JTK44

DOG

tonecas

Very interesting subject. I believe in Europe, or at least in my country, we don't calculate lease rates like that. Never heard of the money factor. But in the end the overall thinking is the same: a game of numbers based on the residual value, the down payment and the lease duration.

I never had a credit for anything. Had the luck, hard work and lack of immediate consumer desire and need that let me to only buy things when I have the full money to buy them and still do not have a big impact on my savings.

But one thing I believe is important to factor in is the cost of opportunity when making a full payment. Even if it is possible to outright by a car it may be wise to lease it since this will free capital that can be put to good use during that time.

In my country lease APRs are high and they seem to present a less better option than that in the US. How ever one tries to play with the variables the total amount payed at the end of the lease period will be higher than the depreciation of the car over the same time. It comes down to get a good discount over the sales price from the start so that it can level the odds of making a good deal. Because after, let's say, 3 years lease one will still not own a car and there will probably another model to go for and the money spent on the lease will cost more than if one had just bought the car in the first place and then sell it after 3 years and take the money and buy again a new one.

JTK44

In the US things are quite different: The residual amount, 99% of the time is higher than the book value of the car at the end of the lease. That is why over 90% of cars on lease in the US are turned in at the end of the lease: the residual value is higher than the trade in value. For example, on a $70,000 E450 the residual will be 61% ($42,700) at three years with 10K miles per year. However, the trade in value will be closer to $35,000 (50%). So, if you buy, you will immediately suffer a $7,000 loss.

Generally speaking you want to own an appreciating asset, such as a house but rent (lease) a depreciating asset like a car.

Car manufacturers are in the business of selling and buying cars. When you own a car vs. leasing it, you are now competing with the manufacturer when you go to sell your car. IMO, considering the size and "weight" of a car manufacturer you are not in a fair fight.

The general consensus, considering opportunity costs as you correctly refer to, for owning to be more efficient than leasing, you must own the car for more than 5 years, after which time the economics favor ownership. That savings continue until 10 years at which time repairs eat into your savings.

Remember when you go to have your 7 year old MB serviced, the service hourly rate and parts are the same as for a new MB: The difference is that paying $150 hour labor rate on a $70,000 car is high, paying $150 an hour on a 7 year old MB, worth $28,000 is obscene!

The trade off in owning is that you are now driving a six year old car, with six year old safety and technology and less reliability.

There are sound economic reasons why over 70% of E and S class MB are leased rather than bought.

tonecas

I see. This is not linear indeed.
It makes my head spin having to spend money on a new car every 3 or 4 years because of the lease, but in fact buying instead one is nonetheless losing money with depreciation every year .

Do you have in the US a purchase modality named renting? It is like a lease but where it is included also the maintenance, tire substitution and insurance, besides other services that can be purchased. So one is paying for using a car where all the servicing and administrative stuff is dealt by the seller.

JTK44

Here in the US the Mercedes comes with 4 years 50,000-mile warranty, whichever comes first. You can also buy from Mercedes a maintenance agreement for the 10,000 and 20,000-mile service for $880 and put that in the lease as well, where you pay 61% of the cost (the maintenance agreement is "residualized”) (BMW comes with 4 years bumper to bumper service and parts. Of course, all of this is built into the price).

As such a high proportion of MB, BMW and Audi's are leased, the manufacturer realizes at the end of the lease they are getting back most of the cars, they want to make sure they are being serviced properly: Hence the "free" service built into the price. (If most cars were purchased outright as in Europe, then the owners would have an incentive to service their cars at regular intervals. But with such a high percentage being leased, there is no incentive to service our cars. Hence the "free" service built into the price)

The best leases, with the highest relative residuals and lowest payments are for 36 months, either 10/12.5 or 15,000 miles per year. Beyond 36 months the residuals take a hit and the monthly payment starts to go up. Similarly, for less than 36 months the monthly payments are higher. The 30,000/45,000 mile lease is the "sweet spot" in that under normal conditions you will not have to replace either the tires or brakes and do major services.

ua549

@JTK44 BMW cut the service to 3 years. The warranty remains at 4 years.

I always purchase my cars for cash and sell them privately instead of trading.

tonecas

Same here because sales between individuals is not subject to tax

rbrylaw

True, but then you pay the full amount of tax on the new car. On a trade, you only pay the tax on the difference between the trade value and new car. So you need to ensure the private sale yields more than the trade value.

JTK44

When the buyer goes to register the car he bought from you, he will pay sales tax. When you buy from a dealer he collects the tax on behalf of the state. Either way there will be sales tax: but if you trade you pay tax on the difference between sales price and the trade in, so there is a sales tax savings by trading in.

I have sold cars privately, and will not do it again, especially a high end car: You advertise the car and get responses: you set up an appointment and the buyer does not show a waste of your time; of the buyer shows and you immediately realize what a mistake - he could never afford your car and you wonder is he there to case out your home, or he offers you 30% less for cash - as if cash is somehow better than a certified check. Or the guy who comes and you agree on the price and he then tells you he first has to have a loan approved, or the guy who wants you to drive the car to his mechanic for inspection and the stories go on and on and on.

It is one thing to sell a 3 year old Honda Accord for $15,000 and totally another thing to sell a 3 year old E Class for $40,000!

With leasing all the problems associated with selling a high end car do not exist!

rbrylaw

Yep! All the reasons I'm not going to try to sell a car outright. If I lose a little by trading in my car, I gain so much more in less hassle and never have to fear for my personal safety.

cetialpha5

I think that poster was probably in Arizona. They have different sales tax laws. Some states are set up where if you buy the car from an individual you don't have to pay the sales tax when you register it. Most other states make you do that.

As for tire kickers, if it's priced too high, you tend to get those not serious people. If you price it to sell, you'd get both so you stack multiple people at the same time and it just sells.

ua549

I never advertise when selling a car privately. My cars are in top condition with very low mileage (3k-4k miles per year). I have several acquaintances who buy my cars. I don't sell to someone I don't know.

AZEZ

For years I believed in the purchase not lease strategy for the same reasons others stated above. After experiencing the hassles of selling a car (as others mentioned above), and then understanding the true costs of ownership v. leasing, Ive fully converted to the lease not buy camp. First, in year 4 of ownership you have a 4 year old car (as opposed to a brand new car if you leased), your car is out of warranty (you new lease is under warranty), and you experience higher service charges as things start breaking down (not the case for a lease in fact many manufacturers (like BMW) include service during your lease term), and then eventually you will need to sell that old car (hassle city and you likely take a bath on the sale), not to mention the limitations on tax deductions if you own. When you lease, you always have a new car, under warranty, with little to no maintenance expense, you never need to sell a used car, and IF the car is used in your business THEN you get a deduction based on the full lease payment (times your business use percentage) as opposed to being limited by IRC 280A. I crunched the numbers several times comparing my old purchases to lease and the cost of ownership really is about the same. Sometimes one deal might be slightly better or worse than the other, depending on the car, but overall the costs are about the same. So, for me, if the costs are virtually identical, then I prefer the "never have to sell a used car and always have a brand new car" option. These benefits would be offset if purchasing brought a substantial cost savings, but it doesn't. Same cost, older used car needing service that you need to sell on the used car market some day (or trade in which is preferable to me but the trade values are so low its almost not worth it).

Regarding the discussion about sales taxes paid on a private party used car transaction, yes you are correct in that in AZ there is no sales tax on a private party sale. Big difference most of the time.

JTK44

tonecas

the selling phase is the biggest problem indeed. a lot of hassle and time spent. in my country there is no tax for private sales. so one can get a better sales price than if the car is returned/sold to a car dealer (because they will have to ask for tax when they sell and they have to add their profit margin).

my issue is spending money on a recurring basis, like every 3 years, in case of a lease and never own anything. but it is probably kind of illusion. unless the car is hold for about 7 years then a owner will always be sending money out of the window thru depression and maintenance costs.
and this idea results from my habit of keeping my cars for years. I had one for 4 years, then another for 7 years and now one for 12 years.

but now I am moving to an upper league, for a high ticket car. So, owning an expensive car does not seem a valued proposition even if i keep it for 7 years. expensive cars take a lot of depression and their absolute magnitude is off course bigger. spending 30k on a cheaper car and having it for 7 years and loose 20k is different than spending 100k and loosing 70k, even if percentage wise the depreciation is more or less similar.

i opted for buying the E63 S just because i could get a heavy discount, otherwise i would lease it, loose 40-50% in depreciation in 3 years and then decide to take another one, a new model or simply downgrade again to a cheaper car.

JTK44

rbrylaw

That's great for you and maybe many others. For me, I have no intention of renting my car. Will I lose money, yes. It's a given that car ownership is a losing proposition. But it's my money to lose and I have no intention of renting my car. I pay cash up front and know at the end, I will have lost money.

I find this discussion interesting. I suggest people do what makes the most sense for them and I have no reason or interest in telling anyone what they do is less or more right.

ua549

I've never leased or financed a car (or been in debt). I deplore any kind of debt even for big ticket items such as a house. It's true that one can come out ahead by investing at a higher rate than the cost of renting/financing, but there is a psychological cost in knowing that one is beholden to the powers that hold your debt.

tonecas

i have the same opinion, but unfortunately not everyone can escape debt. most don't.
and in fact, debt can be good, even to people who don't need it. in my country the game is all about debt. big fat dogs take loans from banks to buy cars, houses, stocks while having their own money secured at a bank locally or offshore and if there is a problem paying back, the problem is with the bank. more fairly, it can also be a means to have something while freeing capital to generate more capital. there are still risks.

cetialpha5

That refers to leverage. Here with a lease, you're basically getting money at a low rate and with the S&P 500 at record highs, if you can borrow money at 3-4% and get a 8-12% return on you money, you'd make the difference so it can be worth the risk. But it's still a gamble. If you already have the money burning a hole in your pocket, then just drop the whole thing on a car and not worry which way the market is going to go.

I'm always surprised by people who claim that they need to get rid of theirs either because they're lost their job or are retiring. They never could afford it in the first place if that's the case.

tonecas

i hear you.
here the "car bug" is unbelievable. the average salary is $900 USD per month but Audi, BMW, MB and even Porsche sell like crazy. people go in considerable debt to pay expensive cars on these brands (expensive for the purchasing power here but also in absolute terms. these are expensive brands in most countries).
and it is not like something that could be paid with a one year's salary. it's about people that have 0 savings or have some savings to make a living but if they lose their jobs they will be bankrupt in a few weeks. If I have to spend more than 10% of my savings on a car I don't like the feeling...
the problem with these debt waves is they struck too many people and affect the overall economy, so even if one plays rationally this will have a toll on us (bank failures, less consumers to your products, less jobs, ...).
but i digress.

infamily

I have compared lease vs. purchase many times. Here are my conclusions in my humble opinion
Lease makes sense if one or combination of these conditions exist -
Want to replace cars every 3 to 4 yrs
Car companies are offering phenomenal MF rates with great residual values
car is used for business and hence can write off lease payments as business expense

Purchase cars if you keep them for long time 6 plus years
Don't have to worry about miles on car
Trade in your old car for new car every 6 or 7 years

I think the paper math of earning 5% on your capital sounds good but is all timing dependent and at risk of loss (think of markets in 2008 - 2012 or since last winter to now)

tonecas

apologies but i am not familiarized with the term "MF rates". What does that mean? Are you referring to lease interest rates?

writing off lease payments in cars used for business has been shielded by the IRS on my country. If the car is a "light passengers car" (i don't know if you have this kind of distinction in the US. there are light passengers cars - less than 3 tons and without cargo area, besides the usual trunk space - , light commercial cars - less than 3 tons and with cargo area -, heavy passengers car - typically, public transports - , etc.) then one is subject to autonomous taxes based on the value of the car and CO2 emissions. you have to show a relevant activity on your company and justify the need for such car. the tax man realized that many people were using small companies and placing their personal cars in the name of those companies to be able to write off lease and other expenses...

I also agree with you regarding the non-linearity of being able to get returns over 5%. i believe we have enter a new era where there will be less opportunities for that kind of compounding. i believe we already have the first generation that sees their future being less promising financially than the previous generation, since WW2. but i digress again...

cetialpha5

MF refers to Money factor. Samuel Jackson uses a different meaning for MF.

https://www.investopedia.com/terms/m/money-factor.asp

If you look at the returns of the an index fund like the Vanguard Index 500 in the US, the returns have averaged about 10.5 to 16% over the last 10, 5, 3 year range. We've been in one of the longest bull market and it's still going, year to date returns in that fund is up to 9.61%.

JTK44

MF = money factor. It is number that is plugged into the lease program to determine the interest portion of the lease payment. To convert MF to interest, multiply by 2400. To convert interest rate into money factor, divide MF by 2400.

You have to check with your accountant to determine whether or not a monthly lease payment is a deductible expense.

Use or money or opportunity costs: As there is an interest rate component in the lease payment, IMO you must also consider opportunity costs or use of money when you shell out over $70,000 for a MB. Unless you have $70,000 sitting in your mattress, I assume it is invested somewhere earning something. This is then comparing "apples to apples".

However, if you feel 5% is too high then substitute a lower number, but in all events give recognition to use of money when comparing the total cost of leasing vs. the total cost of buying.

Here is another way to look at it: If you financed the purchase (not saying you would or should) the monthly payments would be principal plus interest. So, when you purchase a car for cash it is the purchase price plus use of money for the period of ownership.