SL55/63/65/R230 AMG: Lease or Finance, which is better??
12-20-2002, 07:26 PM
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BMW 4.6IS, LEXUS GS 400, SL55 AMG
Lease or Finance, which is better??
Hey, guys, requesting some advice. Should I lease my car or finance it, there are positives and negatives to both. how many people leased their car and how many people financed it? Any help is greatly appreciated. Thanks in advance
12-22-2002, 05:52 AM
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Leasing
If you can demonstrate that your SL55 is used primarly for business, leasing has significant tax advantages, since you can deduct the entire lease payment as a business expense, whereas if you finance the car, you can deduct the interest expense and only a relatively small amount for depreciation (again, assuming the car is used primarily for business).
Demonstrating that the car is used primarily for business involves keeping written logs of usage, etc. - not easy. Note that using your car to drive to your office is a non-deductible commuting expense, not a business expense.
If the car is not used primarily for business, you cannot deduct either the lease payments or the interest and depreciation. Since the implicit interest rate in a lease is usually much higher than the actual interest rate when you finance, the leasing option is usually more expensive than the financing option.
If you are short of cash, the leasing option may be more attractive than the finance option, since the down payment is usually less when you lease. But you will pay for this, and it won't be cheap. The concept is not much different from the higher interest rates charged on a home mortgage when the down payment is minimal.
Demonstrating that the car is used primarily for business involves keeping written logs of usage, etc. - not easy. Note that using your car to drive to your office is a non-deductible commuting expense, not a business expense.
If the car is not used primarily for business, you cannot deduct either the lease payments or the interest and depreciation. Since the implicit interest rate in a lease is usually much higher than the actual interest rate when you finance, the leasing option is usually more expensive than the financing option.
If you are short of cash, the leasing option may be more attractive than the finance option, since the down payment is usually less when you lease. But you will pay for this, and it won't be cheap. The concept is not much different from the higher interest rates charged on a home mortgage when the down payment is minimal.
Last edited by White Knight II; 12-25-2002 at 09:16 AM.
12-22-2002, 07:50 AM
#3
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The bottom line is money in your pocket....therefore you buy it.
Don't lease unless you have extra money to throw away!
Don't lease unless you have extra money to throw away!
12-22-2002, 01:43 PM
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Not exactly, Theine......
If you could actually show that the car was being used for business (not so easy with a two-seater convertible, particularly in light of the record keeping requirements), the after-tax cost of leasing is lower than the after-tax cost of purchasing with financing, because of the limitations on depreciation for a purchased business car.
If the car is primarily for personal use (and convincing the IRS that a high performance two seater convertible is not for personal use is not going to be easy), you're right - leasing is usually more expensive.
There is one way that leasing for personal use can be less expensive than purchasing with financing - if the leasing company's estimate of market value at the end of the lease is significantly higher that the actual market price of the car at the end of the lease, then the leasing company will suffer the market loss rather than the purchaser. This happens from time to time, but rarely. And the leasing companies know about this problem, so their estimate of the market price at the end of the lease is usually very low, to minimize the risk of selling the leased vehicle at the end of the lease at a price which is below their book value. This, of course, translates into a higher per-month leasing/rental fee than if they tried to hit the market dead-on. It also translates into more profit for the leasing company if the market turns out exactly as they expect, so they have not one, but two, incentives to low-ball the exit price.
If you could actually show that the car was being used for business (not so easy with a two-seater convertible, particularly in light of the record keeping requirements), the after-tax cost of leasing is lower than the after-tax cost of purchasing with financing, because of the limitations on depreciation for a purchased business car.
If the car is primarily for personal use (and convincing the IRS that a high performance two seater convertible is not for personal use is not going to be easy), you're right - leasing is usually more expensive.
There is one way that leasing for personal use can be less expensive than purchasing with financing - if the leasing company's estimate of market value at the end of the lease is significantly higher that the actual market price of the car at the end of the lease, then the leasing company will suffer the market loss rather than the purchaser. This happens from time to time, but rarely. And the leasing companies know about this problem, so their estimate of the market price at the end of the lease is usually very low, to minimize the risk of selling the leased vehicle at the end of the lease at a price which is below their book value. This, of course, translates into a higher per-month leasing/rental fee than if they tried to hit the market dead-on. It also translates into more profit for the leasing company if the market turns out exactly as they expect, so they have not one, but two, incentives to low-ball the exit price.
Last edited by White Knight II; 12-25-2002 at 09:20 AM.
12-24-2002, 06:44 PM
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Leasing - the last word
A few more thoughts I should have mentioned earlier, primarily dealing with market risk at the end of the lease:
1. If the lease is full payout (i.e., the amortized value at the end of the lease is zero or a nominal amount), you would normally have the option to buy the car for a few dollars (plus a totally unwarranted “title transfer fee,” usually around $300). Unless the car has burned to the ground and has no salvage value, you will exercise the option and buy the car, since that is the only way to capture the market value of the car. Or you can sell the car (or the right to repurchase it at the end of the lease) back to the leasing company, but it amounts to the same thing financially, more or less. In any event, the market risk at the end of the lease is entirely yours, since you have actually paid for the entire car through the “amortization” built into the lease. If you want to keep the car, this can be a good thing. If you don’t want to keep the car you are in for some real fun. See below.
2. If the lease is not full payout, you probably will have an option to buy the car for a stated dollar amont at the end of the lease. If this amount is greater than the market value of the car, you would normally give the car back to the leasing company and be done with the whole thing. But nothing is simple. If the market value of the car is less than the repurchase option amount, the leasing company will know this, and sometimes the leasing company is prepared to sell the car to you for less than the option price, rather than get involved with reselling it. But some leasing companies have a flat policy against this (perhaps because they are afraid that their employees might take a kickback, but I really have no idea) and the option price is the only price and everyone takes their lumps. If the market value of the car is above the option price, you can buy the car and try to resell it. Doing this without a firm bid for the car exposes you to the fun of selling a car you don’t want or need, which fun is usually reserved for car dealers and leasing companies. If you try this, be prepared for some of the stupidest discussions you have ever heard. (My wife is presently trying to sell her Lexus. The buyer has (a) said he definitely wants the car, (b) can’t buy it until his divorce comes through, (c) just bought a new horse costing 4 time the value of the car (after he said he wanted the car but was waiting for the divorce), (d) said he will go to the bank and just borrow the money, but hasn’t had time to do it, and (e) said he doesn’t want to impose on my wife so she should sell the car to someone else if she can. In the meantime the wholesale offer for the car was withdrawn, and the dealer is not buying cars until next year. Other than that, everything is going fine with reselling the car.)
And now I really have said all I’m going say to about leasing. Any other questions, call your accountant (which I am not).
1. If the lease is full payout (i.e., the amortized value at the end of the lease is zero or a nominal amount), you would normally have the option to buy the car for a few dollars (plus a totally unwarranted “title transfer fee,” usually around $300). Unless the car has burned to the ground and has no salvage value, you will exercise the option and buy the car, since that is the only way to capture the market value of the car. Or you can sell the car (or the right to repurchase it at the end of the lease) back to the leasing company, but it amounts to the same thing financially, more or less. In any event, the market risk at the end of the lease is entirely yours, since you have actually paid for the entire car through the “amortization” built into the lease. If you want to keep the car, this can be a good thing. If you don’t want to keep the car you are in for some real fun. See below.
2. If the lease is not full payout, you probably will have an option to buy the car for a stated dollar amont at the end of the lease. If this amount is greater than the market value of the car, you would normally give the car back to the leasing company and be done with the whole thing. But nothing is simple. If the market value of the car is less than the repurchase option amount, the leasing company will know this, and sometimes the leasing company is prepared to sell the car to you for less than the option price, rather than get involved with reselling it. But some leasing companies have a flat policy against this (perhaps because they are afraid that their employees might take a kickback, but I really have no idea) and the option price is the only price and everyone takes their lumps. If the market value of the car is above the option price, you can buy the car and try to resell it. Doing this without a firm bid for the car exposes you to the fun of selling a car you don’t want or need, which fun is usually reserved for car dealers and leasing companies. If you try this, be prepared for some of the stupidest discussions you have ever heard. (My wife is presently trying to sell her Lexus. The buyer has (a) said he definitely wants the car, (b) can’t buy it until his divorce comes through, (c) just bought a new horse costing 4 time the value of the car (after he said he wanted the car but was waiting for the divorce), (d) said he will go to the bank and just borrow the money, but hasn’t had time to do it, and (e) said he doesn’t want to impose on my wife so she should sell the car to someone else if she can. In the meantime the wholesale offer for the car was withdrawn, and the dealer is not buying cars until next year. Other than that, everything is going fine with reselling the car.)
And now I really have said all I’m going say to about leasing. Any other questions, call your accountant (which I am not).
Last edited by White Knight II; 12-25-2002 at 09:25 AM.
12-24-2002, 08:09 PM
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BMW 4.6IS, LEXUS GS 400, SL55 AMG
Ted, thanks a lot for the whole lease clarification. it sounds like you really know what you're talking about and I'm going to take your advice and just buy the car, that way I can sell it back in 6 months or a year if I wish without my feet being tied. Thanks a lot. And besides, I don't have money to burn on a lease.
Otis.
Otis.
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12-25-2002, 11:09 PM
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S500
Of course, White Knight II imparts a great deal of wisdom on the subject. However, none of this discussion deals with flexibility.
In a long-term lease, you have none. For instance, I bought a 2000 S430 and it took me about two weeks to decide I really didn't like it. I traded "back" to a 1999 S500 and haven't regretted it except for the much higher depreciation (worth it!). If I had leased it, I'd still be grumbling in it. Being able to dump and run was worth something, if only peace of mind.
In a long-term lease, you have none. For instance, I bought a 2000 S430 and it took me about two weeks to decide I really didn't like it. I traded "back" to a 1999 S500 and haven't regretted it except for the much higher depreciation (worth it!). If I had leased it, I'd still be grumbling in it. Being able to dump and run was worth something, if only peace of mind.
12-25-2002, 11:13 PM
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BMW 4.6IS, LEXUS GS 400, SL55 AMG
koz4sure, that's my point, if I want to get rid of the car, my hands and feet are not tied, I can dump it and get into something else. thanks for the imput. that clarifies it, I'm buying the Sl55. have no idea why the dealer might want to talk me into leasing it. mayber he has some hidden agenda or something.
Happy holidays to everyone and thanks for everyone's insights, especially White Knight II. You've been very instrumental in helping me make a decision to buy as opposed to lease this SL55amg.
Otis
Happy holidays to everyone and thanks for everyone's insights, especially White Knight II. You've been very instrumental in helping me make a decision to buy as opposed to lease this SL55amg.
Otis
12-26-2002, 12:55 AM
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Koz4sure, I think that if you had leased the first car, MBNA probably would have "substituted collateral" and allowed you to put the second car on the lease instead of the first, with an appropriate adjustment for capital cost, purchase option, etc. This would have been a pretty good deal for you in California (I don't know about New York) because California assesses sales tax only on the lease payment, not on the initial purchase price of the car. In your case, almost all of the sales tax on the first car would have been saved, assuming that you were in California.
All of which points up another difference between buying and leasing in states which assess sales tax only on the lease payment. If you lease the car in a state like California for, say, two years, you will pay sales tax on the lease payments only, which will be considerably less than the sales tax on the whole purchase price for the car.
But as usual, nothing is simple. If you purchase the car in California at the end of the lease, you will pay sales tax on the lease-end purchase price, leaving you in the position of having paid sales tax on both the entire purchase price of the car as well as the implicit financing cost portion of the lease payments. So if if you plan to dump the car after a short lease, the California arrangement can result in a considerable savings in sales tax, but not if you hold onto it. And I should also point out that if the lease is "full payout", in California you would have paid sales tax on the entire purchase price of the car plus the financing cost, whereas if you purchased the car in California with borrowed funds, you would have paid sales tax only on the initial purchase price and not on the interest paid to the lender.
Are we having fun yet?
All of which points up another difference between buying and leasing in states which assess sales tax only on the lease payment. If you lease the car in a state like California for, say, two years, you will pay sales tax on the lease payments only, which will be considerably less than the sales tax on the whole purchase price for the car.
But as usual, nothing is simple. If you purchase the car in California at the end of the lease, you will pay sales tax on the lease-end purchase price, leaving you in the position of having paid sales tax on both the entire purchase price of the car as well as the implicit financing cost portion of the lease payments. So if if you plan to dump the car after a short lease, the California arrangement can result in a considerable savings in sales tax, but not if you hold onto it. And I should also point out that if the lease is "full payout", in California you would have paid sales tax on the entire purchase price of the car plus the financing cost, whereas if you purchased the car in California with borrowed funds, you would have paid sales tax only on the initial purchase price and not on the interest paid to the lender.
Are we having fun yet?
12-26-2002, 01:53 PM
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originally posted by otisSL55AMG
have no idea why the dealer might want to talk me into leasing it. mayber he has some hidden agenda or something.
That's because they make more money with the lease, confusing borrowers that don't have the knowledge of White Knight II and charging extra fees.
have no idea why the dealer might want to talk me into leasing it. mayber he has some hidden agenda or something.
That's because they make more money with the lease, confusing borrowers that don't have the knowledge of White Knight II and charging extra fees.
12-26-2002, 10:24 PM
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14 'E550
In New York, you are only taxed on your lease payments. If you truly know what you're doing, leasing can be a great thing.
I never buy my cars after the lease term is over, just get another car.
After 3 years, I'm done with the car.......can't stand to look at them anymore. I pay for what I use (12k miles per year) and get reasonable payments with minimal out of pocket costs. I'm well aware of the rates I am quoted and what the dealer buy rates are (not a mystery).
Also, when you buy the car, better hope you don't get in a sizeable accident. Because the value of exotic cars take a c*ap once they have been hit/parts replaced/painted.
My Viper was hit by some 20yr old girl causing $16k in damage. If I had bought the car, I would be one miserable F*ck. But being that its a lease, I could care less....all fixed up and back it goes. One less headache I have to deal with.
Buying vs. Leasing is a never ending debate.....you do whatever makes you happy or works for your situation.
I never buy my cars after the lease term is over, just get another car.
After 3 years, I'm done with the car.......can't stand to look at them anymore. I pay for what I use (12k miles per year) and get reasonable payments with minimal out of pocket costs. I'm well aware of the rates I am quoted and what the dealer buy rates are (not a mystery).
Also, when you buy the car, better hope you don't get in a sizeable accident. Because the value of exotic cars take a c*ap once they have been hit/parts replaced/painted.
My Viper was hit by some 20yr old girl causing $16k in damage. If I had bought the car, I would be one miserable F*ck. But being that its a lease, I could care less....all fixed up and back it goes. One less headache I have to deal with.
Buying vs. Leasing is a never ending debate.....you do whatever makes you happy or works for your situation.
Last edited by Beltfed; 12-26-2002 at 10:26 PM.
03-27-2003, 02:59 PM
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Good discussion. My thoughts.
Pros of leasing: I am planning on writing some of it off since i will "use" the car when on call. I am not emotionally attached as much since i dont own the car. So any dings or other damage is not going to stress me out. Also, if you wreck the car on a lease you lose all of your downpayment. Therefore it isnt a good idea to put alot down.
Cons of Leasing: A big thing with the SL55 that may not apply to most cars is the resale/collector factor. If i buy a car at MSRP from one of the great dealers who frequent this forum but then decide to sell it in 1 or 2 years for market value, which may still be over or similar to MSRP, then i essentially bought the car for the price of gas and insurance. A great deal IMHO.
Please correct me if im wrong.
T
Pros of leasing: I am planning on writing some of it off since i will "use" the car when on call. I am not emotionally attached as much since i dont own the car. So any dings or other damage is not going to stress me out. Also, if you wreck the car on a lease you lose all of your downpayment. Therefore it isnt a good idea to put alot down.
Cons of Leasing: A big thing with the SL55 that may not apply to most cars is the resale/collector factor. If i buy a car at MSRP from one of the great dealers who frequent this forum but then decide to sell it in 1 or 2 years for market value, which may still be over or similar to MSRP, then i essentially bought the car for the price of gas and insurance. A great deal IMHO.
Please correct me if im wrong.
T
03-27-2003, 11:17 PM
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What happens when you wreck a car when it's leased is going to depend much more on the terms of your insurance than the amount of the down payment. And the lessor is going to want to be sure that he's fully insured for that kind of loss. The question is whether you get enough insurance to cover your loss too. It would strike me as a little crazy to insure against this kind of loss if you buy the car and finance it (as most people do), but not if you lease it. Your equity in the car (and potential loss if the car is totalled) will be very similar in both cases.
As to your ability to capture a premium on resale, if your lease gives you the option to buy the car at the end of the lease, you would be able to buy the car for its residual value and resell it for the premium price. Most leases give you this repurchase option.
And you didn't ask, but I doubt very much there will be any premium on SL55's at the end of a lease. The premium on the car has now come down from $50-75K to around $10-20K (and I've seen some new SL55's offered for just about list), and that's NOW for a NEW car. In two years, an SL55 with more than 2 or 3 thousand miles on it is going to sell for less than list. SL55's may hold their value better than some other cars, but the premium is going to evaporate with time and use.
So the pros and cons of leasing you recite probably don't apply. The conclusion is still the same - if you can write off the leasing cost against your taxable income, the value of the deduction usually exceeds the increase in the financing cost. Otherwise it's a bad deal. Put another way, what the leasing companies are selling is a tax deduction. (And the car dealers like leasing because of the commission the leasing companies pay them.) There's not much more to the lease/buy comparision than that.
As to your ability to capture a premium on resale, if your lease gives you the option to buy the car at the end of the lease, you would be able to buy the car for its residual value and resell it for the premium price. Most leases give you this repurchase option.
And you didn't ask, but I doubt very much there will be any premium on SL55's at the end of a lease. The premium on the car has now come down from $50-75K to around $10-20K (and I've seen some new SL55's offered for just about list), and that's NOW for a NEW car. In two years, an SL55 with more than 2 or 3 thousand miles on it is going to sell for less than list. SL55's may hold their value better than some other cars, but the premium is going to evaporate with time and use.
So the pros and cons of leasing you recite probably don't apply. The conclusion is still the same - if you can write off the leasing cost against your taxable income, the value of the deduction usually exceeds the increase in the financing cost. Otherwise it's a bad deal. Put another way, what the leasing companies are selling is a tax deduction. (And the car dealers like leasing because of the commission the leasing companies pay them.) There's not much more to the lease/buy comparision than that.
Last edited by White Knight II; 03-28-2003 at 05:21 AM.
