posted 05-23-2005 04:42               

Cons: You always have a car payment; you need to be careful of your mileage--I turned in my last leased vehicle almost 3 months early because I would have been so over on the miles, it was cheaper to sacrifice the last 3 months' payments than pay for the overage. DON'T BUY OUT YOUR CAR AT THE END OF A LEASE--that's when the cost goes over what you would've paid new. If you stick to the terms of the lease, you should only pay for the portion of the car you've used.

Why are we doing both right now? I bought my truck used because at the time, even lease payments on new ones were too high (my how that has changed with gas prices!)and I got the one I've ALWAYS wanted so I plan to keep it to at least 100,000 miles. My husband has a 100+ mile per day commute, so we thought leasing was out of the question for him. However, when looking for a used vehicle for him, the dealer made us a great lease offer on a brand new vehicle that included a larger than usual mileage allowance.

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we are all angels with one wing. It is when we help each other that we truly fly.

posted 05-23-2005 05:31               

They also offer a wealth of Consumer Information on many other topics as well.

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Kristin Bishop
Other International Reviews

posted 05-23-2005 05:42               

A lease may be good if, as others have said, you want or need a new car every few years. If you don't need new, then you need to reconsider the origina question - compare that lease to the purchase of a used car, maybe even the car someone else turned in at the end of their lease. A good car can last well beyond the first 3 years, but because so many people want that new car, the prices drop significantly. Yes, maintenance cost more for an older car, but you don't have any payments. We just spent $600 on a car that we were going to ditch this summer, mainly because we decided it's still a solid car and has at least anoth year in it.

Since you're at a timesharing site, consider the comparison: Over the short term, you can rent the 2BR condo for less than your annual fees and payments if you bought it as a timeshare now (you plan to use not exchange). But is a similar unit available as a resale, maybe in an older section (2-3 years) of the resort? Get your own financing over 5 years, and add the annual fees, and it costs less than the rental. Now what makes more sense?

------------------
Melinda Towne

posted 05-23-2005 07:18            

quote:

---

Originally posted by Carpeskiem:
Can anyone put forth a good argument in favor of leasing a car for personal use instead of buying one from a dealership?

---

If you are like my father and only knew how to put the key in the ignition and want a perpetually new vehicle, leasing is the way to go. He had someone else wash and service his car too. This was back in the 60's-70's.

Personally, I've never leased a vehicle. Bought one new, many years ago, and have had a number of used ones. Since I know how vehicles operate, on a microscopic level, I must've been the milkman's baby .

If you understand vehicles to the extent my father did and like change and enjoying a simple, painless transition from one vehicle to the next over time, give leasing a try. Think of it as a transportation appliance program...

BTW, my dad was a CPA, so I imagine he crunched the numbers, but maybe emotion won out

Pat

posted 05-23-2005 09:40               

-- Alan Cole, McLean (Fairfax County), Virginia, USA.

posted 05-23-2005 09:43               

My personal choice is to buy a one or two year old car and take a service contract to make up the difference in lost warranty. That way you can own the car in 3 or 4 years for the same payment as a lease on a new car. BUT: this isn't the right choice for everyone.

If you lease, stick to 48 months or less, preferably 36. Interestingly enough, customers aren't satisfied with leases less than 36 months; they aren't done enjoying the car yet! My lease is 48 months, mostly because that was the "hot deal" from the manufacturer. My numbers work out so that I'm actually better off taking the 48, and turning it in at 36 if I so choose.

Tom

posted 05-23-2005 13:20               

quote:

---

Originally posted by Frank:
Add to that $2000 for an extended warranty (100000 miles) which you'd be crazy not to have

---

Just my opinion, but I didn't buy an extended warranty on the new car we bought this past September. The only thing I had done under the extended warranty on my last 2 vehicles was have the radiator replaced on the Toyota Tacoma (normally a wear part, but it appeared like a manufacturer's defect, and would have cost something like $300 if I had paid for it). The '98 Jeep didn't have any problems before 100,000 miles.

posted 05-23-2005 14:49               

I do engineering economics for a living….mortgage and auto loan calculations, as well as the Lease vs. Purchase calculation are a natural fit….I apply it to autos as well as timeshares.

To compare an auto lease versus buy decision, we need to speak about the depreciation that we’re experiencing during the time we own the car, and the financing costs separately.

Autos “depreciate” in value over time because you are consuming a portion of their useful life. (rent vs. buy a home isn’t directly analogous to a car; but that’s a separate topic for another day, as is rent vs. buy a timeshare).

They tend to follow an exponential (constant percentage) decline pattern (but that’s more info than most folks need).

Thus, the first month is the most expensive depreciation, and the depreciation per month or per year decreases over time. Steep in the beginning, getting progressively flatter after several years. Driving a new car until it’s 4 yrs old is the most expensive period; driving the 4 yr old car until it’s 8 yrs old is a cheaper 48 months, and driving the 8 to 12 year old car is cheaper still in terms of depreciation. (i.e. the price you can sell it for, versus the price you paid is the value of the car that you’ve consumed or used-up during your time of ownership.)

Separately, paying cash for a car obviously saves you all the interest expense that you’d have otherwise paid for financing the car, either in the form of a lease or a loan. I prepared an example analysis of auto lease vs. buy a few years back (a chapter in my volunteer seminar on Biblical finances I teach at my church). Since most of my students are struggling to live within their means and get out of dept, my advice is to (1) drive an older car and (2) never pay interest….both of which are counter to the desire to own a newer/better car.

One Jeep Waggoner I analyzed was depreciating at 18% per year. It went from $18,995 new to worth only $8,587 value after 48months. During the 48 months of you driving it, you’ve “used up” $10, 408 of its value. In other words, it depreciates by $10,408. That’s an average of $217 per month.

This car was offered for a lease of $294/month, or buy it on a conventional loan for $434 per month (after a $2500 down payment on either plan). Thus, many folks are attracted to the lease…because they get more car for a lower monthly payment. However, this is a misleading perception.

Leases have a surprisingly ‘heads up’ calculation. They are designed with a lower monthly payment because you don’t pay off the $18,995 value of the car in 48 payments, you merely pay the loan down to $8587 “residual value” after 48 years. (it’s kind of like taking a 7 yr loan (instead of 4), but selling the car for exactly what’s owed on the loan at the 48 month mark. In doing so, you never own any “equity” in the car…the loan balance is always as much or more than the car is worth.

In my example, the $2500 down payment is ‘used up’ in 48 months too, so the family really needs to set aside $2500/48 = $52/month. So for $346/month for life, they can continue to lease this type of car and get a new one every 4 yrs. ($217 is depreciation and $129/month is interest).

By buying the car on a 48 mo loan, the family pays $2500 down, $434/mo pmts and ends up owning $8,587 “equity” in the car after 4yrs…which they can sell and buy another new one (if the desire to always drive newer cars), or keep and drive to be more frugal for several more years. This plan requires $308 per month for life to continue to own/drive the zero to 4 yr old car. ($217 depreciation, $91/month interest expense). This family saves $38/month in interest for life by owning instead of leasing.

Or, restated, this lease is $38 x 48 = $1867 more in financing costs in just 48 months. The lease is the most expensive way to own this car!!!! (Assuming same interest rates, etc).

Please note that if you bought this car for cash for $18,995 you’d sell it for $8587 after 4 years and have suffered the $217 per month depreciation and zero interest. (leasing vs. paying cash costs you $6,192 more in financing costs in 4 yrs). Notice that cash, 48 month loan, and 48 month lease all suffer the same $217/month average deprecation (0-4 yrs in all cases)….the extra expense of the lease

Also note, that if you paid cash for the $8,587 (4 yr old car) and were happy to drive that for 4 years, you’d be using up only $99/month (average) in depreciation. For folks up to their earlobes in debt, they might want to start driving the car that costs them $99/month instead of having to have the $346/month leasing plan. If you think you can afford a $346/month payment, put $247/month of it in savings while driving the $99/month car…then pay cash for the next one.

[note: this example is admittedly 3-1/2 yrs old and prepared w/ 12% auto loan. If you can get a better interest rate today, the ‘gap’ between cash and lease will narrow somewhat, but I’m still convinced I”ll never own a new car and I’ll never lease. Also, the $247 per month saved ($11,856 in a 48 month period) would pay for a lot of repairs….don’t pay the ‘premium’ for the lease just to avoid a few hundred dollars repairs.]

Bottom line, drive whatever car you can afford, but don’t squander your financial freedom to drive something more than you can afford.

posted 05-23-2005 14:53               

quote:

---

Much of it has to do with how long, and how hard you drive your cars. ....[/B]

---

No! The choice to own new or used and how long you keep it can be independent of the method you use to finance it.

quote:

---

If having a new car every 2-3 years is important to you, then leasing may be a good option if your driving situation is such that you wouldn't have to pay extra fees for mileage. ....[/B]

---

Not necessarily, unless manufacturers are offering monster sized incentives, I’ve shown that leasing is an expensive way of financing.

quote:

---

Pros to leasing: new car every three years; you're done before (hopefully) any major repairs need to be done except maybe for brakes; gets you into more car than you may be able to afford to buy; I was taught that you buy what appreciates in value (house) and lease what depreciates (cars, computers).. ....[/B]

---

If I can save $6,000 to $11,000 during the life of the car (buy paying cash instead of using a lease for financing, I can pay for lots of repairs. (I personally like to buy (cash) a 2 to 4 year old car and drive it for 6 to 8 yrs….I believe I’m way ahead. I don’t suffer the expensive depreciation years and still have enough left to pay repairs.

The “lease helps you afford more car” is a short-term myth. I’ve shown above that leasing the same car costs $346 per month for life. Owning that car on a 4 yr loan costs $308 per month for life. The alleged savings only helps you in the first cycle of leasing….you’ll soon feel the pinch on your budget. I repeat: ALTHOUGH LEASING APPEARS LIKE A LOWER MONTLY PAYMENT….YOU’LL PAY THOUSANDS MORE IN FINANCING.

Further, the “lease what depreciates” philosophy forces you to pay a big premium for the convenience of getting to turn the car in at 4 yrs and not have to sell it yourself. (I personally don’t want to pay $6000 or $11000 extra in financing to avoid that hassle).

quote:

---

A lease may be good if, as others have said, you want or need a new car every few years. ....[/B]

---

No! As I said above, wanting a new car every few years can be accomplished with cash, and second best is conventional loan. Worst is the lease.

quote:

---

If you understand vehicles to the extent my father did and like change and enjoying a simple, painless transition from one vehicle to the next over time, give leasing a try. Think of it as a transportation appliance program... ....[/B]

---

I agree CAMach…..the leasing option requires you to pay a big premium for that convenient transistion.

quote:

---

Originally posted by Frank:
… In truth I paid five years of payments at 926 per month, but considering I will own the car 100 months, the 49k/100 is in essence a payment of $490 per month. Which is about what the lease would have been--the difference being that I am driving the same car for 8 years. So, there's an example of half one, six of the other....

---

Something’s wrong with your math, Frank. I don’t believe that driving your car from 0 to 8 years is the same costs as having leased it for ~$490/month for the first 4 yrs and repeating that twice. Driving that older car for years 4 to 8 should have been way cheaper!

quote:

---

Originally posted by Frank:
… Add to that $2000 for an extended warranty (100000 miles) which you'd be crazy not to ….

---

I disagree! Extended warranties cost more than they’re worth. (The company selling them has calculated the odds of a repair and sets the premium accordingly, after adding a healthy profit margin and administrative overhead. Only if you are ‘risk averse’ and can’t handle a repair bill do they make sense. What if you just put that $2000 cash in savings…don’t you believe odds are that you’d have fewer than $2000 in repairs? The company selling that extended warranty is betting on just that! (of course they have hundreds of cars to ‘average’ the odds/results over, you don’t)

quote:

---

Originally posted by Frank:
…. Just make sure you get gap insurance in case you have an accident.

---

Once again, all insurance costs more than it’s worth. Just take the premium and save it…

posted 05-23-2005 18:38               

Only point you missed, which argues in favor of a leased car, is under accounting rules (Country dependent so check first), is that a business can fully write off a lease payment, but has to depreciate a car over years (and it takes about 10 years to do fully). So as a guess the tax savings would "help" to bring the differences even closer in today's market.
But if you don't have a business, then buying a car is cheapest!

.......Peter

posted 05-23-2005 18:45               

Regardless, the decision to lease vs buy is not always about what makes sense FINANCIALLY for a person. Not everyone is positively motivated by the story of the ant and the grasshopper; or, more accurately, many people are better suited to being grasshoppers, and being ants maks them unhappy.

But hey, I'm the guy that buys the one and two year old cars rather than the new ones, except I leased my latest one (I was getting a car allowance from work at the time), and except for the new one I bought because of the 0% financing (but I should have got a used one there). All I'm saying is that sometimes advice can be accurate, but not reflect a person's goals.

Tom

posted 05-24-2005 08:56               

You're partly correct. My blanket statement about insurance needs some qualification. Yes I buy life, health, homeowners and auto insurance. I choose to be "self-insured" for everything else...I'm willing to take on some small risks but not the big ones. I was talking (above) only in the context of the extended auto warrenty....not advocating "self insurance" on life/health/etc.

However, I've studied risk management and risk aversion extensively; I believe my statement that extended warrenties and insurance costs more than the "expected value" of the claims I'm not having to pay....is still true. If a $500k life insurance policy for a guy my age should cost $X per month (based on the odds of my dying this month; per the mortality tables), I'm sure the premium is something like 1.5X . My level of risk aversion says it's unacceptable to leave Mrs. Hatrack in poverty if I die, therefore I buy the life insurance. I can't afford to rebuild a burned down house either, so I don't take on 100's of thousands of dollars in risk....I buy the homeowners' insurance (besides, my mortgage co requires it anyway).

However, I can afford to repair/replace my $30 toaster or my $300 TV or perhaps a $3000 car repair without going bankrupt. Therefore I accept theses risks and I"m "self insured" for these smaller risks.

My neighbor sells extended warrenties on new tires; he told me two days ago, that one new program has collected $1.4 million in premiums and so far only paid out a measly $15,000 in claims (that number will grow in time; they're still liable for much more, but they're confident it's going to make a ton of money.)

I hear this and I'm confident that I don't want to buy the extended warrenty.....the sellers' making too much money off me. I choose to be self insured on these small things.

Secondly, it's not my job to tell other people what short and long term goals they should have. I'm sure you and I would agree on much of what I'm about to say, so it's not necessarily directed to you Tom, but from my reading, I hear too much about too many Americans are living 3 weeks away from bankruptcy at all times, only 3% of Americans achieve financial independence by retirement, personal bankruptcies and personal consumer debt are at all time highs.....and I beleive we could use a little more focus on the "long-term" to counter-act all the "live for today, get the new vehicle you deserve today" and "don't worry about tommorrow" that we're bombarded with in advertising and elsewhere.

In helping/advising my students how to get on a budget and stay out of debt, the more long-term their thinking, the better decisions they'll make. And, yes, unwise auto purchases/leases are the culprit in many busted budgets! Therefore, I took the opportunity to jump in on this topic.

a) leaseing too much car (or other living beyond our means for short term pleasure) and ignoring the future beyond 3 or 4 years is a train wreck waiting to happen.

b) being a penny-pincher and putting all descretionary cash into retirement savings is equally unbalanced....there are some legitimate short term goals that detract somewhat from (but don't derail) our long term goals.

c) some balance between short and long term goals is the way to go....and not every one will have the same goals.

I'm not selling anything. I'm just offering free advice.

However, the new car dealer (leasing agent) is selling something. And he's advocating Plan (A) above...and it's not necessarily in any one's best interest.

Sometimes being an adult means saying "no" to an apparently "good" thing (like short term pleasure of driving a new car) in order to say "yes" to an even "better" or "best" thing (like financial security, longer term).

Most often this means learning a little delayed gratification. Grasshoppers can learn a little bit from the ants. (penny pinching Ebeneser Scrooge ants should learn a little from the grasshoppers' too).

I can respect someone choosing to allocate more of their budget to autos than I would. I only hope that they're consciously and unemotionally pre-planning what they can afford without sacrificing long term goals. I hope they're not walking into a dealer with no thought of tomorrow and saying "can I qualify for that beauty over there? will you approve me for that outrageous lease payment?"

posted 05-24-2005 09:38               

You made some good points; it was only to the Gap advice that I was making the counterpoint. Like I said, I'm an advocate of buying late model used, but my advice carries no weight with the millions of people who love having a new car!

Tom

posted 05-24-2005 10:42               

I truly want to learn. I've not looked into Gap insurance....I"ll be paying cash for my next car. I surfed up one exapmle here: http://www.autoprotection.com/insurance/gap/

Something like a $600 premium insures me against a $3500 loss/claim.

If there's a 17% chance of my car getting stolen/totalled in the time I drive it, then it makes sense.

Do you mind sharing your stats? How many policies were sold that correspond to 9 claims? Is it more than or less than 17% large claims?

Thanks,
Hat

posted 05-24-2005 11:40               

quote:

---

Originally posted by Frank:
As to my math, it probably is off, but since you insist there must be something wrong with it, exactly what, please? Thanks!

---

What's missing is a broader look at such insurance. It's odds-on that if you paid for such extended warranties with every car you own over your lifetime, you'll lose money.

Those who write such policies are in it to make money. They make money only if your and others' repairs cost them less than what they charge in premiums, less administrative expenses. You can bet they have done the actuarial work to reasonably assure themselves of a healthy profit.

posted 05-24-2005 11:57               

One of the best is that there are no real "best" answer that fits everyone - it all depends on one's situation. Extended warranties are that way - I would have considered one but the Unlimited came with a 70,000 mile powertrain warranty. With our driving a 100,000 mile warranty lasts about 3 years.

There are excellent guidelines, but sometimes doing something really stupid, knowing it is incredibly dumb, but having the ability to deal with the consequences makes it a possibility. For example, a car dealer once tried to talk me into leasing a vehicle that I knew I could never turn in - I would be forced into buying it out at the end of the 4 year lease (would have been way above the mileage allowance) and that meant paying for it for 7 years. Besides that, he had written into the purchase price an extra $3,000 above MSRP ("But it meets your monthly payments") meaning I would always be upside-down on the value and could never sell it before the lease was up. As I said, it was a horrible deal.

posted 05-24-2005 12:50               

quote:

---

Originally posted by Frank:
As to my math, it probably is off, but since you insist there must be something wrong with it, exactly what, please? Thanks!

---

Sorry, Frank. Your math may be perfect; maybe I'm misinterpreting what you said. I've a preconceived notion that your owning that car for 8 years for an average of $490/month was way cheaper than a lease. You said that's about a wash w/ what a lease would have been. I jumped to the conclusion that it was a 48 month lease. Was it truly an 8 yr lease that was offered for about $490? If so, in this case, I stand corrected and there appears to be negligible extra financing costs w/ the lease vs. own (still you should have saved a bunch in interest becasue by paying $926/month, you accelerated the loan repayment to 60months....any lenght of lease should have had way more interest built in. (IMHO)

As to your experience and your Mazda friends' experience, you two won and dozens of others in the warrenty company's portfolio offset the loss this time. I do admit that $5/mo (perhaps $240 over 48 months sounds more reasonable for protecting against the $6k loss (must happen less than 4% of the time to 'breakeven' for the warrenty company.

After all, if every one beats the system on the extended warrenty, those companies will have to charge $6k premium for $6k coverage or go out of business.

If it is something like 4% chance of totalling a car in the ~48 month lease, that's 1 in 25. For every 1 friend that you know that totalled a car....can you think of 25 or more other acquantences that havene't? As ...Dave M said it better than I can....on average, the warrrenty company wins.

In fact, can we not find 15 million folks who thought buying last months lottery ticket was a waste of money? However, if we talk to the right one, only one in 15 million was very happy w/ their purchase.

Yes, I admittedly have a lot of theoretical training...but I'm still a pretty practical guy. Sorry if it I come accross as a "know it all". For once I thought I had something to contribute among all the TUG experts that I've learned so much from.

Hat

posted 05-24-2005 14:39               

For the Gap: I charge $400. I sell around 18 policies a month. That's about 78k. 9 claims at 3k = 27k paid out. take out your cost of doing business (record keeping, accounting, paper pushing, commissions, expense account martinis, golf outings, etc) and I'd guess it's a decent profit for the insurance company that underwrites it, and of course my share is enough to keep me happy.

From the customer's standpoint, it's around $8/mo. Criticize people all you want for looking at it as "what's my payment", but that's what they want to know. $8/mo vs a potential $3k "in the hole". For many people, they know that they'll waste the $8 on something else; they certainly won't save it or invest it. They'll get dessert the next time they eat out. Is it right? Beats me. I offer a choice, and the customer decides.

For the service contracts, it really only comes down to one thing: some people are happier with the coverage, and some people are happier keeping the money in their pocket. That's what I tell my customers. I explain the factory warranty, I explain the service contract, I show them the cost, and I tell them to pick the one that makes them happy (or do the one that makes them feel more comfortable, the language varies with the customer). My experience is that if I do it that way, people really will pick what suits them the most.

Service contracts again usually come down to whether a customer can afford a major repair, and the inconvenience that comes with it, rather than "Will I break even?" If a customer can pay the repair, then she doesn't need a service contract.

I really try to show that the products aren't about gambling, and aren't about breaking even; they're about risk management and preserving quality of life, although I don't usually use those words (but I do if they are the right words for that customer). If a customer has a high aversion to risk, then these products fit that person. If a customer is comfortable with risk but isn't in a position to accept it, I will tell her/him that. If a customer is in a position to accept the risk, or if the risk is low (low mileage driver, for example), I'll thank them for listening and move on.

I do think I'm an exception. I've been doing this for 18 years, and most of that has been at the same dealership. My low key approach has worked well for me. My customers like me, and they do seem to purchase a lot of coverage from me.

As far as family is concerned, I ask them the same questions, about miles per year, how long they'll keep the car, their financial position, how they feel about paying for repairs, and cost of the coverage. Then I advise them accordingly. My dad has a high aversion to risk. He WANTS a service contract, which I think is silly because he could pay for a new engine if he needed one. But, he's lived his life by making sure he's covered, and it's worked out OK for him (he's well into 7 figures). I take a service contract, even on my Subaru, because I like the feeling of being covered. My younger sisters buy older cars and drive them into the ground without service contracts. They're doing OK for themselves, and new cars aren't a priority for them. My sister in Chicago took the service contract on her Prius; same reason, a high aversion to risk. I told her it was a toss of a coin, and to do what made her feel best. I don't think my sister in Florida takes them; she usually does 2 year leases. My brother lives hand to mouth, he's a classic example of the kind of person who SHOULD have a contract. He can afford whatever the payment is, he would blow any extra money, and can't afford a few hundred dollars if he neeed to. He has a contract.

But in the end, a customer is either happier with the coverage, or happier with the money in her/his pocket, and that's all there is.

Tom

posted 05-24-2005 16:26               

Looks like about 4.6% of your clients make the big claims; 1 of every 22 folks so far. Thanks for sharing so much...that's really helpful information.

I guess a quick ratio of the $78k taken in in premiums and $27k paid out in claims is a rough indicator (and recognizing that there may be more claims coming)....means that the policy costs 2.88 times the average benefit so far. Restated, of the $400 premium we pay, 35% is used to pay the claim and 65% is used up in the adminitration/profit/commssion and green fees .

So, I'm not wrong to view this as being a little expensive in the administrative costs/profits built in. (don't get me wrong...it shouldnt' be dollar for dollar....I know there are costs beyond just the claims). For me, being risk-neutral in the 0 to $3000 or even $6000 range, I view this as expensive; $400 for relief of $138 average liability (yes it will either be zero or something like $3,000...but it averages $138 per car). Someone would have to be much more risk adverse to pay $400 for relief of a 1:22 chance of losing $3,000.

Thanks for your further discussion of examples from your family of who does/doesnot prefer such policies. (I apologize, as I didn't mean to get so personal; was speaking hypothetically; I was merely using a cliche' my wife uses in front of salesman...."if it were your wife/mother/sister, what plan would you recommend to them".....

Thanks, reading about various cases/views is helpful. I hope other Tuggers learn as much as I did, thanks to your generous post.

(that is if they didn't already give up on this thread due to my lenghty writing )

Hat