timsam

There is probably no way I can lease since I drive about 100 miles a day. So I have always just bought with cash or financed it...

Jkw

Good Point,

I Buy

polarbexar

Buy... 36K miles a year usually.

mbny

Susan Orman is biased and an idiot however. I would have loved to hear her reasoning opposing leases since owning or leasing for a 36-39 month period really has very little difference in amount lost in a vehicle.

She was lecturing on her show about how bad it is to invest in annuities until a woman had called proved her wrong in her certain situation she experienced. it was funny how she quickly reiterated herself and suddenly had some agreement with annuities. basically the woman would have been screwed after her husbands death had her husband invested his money in Orman's advice of mutual funds rather than a variable annuity. Her lack of ability to advise properly is quite humorous at times

mbny

bottomline, want a car for more than 3 years, buy it. want a car for 3 years, flip a coin. you'll find yourself losing just about the same amount in that timephrame either way.

also with lease end charges, you can avoid them by buying or leasing another car of the same brand or by being slightly under mileage. but it's usually only about $300 anyway. not sure about MB, but that's what BMW kept out of my security deposit and refunded me the rest.

you really could beat the subject to death. there are pros and cons to each side and just need to do what fits your style more. i'm in agreeance with both ways

revstriker

The old "Lease vs Buy" argument has raised it's ugly head once again!

There are many many things to consider when deciding between these two things, the main one being how long you intend to keep the car. There are great advantages to each. First, let's talk about the "cost of money". On a financed car, you are paying an interest rate on the unpaid (balance) amount on the car. This is very clear. On a lease however, your "charge" is a money factor. With some simple (well for some it's simple) math, you can calculate what the equivalent interest rate would be, and you can calculate the cost of money for both a lease and a finance job.

Another thing to consider is the depreciation of the car. With a lease, you are only paying for the depreciation of the car (not including any money charge). The interesting thing about a lease, and this can be a good or a bad thing, is the residual amount that is set at the beginning of a lease. Often times you can find the residual set artificially high. What this translates to is a lower depreciation cost. It's good if you plan on keeping the car until the end of the term and turning it in. It's bad if you want to trade in early, or you want to buy the car at the end (although sometimes you can negotiate a lower buyout).

With a finance, you are paying for the depreciation plus a some of the balance. The disadvantage to this is when you want to get a new car at the end or before the end of your term. Trade in values are almost always lower than the residual on a lease, and often times, private sale values are also lower. You can also be "upside down" on the car, although this could also apply to a lease.

There can be a tax advantage, but this varies by state. In my state of Texas for instance, you pay the sales tax on the entire value of the car whether you buy it or lease it. This can be paid upfront, or rolled into the finance or lease deal.

Some say the required Gap insurance is a disadvantage on a lease. However, gap insurance can be a good idea on a finance (most car insurance co. offer this), it's just not required.

Finally, there is another option that is sort of a mix between the two, and that is a bubble loan. You are actually financing the car, but your last payment is large, so your normal monthly payments only go to the depreciation and interest. Normally, you can choose to refinance the final amount, or turn the car in, much like a lease. Depending on where you live, there may be tax, and insurance advantages or disadvantages in this.

Bottom line is that there is a LOT to consider, and there are DEALS in both leases and buys.

PERSONAL DISCLAIMER: I am NOT an expert at leases or finance, I am not in that kind of business, and I do not work for a financial institute, so please verify any of this information before you make a decision from it. :p Also, MBWORLD has a lease forum with a sponsor/moderator who is VERY knowledgeable on these things.

livestrongONe

PLease can you explain (be "upside down" on the car ).Thank you.

SuperQ

it's when you owe more on the car than the car is actually worth. nasty nasty situation to be in. Example, you go to trade in your car and they tell you they will give you 10k for it, but you say hey wait a minute! I still owe 16k on this car!!!

SuperQ

LOL!! I am not rich, I am just a poor educator, but I got a Mom who loves me!

livestrongONe

KB PRICES or what dealer will sell the car for

b3d_sage

lol! where / what do you teach?

revstriker

SuperQ is gives a correct explanation of this. A lot of times, when people are "upside down" on a car, they roll the amount into the finance or lease. So if you owe 16K on a car, but the trade in or sale value is only 12K, you are upside down by 4K. If you finance or lease a car for 30k, you are actuall financing or leasing for 34k.

Obviously (or maybe not), this is a very bad method of managing your money.

Also, the KBB values (they list trade in, private sale, and retail sale values) of the car does not really play into this (although it may be used as a base to come up with the trade in value or sale value). It's the amount that you are actually getting getting for the car that is used to determine how much you are upside down.

livestrongONe

Cool Thanks for the explaintion. The only thing I see is when a person is up side down is really the intrest added to the car financed amount. So in a sense everytime you buy a car (loan or lease) NOT CASH LOL then you will always be up side down unless you have put a large amount to counter act it ,am I right in saying that .Please correct me if I am wrong. Thank you

revstriker

You are correct. Although people don't normally call it "upside down" unless they're getting out of it. The fact is, when you finance a car, your monthly payment consists of principal and interest. At the beginning, most of the payment is interest, and only a little is principal. Because your balance goes down each month, and you only pay interest on the balance, each payment you make sees an increase to the principal amount, and a decrease to the interest amount. For example, say your payment is $500 per month. This months payment might consist of $450 interest, and $50 principal. Now next month, the balance is $50 less, so your $500 payment might consist of $440 interest and $60 principal.

Anyway, a car typically depreciates at a much faster rate than you are paying down the balance. But given enough time, you will pay off the depreciation amount. That means on a 4 year loan, your balance owed might be higher than the car is worth for the first 3 years (this is not a rule, as it all depends on interest rate, rate of depreciation, etc.).

Also, when we talk about depreciation, you have to understand what it's depreciating to. If you trade your car in at a dealer, then the value depreciates from what you paid to what the trade in value is. If you sell the car privately, then it depreciates from what you paid to what you sell the car for. The latter might equal less depreciation.

What all this means is: You might be upside down to trade the car in, but you might break even or do better to sell the car privately. Of course, you could be upside down on both.

Another thing to consider is the length of the loan. With a longer loan, you are paying less principal each month and more interest (since you are not paying down the principal as fast). You will be upside down for a longer period with a longer loan.

livestrongONe

Thank you now it makes alot of sense. One more question what if you say have $300 a month payment and pay $300 on top of that so $600 amonth payment does that mean you will pay the car down half the time you loaned it for say from 60 months down to 30 months left to pay the car off. I hope I have some made sense.

SuperQ

I am an instructional facilitator in Cedar Hill

SuperQ

this is all very true, but I would just like to add one more thing. For the most part, a normal new car purchase will not end up "uspide down" unless you finance with an extremely high interest rate. For example a 21% interest rate (which they give to people with poor credit) will cause you to end up upside down. Normal rates for the most part won't.

b3d_sage

I have no clue what an instructional facilitator is... but, I know Cedar Hill really well. I used to work in that area and also spent a lot of time there because my (no longer) good friends lived out there. And, they are both high school teachers.

eddieo45

even faster than half the time. for example, I waffled between a 3 year and a 4 year term, as the 3 year payment was $360 and the 4 year $240. I chose the 4 year, then set up auto-payments of $300. Voila! I have a 3.4 year loan. You can do this with a mortgage or any other kind of note as well. Any additional payment amounts reduce principal, thereby reducing the payback period.
this is a good point. I also like to remember something I was taught when I used to sell cars: your new car's starting value is really what the dealer paid for it, not what you paid. so, if one would look at the extreme example of, say, buying a $30,000 new car and trading it in the next day and it's only worth $24,000, bear in mind that the dealer pays about, say, $26,000 from the manufacturer for the brand new one, so why wouldn't he give you less for your 1 day old one, which he'll have to sell for less?
Great thread, but now I want to focus on helping livestrongONe with his avatar and signature!

revstriker

I think eddieo45 answered this question quite well. To just elaborate a little, Say your $300 payment was really $150 interest, and $150 principal. If you add $300 to that your new payment is actually $450 principal and $150 interest. Since the beginning balance is the same, it has no change on the principal so the extra money goes straight to the principal! Instead of reducing your balance by $150, you are actually reducing your balance by $450, or 200% more. Of course, this will vary based on where you are in the loan (as I said earlier, at the beginning of the loan, a larger percent of your payment is going toward interest).

Word of caution though: Make sure that you are allowed to do this in the terms of your loan! Most car loans state that there is no "pre-payment" penalty, but there could be on some. Also, you may need to state specifically that the extra money is for principal, and not a pre-payment for next month.

revstriker

I'm not sure I understand what you mean. Pretty much every new car would be upside down unless you put a large enough down payment on it to cover the depreciation.

The larger interest rate would change the rate that you pay down your balance. Comparing a 48 month finance on a 30K value with a 21% interest rate and a 6% interest rate we see that the monthly payment on the 21% would be about 942 while the 6% would be about 718. After say 36 months, you decide to turn the car in. On the 21%, your balance would be around 10.1K while the balance on the 6% would be around 8.3k. The balance amounts start off the same and then slowly, the 6% loan balance gets less and less until about the 27th month (where the difference would be about $2,100), and then they start getting closer together.

eddieo45

Revstriker's right. Let's say you took advantage of a "no money down" or put some small amount, say $1000, down, and then tried to sell the car a month or two later. You're upside-down no matter what your interest rate is.

livestrongONe

Ok I understand that now so. I will pay off my car in 24 months than 30 months BUTTTT how do I know they pay a certain % to intrest and a certain % to principle and what is the normal % split. I know these are silly questions I am just trying to educate myself so I can make thw right choices. Thank you for all the answers and advise.

eddieo45

one quibble, Rev: What constitutes a "known" or "unknown" varies from individual to individual. Some go car shopping and consider the MB and the BMW, some the MB coupe and the MB sedan. I, for one, have no idea how long I'll want to keep the car, and don't spend any time pondering the issue (I guess buying therefore gives me more flexibility, if I end up needing it, then leasing). I think I approach every car loan with the idea that I'll eventually pay it off, then I'll be driving "for free", but in 30 years of driving, that hasn't happened that often. Of course, this is how dealers rationalize leasing to customers ("you're going to want something new in three years, you always have a payment, you're only paying for the time you have the car, etc.")
My guess is that if two twins went and procurred 2 identical cars, one purchased and financed, the other leased for the same length of time, then kept them till the end of the term, then liquidated their positions, it might come out about the same, with the big difference being when the money was spent or recouped.
They say that, over the long term, low-carb diets are no better than other established diets, but they cause one to lose more weight at the beginning. In that situation, I'd take the "instant gratification", but to drive a new Benz off the lot for $3500 at lease signing, vs. putting enough down to own it...that's a different story.

eddieo45

Your payment book will detail on each payment coupon how much goes to each. The proportion is based on an algorithm that factors the always-declining loan balance. The long-and-short of it is that it doesn't matter; it just is. Pick a loan with a payment you can afford, then pay more. Your loan gets paid off quicker (as long as you live in a state with no prepayment penalty).
Now fix your sig; get rid of the dimensions and IMG brackets: