Lease Vs Buy (THE DEBATE)

I was looking at this site and I was curious everyones imput on this. Feel free to discuss and poke holes in this. I plugged in the numbers on this site and I was suprised to see I could lease for 3 to 5 years and the residual was always 30 to 40,000 over what I paid in. So 168k lease for X years at X amount. I imagine if its not a payment issue its better to buy. Why lease for 90,000 in payments to owe 110k. Or is that the value. Do I get to buy it a discount?? Confused. JJ

http://www.leasecompare.com/quick_lease_quotes.php?ModelYear=2007&MakeID=2000&ModelID=2100&StyleID=2110&vehicle=2007+Ferrari+F430

 

The sum of your lease payments will always be larger than the actual depreciation of the vehicle. You would have the option to buy it at the residual value at the end of the lease term - though there's usually negotiation room.

Leases have something called a 'money factor' that is the same concept as interest on a regular auto loan. (You probably know all this...)

You might visit edmunds.com for a great lease versus buy primer.

In general, the reasons people lease are:

1. They can't really afford the car but want to project an image of wealth.
2. They can write off the lease payments through their business.
3. They trade their car in every 2-3 years anyway and wouldn't benefit by buying new every time because they own the vehicle during its worst depreciation hit.

The best approach to buying is almost always to buy a car used, but with a bit of warranty left. Buying a new F430 now you will be pi$$ing away a large premium for a car that won't be the hot thing anymore in a year or two.

But, life's not always about 'rational' or we'd all buy used Camrys and drive them for 8 years.

 

The best reason to lease is that you want an un-resellable color combination...because the leasing company is on the hook to take the car back at the end of the lease term.

The worst reason to lease an exotic is as a tax write-off. Trust me when I tell you that you do *not* want an IRS agent seeing "Ferrari" anything on your business expenses (Hello audit, here we go).

For toys like exotic cars, I'd suggest buying. It's a pretty well-accepted principle that when you can throw cash at a toy without feeling the hit, that you can afford said toy. The opposite situation is when the *only* way that you can "get into" a car is through a lease. At that point you are a long way from being able to afford your toy, and you begin to enter that zone where you are one of the ones who can't afford to "keep up a car" via maintenance, etc.

So your mileage will vary on leases based on your individual situation/desire.

 

If you're not leasing for business with a write-off, you get all of the responsibilty and the dealer gets all the benefits. Bad idea. You're left upside down.

Better to find a good auction broker and wait until the right opportunity comes along. Could take six months. You get a deal. Example: '04 T-Bird bought in '05 with 3750 miles on it. MSRP $43,600. Paid $28,500. Now has 10K miles on it. Great car. Take a look.

 

Again, Jon, that's not true. I leased an '06 MB C350. I negotiated the car, then worked out the lease. I decided to lease because it was going to cost me $10k over 3 years whereas the depreciation is more like $14k to $16k over the same period, according to Edmunds, KBB, etc. If you get a lease special from any of the manufacturers, and you're a good negotiator, it's very possible to have your lease payment sum be less than the depreciation.

Back to the OP's thought. This is something that I posted before. I am posting it again here. FWIW, The most important factors in leasing a car are: 1)price of the car, 2) the down payment/Cap cost reduction, and 3) the residual value. I always go for zero money down and I always get the price of the car as low as possible. This is all simple business practice and simple math. When you factor in the time value of money it makes a lot of sense for someone like me. I never get more car that I can afford because in reality, I make the buy or lease decision based on depreciation for the car that I have already chosen. Here is that previous post of mine.

I am going to jump in here with a simple tale about personal finance regarding leases.
I think that it's best to pay cash for a Ferrari, especially a used one, assuming that you're not the total idiot who overpays for the car. Let's take a 512BBi for example. Said 512BBi costs $83k. In three years, said 512BBi will probably be worth at least the same $83k if not more. There is no downside to paying cash for the car because you will not lose that in depreciation when the time comes to sell the car (if ever, right Frank?)

Now, let's say that you need a daily driver. And yes, you can buy a used Honda Civic that gets you to Point B quite easily and efficiently but you're an investment banks with clients that don't want to be picked up at the airport in a Civic. You want a new Mercedes Benz E350 and you're the kind of guy who gets rid of it in 4 years or less for a new model with a full warranty and maintenance included. You go to the dealership to buy the car and you find that you can by the car with cash for $45k or you can lease it through DCFS (Mercedes' financial services company) for $400 a month with no money down for 36 months. Hmmm, you can drive the car for $4800 a year for three years $14,400 or you can buy it for $45k and sell it in 3 years or 4 years. You look and see that a 3 year old E350 is selling for $26k on average. So you can pay $14400 by leasing or you can pay $19k by buying it with cash. I'll tell you right now that if you're this type of buyer and want to buy the car instead of leasing, you're a ****ing moron.

In certain situations, leasing really has it's advantages. However, you need to be smart about contracts and know exactly what you need in terms of how you use the car. In certain situations it's very financially savvy to lease.

Also, the cheapest way to buy a car is not with cash. The dealership can give you a BETTER price if you finance (because they get a "referral fee" by the finance companies that adds dollars back into their pockets, thus allowing them to sell the car more cheaply). And what you do is get that price and finance the car and just pay it off in one month so you don't have to pay the interest. Usually the pre-payment penalty is 1 month's interest if you can't get a loan with no pre-payment penalty.

At any rate, I just wanted to say that it makes good sense to lease in some situations (daily driver that you're not keeping beyond 3 or 4 years anyway that you can get a lease special on). I have yet to see a lease on a Ferrari (or any other exotic that doesn't depreciate like a rock) that makes sense to me over paying cash. And not to complicate this but if you have a car that's not depreciating (365 GTB/4 for example, then it's not as terrible an idea to finance because you won't be "upside down" on the car. Financing a newer car is not the smartest for that very reason.

 

I must be the luckiest man alive in that respect.

I was recently audited (no changes ) but the IRS agent actually told me
during a discussion of my business and what my future plans for the "war chest" are
that it was TOTALLY acceptable - for my business - to get some Ferraris.

(For R&D of Ferrari-based products of course!)

As to lease vs. buy - I've looked at that - and still will likely buy because a lot
of the leases are at (IMHO) usurious interest rates.

Jim

 

Whoa! Details, please.

 

yeah but you're Jim Conforti !

I do the same (write off) since i develop 'upgrades' for Ferrari's as well. if your interested in cracking the 360's software for some upcoming new products let me know

 

ohh and for those who may not know Jim...
http://www.bonnevillemotorwerks.com/

from the land of BMW's, well known, very well known.

 

The problem is that it is not usually a matter of economics. Because most most owners cannnot (legitimately) deduct the interest expense of financing a Ferrari - it makes perfect sense that a leasing company should be willing to purchase the tax deduction from the owner by agreeing to a true operating lease on the car. The result should be that that the cost of the money for a lease should be at least 150 basis points less than the cost of a loan. I have no idea how that works out in practice - since I waited until I could buy my Ferrrari for cash and have an ample cash reserve for whatever might come up in the future.

Still - that's the reality of the decision ffrom a purely economic standpoint.

 

I am indeed going to be working on the 360 next. As soon as I settle
on one. I'm trying to decide if the F1 trans is going to get in the way
of tuning.

Feel free to PM me at any time.

Jim

 

Good info keep it coming. I guess why I asked the question is why do the lease payments total 80,000 dollars if the residual value is 120 to 125k? Wouldnt you be better If It was a Payment issue Buying it with a long term loan and selling it at the 3 year mark with Less Out of Pocket if the Residual is the same? Maybe I need to check my math. JJ

 

JJ I leased my last 360 Spider through Premier, bad idea, PM me and I will give you the details. Buy it, if you can't deduct it as a business expense it is a **** situation.

 

I agree with No Doubt completely on the matter of affordability. The nature of leasing allows people to acquire cars that are beyond what they would otherwise purchase if they were financing the market value of the car via conventional automobile loan financing. As an example, a potential buyer prices a Camry, but realizes that an Avalon is within his reach if he leases it. Or maybe even a Lexus.

Aside from the economics of the deal and the many good points that were made in other posts, over extending yourself for your dream car before you're financially ready is usually not a good decision. The "ease" of handling the monthly lease payment is not always the best indicator that you've bought an affordable car.

 

Unless Ferrari has a lease special on the F430, I think you will be behind by leasing.

The '06 C Class is at the end of its product cycle -- a new model is coming out later this year, IIRC -- so yes, Mercedes are going to do what they can to clear those out fast and you likely could do well on one.

Thanks for correcting me as always.

Because ... it's a bad lease.

 

Leasing versus buying is one of those debates in which there is never a clear cut winner.....every single lease, vehicle and driver is different.

For example.......here's a deal I did for a client 18 months ago......I leased him a 2006 F430 spider for $400K.......(all figures in CAD $$).......he put $150K down.....and paid $2890 a month.......the buyout was $200K.......the rate was 7.95 %.......

I sold it 12 months later for $410K.........with principal buydown he ended up clearing $15K profit. Yet he made $35K in payments. So he is in the hole $20K so far......and as he lost the opportunity cost on the $150K downpayment (let's say at a 5% bank rate) that is $7.5K interest lost....so he's in the hole now for $27.5K......

If he wrote a check........he'd have a lost opportunity cost on $400K (plus taxes on a purchase) of some $22K on the money over 12 months.

It is a 1.285 % difference or $5,500 in favor of buying to use an F430 spider for one year............but...........my client has routinely averaged in excess of 25% on his money. He is a multi-millionaire many times over as are many of the people here......

So.......was leasing better ? Damn right it was......given his rate of return he'd have lost another $60K by purchasing with cash. You can talk about people stretching their affordability all you want.....etc.....but when you run the numbers and look at the big picture ON AN INDIVIDUAL BASIS.....leasing works in many cases.....and in others financing or writing a cheque works better.

 

Wait a minute! The real Jim Conforti!( From a BMW lover and many times over owner) Can we have proof!

Jeff

 

I only lease a car I can:

1. Get considerable off the MSRP-usually below invoice(dealer incentives or the like)

2. Money factors that are very low-know your numbers on that.

3. Residual values that are high-certain high end cars, especially BMWs have very high residuals-60+%.

Depending on these numbers, I decide whether it makes sense to lease or not. If not, and it's a car I don't intend to keep more than 3 years, I don't lease or buy, just look at other options. Daily drivers for the wife and me I lease and the others I buy typically. It's a pain to resell cars these days so I factor that in as well.

www.leaseguide.com can be an informative way to evaluate leases and gather information by the way. Small fee for certain info but worth it(no affiliation).

I leased a 530iXt(wagen) for 2%(effectively) money factor at $1000 below invoice and about 68% residual for 24 months for a little more than the 328i coupe deal being advertised. Car fit my needs and was not popular at the time. Feels great driving a $56K car for 2 years at $400/month!

I second that no money should be put down unless the money factor is high(which probably means you shouldn't lease anyway).

Jeff

 

bump.. I want to learn more...

 

Me too. What should I do in this situation...buy or lease? I drive 30K miles a year. I don't have a business so I can't write off a lease. If I buy the car the car depreciates like a rock with 30K miles a year. I"m thinking I'm better off with a 2 or 3 year lease and let the dealer take the hit on depreciation. Toyota gives you 15K miles a year on the lease and 10 cents a mile past the 15K.

 

Jeff.....

You should negotiate a closed end lease.

Pay the potential $4,500 in excess mileage charges at termination when you walk from the car.

If you had paid cash for the car, you are 100 % correct as you'd have a hell of a time getting a good trade-in value or selling it privately.......due too it having a lot of kms. I think in this scenario the leasing company is gonna take a hit greater than you would.

 

I've never been able to make the lease numbers work so I've always bought, but the constant advertising makes me ask what I'm missing...

A number of people have stated "no money down" - I'm guessing that means none of the fees are applied? Say for a MB GL they're advertising: First month payment $699, Capitalization cost reduction $3250, Acquisition fee $795 = $4,744 in the hole immediately.

Guess I need to read up on some of the web sites mentioned here. Then keep running the numbers.

Ray

 

Jon,
If you were making your statement solely in regards to Ferraris or Lamborghinis, etc., then I need to apoogize as you are right about leases in reference to those types of cars.

 

Some random thoughts -
- Cap cost reduction is nothing more than money out of your pocket going to the dealer for no reason other than to lower your lease value basis and therefore monthly lease expense. The only way to see cap cost reduction is to the take the number, increase it by the cost of money over the period and then divide that total by the number of lease payments. Add the result to your lease payment for a true cost of the lease. IMO NEVER EVER pay a cap cost reduction.
-Money factor is a fancy way of saying interest rate. The only way to know what the rate is really, is to add up the sum of all the lease payments (plus any other BS charges such as doc fees, lease termination fee etc, plus the residual value of the car at the end of the lease and compare it to the price of the car if you bought it for cash. The difference is your interest cost over the life of the lease. When you reduce it down to the cost per year you will find, in almost every case, that the money factor is way higher as a percentage of the price than a regular car loan's interest rate would be.

Unless you have a business that will allow you to write off all of the lease expenses and you intend to simply give the car back at the end of the lease, don't do it.

Remember, LEASE is another word for RENT, but with way more obligations. Do you really want to RENT a Ferrari that won't be used enough to justify RENTING it. Leasing is for everyday cars where you can reap a tax benefit by writing off the expense against your income - otherwise don't do it.

 

Exactly, I made that mistake once and I will never do it again.