Leasing... don't get it
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Leasing... don't get it
So I have my E320 on order and I'm trying to figure out the best way to pay for it. My last 3 cars I simply paid in cash, but alas the internet bubble has burst ;-) I really am having a hard time understanding why anyone would lease a vehicle (I don't have a tax advantages since I won't be using the vehicle for work)
I was doing a comparison of lease vs buy after 36 months.
Here are my assumptions:
Price of car $53000
Downpayment 10%
Residual value 69%
Loan APR 6%
Loan term 60 months (plan to sell early)
According to mbusa.com, lease payments would be around $807/month so the total money spent to have the car for 3 years would be 807*36+10%*53000= $34532. As I understand it, this is money out the window that I don't see again at the end of the lease term.
For the 60 month loan, I'm assuming I want to get rid of the car at the end of 3 years. Payment is $922/month so total money spent after 36 months is 922*36+10%*53000=$38492
BUT, in the loan case, I still owe 20806 at the end of 3 years and the car is worth 36570 after 3 years, so I have a net equity of 15764 that I could get if I simply sold the car in 3 years time. So 38492-15764=$22728 is the cost to drive the car around for 3 years.
So other than the mariginally cheaper payment of 807 vs 922 which is peanuts, what am I missing. Seems like leasing is way more expensive.
What am I missing?
Thanks,
-Eric
I was doing a comparison of lease vs buy after 36 months.
Here are my assumptions:
Price of car $53000
Downpayment 10%
Residual value 69%
Loan APR 6%
Loan term 60 months (plan to sell early)
According to mbusa.com, lease payments would be around $807/month so the total money spent to have the car for 3 years would be 807*36+10%*53000= $34532. As I understand it, this is money out the window that I don't see again at the end of the lease term.
For the 60 month loan, I'm assuming I want to get rid of the car at the end of 3 years. Payment is $922/month so total money spent after 36 months is 922*36+10%*53000=$38492
BUT, in the loan case, I still owe 20806 at the end of 3 years and the car is worth 36570 after 3 years, so I have a net equity of 15764 that I could get if I simply sold the car in 3 years time. So 38492-15764=$22728 is the cost to drive the car around for 3 years.
So other than the mariginally cheaper payment of 807 vs 922 which is peanuts, what am I missing. Seems like leasing is way more expensive.
What am I missing?
Thanks,
-Eric
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From: So. FL
2003 SL Launch Edition, 2003 E500 Pewter/Stone
I have always assumed that you are indeed better off buying rather than leasing unless: you are using in business and a write-off is legitimate; and/or there is a sweet lease deal being offered by the manufacturer or dealer as an incentive to sell (i.e., as there are on remaining S class cars at some dealers now-such as $3500 down and $839 month for 43 months for an S430 recently).
Having said that, there seem to be some questions about how you approached your calculations that you may want to take into account. First, I am not sure where the % rate you gave of 6% comes from. Is that available? On the MB site, the rate is indicated as 7.5% and results in a $955 per month payment with $5300 down. Did you factor in paying sales tax on the full purchase price on a purchase, as applicable? Are you absoutely sure of the resale value (I have been happy to turn in some leased cars where the "residual" value was way over market? Sometimes at lease end in such instances, if you want to keep the car, you can negotiate a lower buy). Have you factored in lost interest on the larger out-of-pocket for the purchase?
Probably even with all those issues taken into account, without an incentive lease deal or business use, purchasing remains, at least marginally, a better financial approach. I don't think it is as dramatic as you have initially calculated, though.
Having said that, there seem to be some questions about how you approached your calculations that you may want to take into account. First, I am not sure where the % rate you gave of 6% comes from. Is that available? On the MB site, the rate is indicated as 7.5% and results in a $955 per month payment with $5300 down. Did you factor in paying sales tax on the full purchase price on a purchase, as applicable? Are you absoutely sure of the resale value (I have been happy to turn in some leased cars where the "residual" value was way over market? Sometimes at lease end in such instances, if you want to keep the car, you can negotiate a lower buy). Have you factored in lost interest on the larger out-of-pocket for the purchase?
Probably even with all those issues taken into account, without an incentive lease deal or business use, purchasing remains, at least marginally, a better financial approach. I don't think it is as dramatic as you have initially calculated, though.
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From: Northern VA
2003 MB E500
I have never leased a car in my life. Buying is cheaper especially if you keep the car for a long time. When the loan is paid off all you is maintenance and repairs to pay. When you lease, you never have any equity in a car to help pay for the next one and you will ALWAYS have a car payment. Some people must have a new car every few years. if that is the case and you do not drive many miles each year leasing may be best in that case but it will not likely be cheaper.
As far as interest rates, I can get 5.49% for 60 months from my credit union. If you are willing to take a little more interst risk, I can get 4.25% from equity line of credit and the interest is generally deductible. So there are very cheap ways to finance a car. Just my thoughts. Buying is best in my opinion and for my circumstances.
As far as interest rates, I can get 5.49% for 60 months from my credit union. If you are willing to take a little more interst risk, I can get 4.25% from equity line of credit and the interest is generally deductible. So there are very cheap ways to finance a car. Just my thoughts. Buying is best in my opinion and for my circumstances.
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Well the 6% comes from an average of loan rates from local banks. According to www.bankrate.com for virginia rates vary between 4.90% to 8.24%.
I did not factor in sales tax good point, although it is only 3% locally so that is not a huge deal. Im not at all sure of the resale value, but the little spreadsheet I have tells me I'd have to get to around 50% resale value in 3 years to make the lease look attractive. I have a hard time imaging the e320 would be worth only 25,000 in 3 years time, but it could be.
So, my numbers might be off, but still I don't think they are off enough to where leasing breaks even with purchasing in this scenario.
Thanks for the feedback
I did not factor in sales tax good point, although it is only 3% locally so that is not a huge deal. Im not at all sure of the resale value, but the little spreadsheet I have tells me I'd have to get to around 50% resale value in 3 years to make the lease look attractive. I have a hard time imaging the e320 would be worth only 25,000 in 3 years time, but it could be.
So, my numbers might be off, but still I don't think they are off enough to where leasing breaks even with purchasing in this scenario.
Thanks for the feedback
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Joined: Dec 2001
Posts: 633
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From: NY
14 'E550
I can't look at a car for more than 3 years, so it pays for me to lease......why throw down thousands of dollars down to finance to arrive at the same payment as a lease would be with almost nothing out of pocket (you can't go by the MB calculator, these online calcs are always too high). So, lets say I purchased it, what if the car gets in a fairly serious accident. Then will the car be worth then? I'll have to worry about a low ball dealer trade in value in either case, or try and find a private buyer (which is like pulling teeth on a high end car), I've done it before.
So, buying and leasing both have there benefits....buying, if you keep a car more than 4 years, or put a ton of mileage on your car.
So, buying and leasing both have there benefits....buying, if you keep a car more than 4 years, or put a ton of mileage on your car.
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From: MS Gulf Coast
1997 E320 Sedan
SmartMoney Guide to Leasing
I've had this page booked marked for several years now. I find it very helpful in time like this. If you can get the correct interest numbers from either your dealer or bank then this should help you out. If you use the lease calculator in the right hand column I get somewhat different numbers than you but then again I don't know what interest rate (money factor) the dealer is using either. I've assumed 8% or .003333 but I could be off.
You might want to check out www.leasewizard.com for a software package that can be helpful. Can't say from personal experience though on this one.
I've had this page booked marked for several years now. I find it very helpful in time like this. If you can get the correct interest numbers from either your dealer or bank then this should help you out. If you use the lease calculator in the right hand column I get somewhat different numbers than you but then again I don't know what interest rate (money factor) the dealer is using either. I've assumed 8% or .003333 but I could be off.
You might want to check out www.leasewizard.com for a software package that can be helpful. Can't say from personal experience though on this one.
Last edited by Jack; Sep 13, 2002 at 03:40 PM.
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From: Miami Beach
E320 - 2003
The way that a lease payment gets calculated is not as straighforward as it seems. There are a couple of numbers you need:
- The Net Cost of the car (after deducting your down payment)
- The Money Factor (it's the interest rate/24). The money factor looks something like 0.00312. Regardless of the lease term, the money factor is based on the value 24 (multiply it by 24 to see the approximate interest rate)
- The Residual Value of the car (essentially, your buy-out price at the end of the term). This may also be expressed as a percentage (i.e. MB's usually have a 60ish% residual value...depending on your lease term)
- The Lease Term
You REALLY have to watch out for your dealer. They will follow the formula...and can mark up the month lease price...and all that money goes in their pocket. You may feel that you are getting a deal, but unless you know the true calculation you may be getting scr*wed.
The formula for calculating the lease payment is:
YOUR PAYMENT = Depreciation Fee + Finance Fee + Sales Tax
Depreciation Fee = (Net Car Cost – Residual Value) ÷ Term
Finance Fee = (Net Car Cost + Residual Value) × Money Factor
Sales Tax is calculated on the sum of Depreciation Fee and Finance Fee
All you need to do is set up a spreadsheet...to test our various options. Generally, if the lease price that the dealer gives you is higher than you expect, they are either (a) giving your a lower depreciation value than they should or (b) giving you a higher money factor than they should.
- The Net Cost of the car (after deducting your down payment)
- The Money Factor (it's the interest rate/24). The money factor looks something like 0.00312. Regardless of the lease term, the money factor is based on the value 24 (multiply it by 24 to see the approximate interest rate)
- The Residual Value of the car (essentially, your buy-out price at the end of the term). This may also be expressed as a percentage (i.e. MB's usually have a 60ish% residual value...depending on your lease term)
- The Lease Term
You REALLY have to watch out for your dealer. They will follow the formula...and can mark up the month lease price...and all that money goes in their pocket. You may feel that you are getting a deal, but unless you know the true calculation you may be getting scr*wed.
The formula for calculating the lease payment is:
YOUR PAYMENT = Depreciation Fee + Finance Fee + Sales Tax
Depreciation Fee = (Net Car Cost – Residual Value) ÷ Term
Finance Fee = (Net Car Cost + Residual Value) × Money Factor
Sales Tax is calculated on the sum of Depreciation Fee and Finance Fee
All you need to do is set up a spreadsheet...to test our various options. Generally, if the lease price that the dealer gives you is higher than you expect, they are either (a) giving your a lower depreciation value than they should or (b) giving you a higher money factor than they should.
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I have usually asked them for the parameters they use to calculate the lease payments as a check. So far, none have refused to tell me since it would indicate that they've something to hide. Of course, I live in an area rich in competing dealers.
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Joined: Jun 2002
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From: Chandler, AZ
Nissan Sentra
The lease on my ML430 will be up in about 6 months. THe residual is 28,830, the actual wholesale value of the car is about 19,500 right now. I will happily return the car to MBUSA including a check for about 3K for excess mileage. I think this is an extraoridnary example but something to think about.
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Joined: Nov 2001
Posts: 500
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From: NYC
C32 AMG, C300 Sport
there is no question that buying is cheaper...
but some people want a car that is much more affordable to lease than to buy. The lease may be 600 per month and the purchase may be 1100. Yes in the end you owe less and the term is less... but you dont outlay 1100 a month. Depends on individual cash flow. I believe in buying unless it is a new model and there is the possibility of a failure.
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it all depends on your financial situation.
if you can borrow at prime or better, pull the money out of lets say a line of credit and buy the car...
but if you are paying retail interest...it may be better to go with the financing offered via gmac etc.
with zero percent financing...for cars/trucks under about 35k, it is a no brainer.
I personally love to lease, I always go into a 3 year lease saying "I will love this car for three years", but in the end I see something else that catches my eye...so I buy out of the lease...pay some $ or roll it into the next lease (this only works well if the car you are leasing is deeply discounted from msrp)
ultimately every car, every deal, every time to buy is different and there is not one concrete answer as to whether to buy or lease.
I guess I said nothing ultimately...too many ****tails...
drdave
if you can borrow at prime or better, pull the money out of lets say a line of credit and buy the car...
but if you are paying retail interest...it may be better to go with the financing offered via gmac etc.
with zero percent financing...for cars/trucks under about 35k, it is a no brainer.
I personally love to lease, I always go into a 3 year lease saying "I will love this car for three years", but in the end I see something else that catches my eye...so I buy out of the lease...pay some $ or roll it into the next lease (this only works well if the car you are leasing is deeply discounted from msrp)
ultimately every car, every deal, every time to buy is different and there is not one concrete answer as to whether to buy or lease.
I guess I said nothing ultimately...too many ****tails...
drdave
