# Leasing with Intent to Purchase: Good Idea?



## jvr826 (Apr 22, 2002)

suntan said:


> Oh, someone was also telling me that leasing exposes you to "double sales tax".... what does this mean?
> 
> Cheers!


Double sales tax *can* happen in the situation where you pay off the lease, then try to sell the car after the grace period expires. In CA you have 10 days to transfer title to the new owner without being responsible for sales tax.

If you pay off the lease, receive the title, and do not transfer it to a new owner within 10 days, YOU will be responsible for sales tax on the payoff amount. Then when you sell the car to someone, on the 11th day for instance, the new owner will pay sales tax on the amount he paid you - thus the double sales tax issue.

BMWFS shipped me the title for the last car I sold with the date field empty. I filled it in on the day I sold the car so we didn't lose any time on the grace period due to mail delays.


----------



## jvr826 (Apr 22, 2002)

mattldm said:


> With Current lease rates and residulas, 2006 330i (sp, pr, paint, shades, sat prep)
> Zero down, sale price is $1200 above invoice.
> 
> MSRP $42,220.00
> ...


Maybe so, but you don't own the car after 36 months of leasing. You still have to fork over the $25,332 to buy the car (plus sales tax) in addition to what you paid on the lease. And if you have to finance that amount for, say another 5 years, it costs much more in the long run.


----------



## BayAreaBMWFan (Aug 8, 2004)

mattldm said:


> So after 36 months the total lease cost is: $620.07 X 36 + $422 (upfront fees) = $22744.52
> after 36 months the total finance cost is : $829.53 X 36 = $29863.08
> 
> So the lease costs: $7118.56 less over the 36 months.


What about the equity you now have in the car if you are financing? 
After 3 years, your equity in the car will be $24,191 (amount of principal paid). You will owe the bank $18716.62. The car itself will be worth $25332 (residual). So you will have a net positive equity of $6615 in the car.

A few other factors to consider:

1. You have used the same rate to finance the car as the lease rate (6%/.0025). Lease rates are at least 1% higher than finance rates. My credit union is currently offering 4.75% for 60 months on auto loans.

2. The residual is typically close to the wholesale value of the car. The true private party value of the car may be more than the wholesale value.

3. Financing only makes sense if you are going to keep the car for 5-6 years. If you are keeping the car for 3 years only, lease it.


----------



## BayAreaBMWFan (Aug 8, 2004)

jvr826 said:


> Double sales tax *can* happen in the situation where you pay off the lease, then try to sell the car after the grace period expires. In CA you have 10 days to transfer title to the new owner without being responsible for sales tax.
> 
> If you pay off the lease, receive the title, and do not transfer it to a new owner within 10 days, YOU will be responsible for sales tax on the payoff amount. Then when you sell the car to someone, on the 11th day for instance, the new owner will pay sales tax on the amount he paid you - thus the double sales tax issue.
> 
> BMWFS shipped me the title for the last car I sold with the date field empty. I filled it in on the day I sold the car so we didn't lose any time on the grace period due to mail delays.


I think the issue was the tax paid on the finance charge component of the lease term. If you buy upfront you only pay tax on the purchase price. If you lease then buy, you pay tax on the purchase price and the finance charge portion of the lease too.


----------



## jvr826 (Apr 22, 2002)

Liverman said:


> This is an excellent discussion about lease vs. buy.
> 
> I'd to add another dimension, namely that of annual mileage. suntan's scenario is one where he drives 12-15k per year. Is there a generally accepted mileage breakpoint where it just does not make sens to lease?
> 
> ...


BMWFS will also allow you to buy mileage up front at a discounted rate, but you need to figure the lease on 15k miles per year, then pay for a block of miles at the discounted rate. In fact, if you do not use up all of the pre-paid miles, you get money back for the miles you did not use. So, you get 45k as part of your 3 year lease, and you can buy up 45K additional miles at a discounted rate, sorry I don't know what it is.

You can also look at it like this: lease at the lowest annual mileage (10k/year) to keep your payment low. If you want to return it at the end, you will pay $0.20/mile over 30k total. That's 60k miles or $12,000.00 in penalties. OUCH! Will a 3yo car with 90k miles on it be worth $12,000 less than a 3yo car with 30k miles on it? If you can sell the car and take less than a $12,000 loss after 3 years because of the mileage, then it makes more sense to sell to private buyer than return it.


----------



## jvr826 (Apr 22, 2002)

BayAreaBMWFan said:


> I think the issue was the tax paid on the finance charge component of the lease term. If you buy upfront you only pay tax on the purchase price. If you lease then buy, you pay tax on the purchase price and the finance charge portion of the lease too.


This is true, but it's not that big of a difference...

Here's an example for my particular lease:

36 month term
Cap cost: $44140
Monthly sales tax: $45.14
Total sales tax on lease: $1624.94

Residual value: $28302
Tax on residual (if I buy at end) $2334.92

Total sales tax for lease/buy at end: $3959.86

If I purchased the car outright, sales tax on purchase price is: $3641.55

So, leasing with intent to buy means I paid $318.31 more in sales tax.


----------



## LeaseCompare (Mar 3, 2005)

With buying the car up front you are taking the residual risk. It only makes sense to buy if you are going to keep the car for more than five years. Most people don't and will always have a car payment.



jvr826 said:


> So, leasing with intent to buy means I paid $318.31 more in sales tax.


----------



## mattldm (Feb 7, 2004)

jvr826 said:


> Maybe so, but you don't own the car after 36 months of leasing. You still have to fork over the $25,332 to buy the car (plus sales tax) in addition to what you paid on the lease. And if you have to finance that amount for, say another 5 years, it costs much more in the long run.


that is correct, but my examples just shows that if you dont mind the constant car payment, and you like a new car every 3 years, then leasing is the way to go. However, if you plan on keeping the car until it is paid for, then I think financing is a better option.


----------



## mattldm (Feb 7, 2004)

BayAreaBMWFan said:


> What about the equity you now have in the car if you are financing?
> After 3 years, your equity in the car will be $24,191 (amount of principal paid). You will owe the bank $18716.62. The car itself will be worth $25332 (residual). So you will have a net positive equity of $6615 in the car.
> 
> A few other factors to consider:
> ...


1.You may be right about the interest rates because they are constantly changing. The rates from BMWFS will likely change this week so my calculations will have to be adjusted. My example is just an estimate based on the numbers that I had available at the time.

2. About the residual. BMWFS has extremely high 36 month residuals, which is why the lease payments seem so attractive. A 60% residual for a 36 month old car, is closer to retail price than wholesale price.

3. Exactly the point I was trying to make!


----------



## LeaseCompare (Mar 3, 2005)

The key word you use is a "constant car payment". What happens when most people pay off their car loan? In most cases they sell/trade the car in and get into another car loan. At that point they have to try and negotiate a selling price. This problem along with a probable negative equity situation if they try and trade/sell the car prior to paying it off (which most do) makes leasing the best option. The payments are lower and the disposition/acquisition process is easier.



mattldm said:


> that is correct, but my examples just shows that if you dont mind the constant car payment, and you like a new car every 3 years, then leasing is the way to go. However, if you plan on keeping the car until it is paid for, then I think financing is a better option.


----------



## BayAreaBMWFan (Aug 8, 2004)

jvr826 said:



> This is true, but it's not that big of a difference...
> 
> So, leasing with intent to buy means I paid $318.31 more in sales tax.


Yup. It is after all sales tax on a small amount but it is still an extra.

At the end of the day, it depends on your personal situation and how much you can earn (post tax) on your free cash flow.

A lease reduces your cash outlay but you are financing that a higher rate (MF) than the typical car finance rate. Plus you are not taking any residual risk.

OTOH, if you plan to own the car for five years or more, buying it clean makes more sense. You will save the leasing fee, the extra finance charge (higher rate, more principal), the sales tax on the finance charge etc. Longer term leases (> 36 months) may force you to recondition the car (tires etc.) but you may not get any use out of them.

As a rule of thumb: lease for short term (< 3 years), buy for long term, especially if you are in a high tax state.


----------

