How do Leases work? Whats the advantage of one? I have been curious but dont want to get the salesman speech. I am not talking about high-end exotics just a nice BMW or Mercedes Sedan. The way I understand it is you sign a lease for say 2 years with a down of 5,000. Sign a statement saying you wont drive more that 12,000 miles a year. You then pay 500 monthly for the vehicle. (All numbers are made up) What happens at the end of the 24 months? What happens when you go over 12,000 miles a year? (It looks like they charge you per mile over.) If you have to put a down and your paying monthly whats the point? Why not buy from the get go?
Think of it as a long term car rental. You're responsible for returning the car at the end of the term within the mileage and in clean condition. You get charged accordingly if not. Your expenses are limited, excluding accidents, to the contract and operating costs; they get the car at the end. It might make sense if you're the type that trades cars frequently. It's usually a more expensive proposition than buying a car with cash or financing.
I think the biggest consideration for this is the tax implications. In Canada, you can deduct your lease up to $850/month assuming that you use the car 100% for business. If you own your car outright, the CCA deduction is only good up to $30,000. An $850/month lease can easily put you in a $100,000 car, whereas if you're going the CCA route, you're driving a Honda Accord. Obviously it's not as simple as this, and there are many factors to take into consideration...
You get approved based on credit, history and income. You then "rent" a car from the dealer and return it after a few years or buy it at the end of the term. You drive a new car and drop it off at the dealer if anything goes wrong. Anywhere you go you'll get a speech and a salesperson. Just because you go to a BMW or MB store doesn't mean you'll be treated better or worse than any other place. Yeah the contract will have a lot of numbers in it. If you go ahead don't ever decide to agree based on a monthly amount. Negotiate based on the value of the car. If you say "I can afford $650.00/ month" then you'll pay that or more. Decide what the car is worth, then go from there. Leases can be ore than 24 months, what happens at the end is they will ask you go the residual on the car if you want to buy it. Most likely the car won't be worth the money claimed in the residual because the economy is poor, cars depreciate badly in the first three years and you just got the "best" out of the car anyway. So you can get a new lease, buy that car, buy a used car from the lot or be wise and skip the last few years and buy a three year old car now from a private seller. You can save a ton of cash in the long run. It doesn't "look" like they charge you per mile, the do charge for for every extra mile you put on the car because that takes value away from the car if you don't end up buying it from them. If you do decide to buy it from them after the least you won't be charged for the extra miles because you will be owning the car which has less value. If you wanted a car badly and couldn't afford to buy it from the dealer, a lease is a way to drive the car without paying the full amount. It's more expensive in the long run but people do it everyday. My advice is to buy a car that's two or three years old from a private seller. I've done this for many dozens of people I know.
Oh yes, this. If the car is banged up a little on the inside and out, be prepared to have a bill from the dealer. Some wear and tear is included but it doesn't cover the whole car and if they can't quickly clean up the car at the dealership, be prepared to pay for a body shop to do it.
The OP said BMW or Mercedes, both of which offer several 'ritzy' cars... I know, personally, I would rather lease an M3 for $850/month, than purchase a 323i outright for $30,000 and then deduct the CCA on it...
We missed each other, I meant the option to lease a luxury car isn't open to most people. Try claiming a MB when you own a snowplow and a snow blower with a crew of four. Or try to claim a BMW when you own a recycling plant.
^ I see what you're saying, but where there's a will, there's a way. I'm not saying that it's legal, and it might make you a likely candidate to be audited, but it's definitely possible. You can claim a Hyundai or a Ferrari, it doesn't matter, as long as the total deduction is no more than $850/month. The snow-plow operator could claim his BMW and justify it by saying that he uses it to drive to clients and potential clients in hopes of gaining their business. Same goes for the recycling plant owner.
How a lease works, in general terms: You are buying the depreciation on the car over your ownership term. However, a finance company is buying the car from the manufacturer, or dealer. They are putting up the initial money for the car, so you are also buying the interest on the money used to buy the car. Advantages to leasing: if you like to turn over your cars, it will meet your needs. There is always a new model to covet, and you are only a couple of years away from it. At lease end, just give it back, it's super easy. As mentioned earlier, you get to drive the best time in the car. Very little maintenance or worry. You can drive a nicer car for your sample $500 payment than if you purchased. Disadvantages to leasing: it's not the cheapest form of car ownership. Buy and drive for 10+ years is, so it becomes a personal finance decision. How to Lease Smart: You must choose a car that does not depreciate much. A $50K Mercedes is cheaper to lease than a $50K Lincoln, even though both are $50K. Lincoln's just don't hold their value. But even within Mercedes, there will be a range of monthly payments because a $50K R-class will depreciate more than an $50K E-class, so it will be more $$ monthly. The simple rule: Since all you are buying is depreciation, buy the car that depreciates least.
Chris gives a great explanation, a simple way to understand the big picture. Some thoughts: A $50,000 MB and a $50,000 Lincoln may not have the same payment, but there may be more involved than just depreciation. Cap Cost minus Residual equals Lease Obligation, multiplied by some money factor gives you your payment. If you can negotiate a $40,000 capitalized cost (i.e. starting price on which the lease is based) on the Lincoln because of incentives, but only $45,000 on the Benz, YOUR obligation for depreciation (and thus your payment) may be less, even though the Benz may hold its value better (residual) -- residual is almost always expressed as a percentage of the original MSRP (the only constant). The money factor (think of it as the interest you pay on a lease) may prove the most important. Some manufacturers heavily subvene these rates to make payments attractive, so if one manufacturer is being more aggressive with their 'rate', it may well trump the depreciation difference. If it is expressed as a factor, multiply by 2400 to get a rough APR (ex; .00180 x 2400 = 4.32%). To decide which is best for YOU, one must compare to their alternative choice. There are very few ways that a lease doesn't work out to be better than buying a new car over a five to (gulp) seven year loan if you drive 12-18K miles per year and want a new car every few years. Owning a car 10 years is still much cheaper. There are still many factors that come into play. If you decide to lease, write a lease tailored to your situation. You can usually chose your contracted mileage anywhere from 10K mi/yr, then 12K, then 15K, then up-front per-mile beyond that. If you can buy mileage for $.10/mi up-front, but have to pay $.20/mi at the end, weigh your options carefully. I've personally leased more than a dozen vehicles and I'd do it again, but I weigh everything out each time. Leasing has worked well for me because of shorter-term commitment, always under warranty / no repair bills, flexibility, easier write-off (not an asset), and someone else is on the hook for resale (but I have the first option to buy if there is equity). Cheers E
