Financing vs Leasing

[alwayslive]

Please move this thread to the appropriate thread if necessary, I just thought that this would be the best fit.

So I was having the imfamous finance vs lease argument with a relative today, and she was very stuck on financing because her and everyone else in my family has done it and you actually have equity after your term is up.

I have been doing some math though, and it just does not make sense to me especially with current lease rates on some cars.

2017 Acura ILX A-Spec (finance)

$5000 down
$750.18/month for 48 months (including sales tax)
Seems like current market price for a 2013 ILX is ~$20k so lets assume you sell it for that value after your 4 years is up.
This is also assuming that the dealership covers all maintenance for 4 years.

=$21,008.64 assuming all conditions above are met.


2016 BMW 320i sedan (lease)

$0 down
$524/month for 48 months (including sales tax)
assuming BMW covers all maintenance for 4 years.

$25,152

So really, you only pay about ~$4000 more to own the BMW and you also do not have to go through the hassle of selling the car afterwards. This is also assuming you are able to sell the ILX for ~$20k and if not, the difference becomes even smaller. Of course, with financing you do get the car afterwards so there are those years that you can drive without payments, but you are responsible for all maintenance and the value of the car also depreciates greatly as the years go by.

Which one would you guys do, and why?

[SpeedStars]

I would say financing is good if you plan on keeping the car for 10+ years and as long as it's not a financial burden such as a BMW 7er or S-class it's a viable option. With some manufacturers offering 84 months @ 0% financing, your payments (due to inflation) naturally are lower every year and that's to appeal to people who want to keep their cars for a long time.

With leasing, you're pretty much "renting" the car for an unforeseeable future since you never actually own the car and end up in a loop of leasing (until you either cannot drive anymore or end up purchasing a car). Leasing is good for cars that have an insane amount of depreciation/maintenance costs or if you run a business.

The best option depends on how long you keep the car for really. The best financial option is to buy a $400 Tercel, drive it to the ground, repeat.

[320icar]

Originally Posted by alwayslive

So really, you only pay about ~$4000 more to own the BMW

Wrong. After the lease you don't own shit! You'd then have the option to buy out and purchase the car after the lease for another lump sum. With the Acura, you pay less AND own it afterwards. How is that not the better option

[smoothie.]

The first problem with this scenario is, you're comparing two different cars.

The second, after a lease, you own nothing, whereas you'd have at least 30-50% of msrp equity after financing is over. You need to account for this, as you'd be car-less.

I'm a lease guy, but if those two are your options, go for the ILX and put 0 down, and the rest in high interest savings accounts, unless if the down is giving you a better interest rate or overall discount. Leasing a base model bmw is a complete waste of money.

[Verdasco]

Originally Posted by smoothie.

The first problem with this scenario is, you're comparing two different cars.

The second, after a lease, you own nothing, whereas you'd have at least 30-50% of msrp equity after financing is over. You need to account for this, as you'd be car-less.

I'm a lease guy, but if those two are your options, go for the ILX and put 0 down, and the rest in high interest savings accounts, unless if the down is giving you a better interest rate or overall discount. Leasing a base model bmw is a complete waste of money.

this guy fucks (and is correct)

depends on the situation, if baller, would lease on crazy exotic cars (or not even exotic, maybe mid range semi ballin cars)


in her situation, i think shes gonna keep it for a while, finance it.

[320icar]

To tangent, there are a few vehicles perfect for leasing. F150's (as the rates are stupid low), range rovers, s-class, any new m3 or m5 etc etc. These vehicles have horrible maintinance and cost of up keep, and normally if you can afford a $1000/mo car lease you're not sweatin for cash and can just keep renewing a lease for years to come.

Where as a Honda/Acura/Toyota, they are cheap to buy and even cheaper to run and maintain. No reason to ever lease these cars. Just buy, sell, give to your momma etc

[alwayslive]

Yes I was comparing two different cars, but they end up being around the same price. (~$42k) so these figures are all based on that number. I put an acura instead of a BMW or Mercedes as the finance car because depreciation will be much lower.

Also, yes I understand that you own it after. The initial figures actually account for selling the ILX for ~$20k, so even after the 20k the difference between ownership is really only 4k.

The only way that I would see it being less expensive is if you really do keep it for 10+ years, even after depreciation you'll pay less for ownership overall.

[smoothie.]

If you're comparing lease and finance scenarios, then yes, there is not a whole lot of difference in the short term.

It's always personal preference when it comes to lease vs finance for new cars.

If I have the budget, I like to lease new toys. Plus I don't worry about depreciation with claims.

Interesting note from my last lease: if you lease a car for 3 years, your buyout will be much less than buying the same one from the dealer. (but still more overall then just buying when new)

[Hehe]

Wife has leased many vehicles throughout her work life, so I'd share my thoughts.

Finance/buy outright if:
You plan to drive the same car down to dust or any period more than 5yrs (period where most depreciation takes place)
Can't write off as expenses (technically you can still claim it as expense when financing/owning, but it's less flexible and not worth the trouble if writing off is the goal)
Incentives (cash purchase) makes more sense rate-wise.

Lease if:
Can write off
Don't plan on driving the same car for more than 5yrs (it could even work out in your favor if the residual value is higher than the market going price. It saves you some money, and the hassle to sell the car afterward)
Incentive on lease rate

In the example of OP, if you are planning to change car after 4yrs, you might as well just lease it. You'd be paying the full depreciation in either case and assuming you have no other incentives to pick side, leasing is a much more convenient way to go.

Leasing is not throwing money away, you just set a clear cut line where the payment ends. You always have the choice to buy the car outright at the end of lease if you choose to keep it. The first few years, you'd be paying the full depreciation in every possible way of financing.

[6793026]

2 questions to ask: do you get to write off the leasing amount? If you go, then lease. If not, finance it if you plan to own it for 10+ years.

Do you want to drive it to death. There is NOTHING better than your last payment on your car after you financed it and you get 6-8 more years out of it NOT paying for shit.

For realtors, my friend gets a budget of $850 a month as expenses on cars, so he does it for that purpose only.

[bcrdukes]

Originally Posted by 320icar

Wrong. After the lease you don't own shit! You'd then have the option to buy out and purchase the car after the lease for another lump sum. With the Acura, you pay less AND own it afterwards. How is that not the better option

I would like to add to this.

During and after the lease, you own nothing as the leasing company owns the vehicle (i.e. BMW Canada or Acura.) The vehicle is not an asset to you throughout the lease. One way to see it is that the vehicle is a liability as opposed to an asset.

OP may also want to consider cost of ownership and depreciation values of both cars. Take a look at equivalent models within the past 5 years on the used market (both dealership and private) to get a better idea of what to expect. Only you can decide what is more value to you. For all you know, you may really like the BMW or you may hate the Acura after 6 months.

More so, take a look at BMW and Acura's financial programs. I haven't looked, but some manufacturers offer flexible programs which allow you to do balloon payments, thus reducing your interest payments and overall costs. I believe Mercedes Benz and Lexus offers these options.

[Ferra]

People who have no clue how the finance/lease payment are calculated are usually the one that say "durrr u should always finance since you own the vehicle and leasing you are only renting with nothing left after your lease"

You are ALWAYS paying to use the vehicles. Regardless of whether you are buying cash upfront/financing/leasing, the car is losing value all the same.
Trying to build equity on a car is a stupid idea. You don't build equity on a depreciating assets. Do you build equity when you buy an laptop or a TV?? A car is a consumption expense just like your laptop and TV.

Your lease payment is not some random number the manufacturer make up to earn a profit. It is an exact formula based on F(Price, APR, Residual Value, Terms)
The only thing you are paying more on a lease is the interest. So if the interest is 0%, it will cost the same to finance vs lease then buyout a car. (And if the interest rate is low enough, the difference is negligible.) But with the latter giving you flexibility and an insurance against "excessive depreciation".
(e.g. during your lease term, you got into a $20K accident. Insurance repaired it, you got a $20K repair record on the car. Normally you would be able to sell the car 3 years later for $22K, but with a $20K repair, people won't touch it even at $17K. If you own the car, you end up with that $5K resale value loss. If you lease the car, you return it without any cost to you. The manufacturer ends up with the loss)

This is one reason why I often lease even if it is my plan to keep the car for a long time. As long as the difference in finance/lease cost isn't too differ.
Typically, leasing a $50K car @1%APR vs financing @1%APR, the difference is about $350 for 36 month.

Leasing is also great when sometimes the manufacturer kinda screw up/overestimate the residual value. (i.e. giving a car 68% residual @ 36 months....when in fact it is more like 50%.)
To get an idea how residual value works...if the manufacturer set the residual value at 100% @ 24months, and 0% interest rate. Their formula will basically say you can drive the car for 24 months @ $0/month, all free. Of course 100% residual won't happen, but you get the idea how residual value affect your lease payment.

Also kinda important...when you lease and return a car. You actually don't pay for the HST portion of the residual value.
If you financed a car and want to sell it private, you essentially lose a huge chunk of HST you paid...unless you want to trade in at dealer which you get a credit back for the HST.

FYI, i am not advocating people should always lease. I just think they should understand how the numbers work. There are times it is very stupid to lease. Especially those people who chose to lease just so the payment could fit the bill. (e.g. people who choose to lease an M3 or some sportcars at 7%+ interest rate, knowing they can't really afford the car)

[RickyTan3]

Sorry to jack the thread but anyone experienced in open and closed leases?
this is regarding a super/hyper car.

The dealer is telling me open leases are crazy on these because I can get dinged on depreciation at the end of the lease. The closed leased is flat fixed rate.

The difference is because another dealer across the country has the same car for $500 difference in monthly cost but it is an open lease vs closed.

Confused I thought open leases like BMW mercedes you can walk away and not get dinged regardless

[mr_chin]

EDIT #2: Ignore the part about interest applied only to the money you borrow. I just dug out my lease papers from 6 years ago and calculated the interest. You pay interest on the money you borrow for the monthly payments and the residual value. Stupid how they charge you interest on money you didn't borrow. I didn't even know that and I signed the papers... FML.

Either way, lease-to-own is still better because 1) lower monthly payments and 2) if you're self employed and uses the vehicle for work, you can claim tax.

-----------------------

Here is how I see it.

First and foremost, you should determine whether you want to keep the car or sell the car after the lease/finance term. If you are indecisive, or cannot foresee whether you will keep or sell, then don't grudge on what you're about to take up the ass. Because that is the reality on buying a car, you'll never come out "winning", you can only minimize your losses.

Now that you've soaked it into your system, let me explain how I view the differences of lease and finance.

If you don't plan on selling your car during your financing/leasing terms and you're dedicated in reaching to the point where you actually own the car (no more payments), leasing is better. This is known as lease-to-own.

When you lease-to-own, you are dividing the price of the vehicle into 3 parts. First, the down payment, then the portion where it is divided into monthly payments, and finally, the residual value where you pay at the end.

Car price: $15,000
Lease term: 3 years
APR: 0.9%
Down payment: $2000
Residual value (buyout): $6000
Monthly payments: $7000/36 + interest

So why is this better in terms of financing? Well, for one, your monthly payment is cut in half (depending on your residual value which you can negotiate), which means you can put aside the money you would pay monthly if you financed, for the buyout. Second, if you don't get the juicy 0% APR financing deal, essentially you're only paying interest on the $6000 that you borrow, whereas the $13,000 if you financed.

If you choose this route, you have to make sure you're dedicated in buying out the car in full at the end of the term, rather than financing the buy out. This is because at the end of your lease, if you want to finance the buy out, you will not get sweet financing APR deals that the dealer initially offered. They will go with bank rates, usually in the 4%+.

If you think you might sell the car during your lease/finance terms, then financing is better. People have told me that if you lease, you can simply return the car. Well yeah, but you will definitely lose more money if you had finance and resell the car privately on your own.

Given the example above, say you drove the car for a year and you decided you want to return the car. How much will you lose in this case?

$7000 / 36 = $195/month (roughly) * 12 = $2340
Plus your $2000 down payment.
And any damages on the car.
So basically what you did here when you return a lease car is, you bought the car for $15,000 and resold it for $10,660.

This scenario is exactly the same if you had bought the car and sold it to a dealer after a year. Whereas, if you sold privately, after depreciation, your $15,000 vehicle would be worth roughly $13,000.

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Simply put, comparing to real estate, leasing is like renting, and financing is like buying. But in the case of vehicles, you're not dealing with $1000 monthly payment vs a $1,000,000 mortgage. The comparison is in a smaller range when you compare leasing to financing, the latter is manageable and a better option. Unless you're determined to own the vehicle, lease-to-own is better.\

EDIT:

Just want to elaborate on the comparison of monthly payments and savings for financing vs lease-to-own.

If you lease-to-own, you're paying $195/month for 36 months on the $7000.

If you finance, you're paying $361/month for 36 months on the $13000.

So what is the advantage here when you choose lease-to-own? If you lease, you're saving $166/month, which you can put aside for the buy out. $166 * 36 = $5976, which is pretty close to the buyout. Keep in mind that you didn't pay interest on this $6000.

[Hehe]

Originally Posted by mr_chin

EDIT #2: Ignore the part about interest applied only to the money you borrow. I just dug out my lease papers from 6 years ago and calculated the interest. You pay interest on the money you borrow for the monthly payments and the residual value. Stupid how they charge you interest on money you didn't borrow. I didn't even know that and I signed the papers... FML.

.

But you did borrow that money. There's nothing shady about the math of lease itself which is (depreciation+financing cost)/term.

TBH though, only 3 things matter in a car lease agreement: final negotiated price, interest rate and residual value. Everything else is derivative from these 3 numbers. Just focus on getting the first 2 as low as possible. For the residual, you want to get high as possible (usually fixed if dealing with manufacturer, but when you are comparing 2 different cars, it makes sense to see which one offers higher residual).

[mr_chin]

Originally Posted by Hehe

But you did borrow that money. There's nothing shady about the math of lease itself which is (depreciation+financing cost)/term.

TBH though, only 3 things matter in a car lease agreement: final negotiated price, interest rate and residual value. Everything else is derivative from these 3 numbers. Just focus on getting the first 2 as low as possible. For the residual, you want to get high as possible (usually fixed if dealing with manufacturer, but when you are comparing 2 different cars, it makes sense to see which one offers higher residual).

The residual value? I didn't borrow that? I put a down payment and borrowed the second portion of the purchase price. But interest is calculated like this.

($500/month * 36 + residual value) * 2.9% APR

not gonna go into the compounding stuff, just showing an example of how interest is calculated on a lease vehicle.