true. In general I agree it's better to borrow money in a low-interest environment; If the after tax investment return rate exceeds 1.05 times the loan interest rate, then you come out ahead. (Why 1.05? because car payments are monthly while investment dividends are quarterly.) However it all depends on how a person manages money and more importantly risk.

Say the loan is at 2.9% for 60 months and you are in the 28% federal and 9% California tax bracket, then your investment needs to generate 3% after tax or 4.8% before tax to break even (assuming quarterly dividend distribution and reinvestment). Sure 4.8% seems small, but considering bank saving is at 1% and 5-year T-bond at 3.5%, 4.8% is pretty good return. Of course, you can always be an active investor and get more, but that requires time, effort and investment accumen. As the 70% plunge in NASDAQ attests, few have that investment accumen.

What most people forget are the taxes. Yep taxes hurt. The best way IMO is to invest in munis, which are tax-free. 3% 5-year munis are pretty easy to find. In fact some AAA 5-year munis are at 4.5%.

The bottom line: do you want your car to be part of your risk capital? And how leveraged are you in general? Always remember, even if you have plenty of liquidity, "value at risk" can quickly spiral out of control as Long Term Capital found out with their $1 trillion problem.


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## kurichan (May 1, 2004)

WBear said:


> That's not entirely true. In general I agree it's better to borrow money in a low-interest environment; If the after tax investment return rate exceeds 1.05 times the loan interest rate, then you come out ahead. (Why 1.05? because car payments are monthly while investment dividends are quarterly.)


What's not entirely true? Not sure what you're referring to...

Just a reminder (regarding dividends): there are endless ways to invest which pay out differently depending on the security, so the fact that SOME public equities SOMETIMES pay dividends quarterly, while true, doesn't help frame this point.

And in case there was a misunderstanding "discount rate" is a term that refers to how much money a person could earn using their cash for something else, NOT what discount they got on their car. Also, you've neglected to consider the opportunity cost of the capital tied up in the equity of the car.



> Say the loan is at 2.9% for 60 months and you are in the 28% federal and 9% California tax bracket, then your investment needs to generate 3% after tax or 4.8% before tax to break even (assuming quarterly dividend distribution and reinvestment). Sure 4.8% seems small, but considering bank saving is at 1% and 5-year T-bond at 3.5%, 4.8% is pretty good return. Of course, you can always be an active investor and get more, but that requires time, effort and investment accumen. As the 70% plunge in NASDAQ attests, few have that investment accumen.


For starters, let's not forget that the dividends you mentioned are no longer taxed at ordinary income rates (makes a big difference!)

Or you could generate a 20 - 35% IRR post tax in a diversified portfolio like I do (42% for '03)... BUT, no one has to do that... The public equity market has historically returned approximately 11%. Take that cash and put it in the market and leave it there (being an "active investor" in public equities is financial suicide) and you're going to beat the socks off that loan.



> What most people forget are the taxes. Yep taxes hurt. The best way IMO is to invest in munis, which are tax-free. 3% 5-year munis are pretty easy to find. In fact some AAA 5-year munis are at 4.5%.


Now we're getting somewhere... Munis should be a part of everyone's diversified portfolio. But don't forget that they aren't foolproof unless you buy and hold (and there can still be opportunity loss if inflation spikes!)



> The bottom line: do you want your car to be part of your risk capital? And how leveraged are you in general? Always remember, even if you have plenty of liquidity, "value at risk" can quickly spiral out of control as Long Term Capital found out with their $1 trillion problem.


"Risk Capital" refers to money at risk when invested. You cannot put "risk capital" into a car. A new car is NEVER an investment, it is a depreciating asset.

Also, Long Term Capital didn't have "plenty of liquidity." They were a highly leveraged formulamatic arbitrage fund with flawed formulas that got caught in a downdraft caused by the infamous AC, but your point about "value at risk" should be well taken by all (new definition of value at risk = investing in Google :rofl: )


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