Poll on Lease or Buy

Quote: Honda Accord Advertisement

Offer valid from 5/1/2013 through 7/8/2013
$219.00 per month for 36 months. $2,399.00 total due at signing.
Includes down payments with no security deposit.
Excludes taxes, titles and dealer fees. For well qualified lessees.
Closed end lease for 2013 Accord Sedan CVT LX (CR2F3DEW) available from May 1, 2013 through July 8, 2013, to well-qualified lessees approved by Honda Financial Services. Not all lessees will qualify.
Higher lease rates apply for lessees with lower credit ratings.
MSRP $23,270.00
(includes destination, excludes tax, license, title, registration, documentation fees, options, insurance and the like).
Actual net capitalized cost $20,734.26. Net capitalized cost includes $595 acquisition fee.
Dealer contribution may vary and could affect actual lease payment. Total monthly payments $7,884.00.
Option to purchase at lease end $13,962.00.
Must take new retail delivery on vehicle from dealer stock by July 8, 2013.
Lessee responsible for maintenance, excessive wear/tear and 15¢/mile over 12,000 miles/year for vehicles with MSRP less than $30,000, and 20¢/mile over 12,000 miles/year for vehicles with MSRP of $30,000 or more.
See your Honda dealer for complete details.

For the purposes of this thread, I do not want a general discussion about finance options. Please confine opinions to which is better, a 7 year finance note, or the lease in the advertisement above.

For the 7 year financing, it is still your intention to trade the car in at 36 months. As with all plans (leasing or financing), your intentions may change for some reason during those 36 months.

Subtracting the $595 acquisition fee in the ad, and using 3.99% (quote from a Credit Union) the monthly payment is $275.19 a full $56.19 higher than the LEASE option. So you pay 36*$56.19=$2,022.73 more over the three years.

But at the end of 3 years into your 7 year loan you owe $10,327 loan balance instead of the $13,962 optional purchase price on the lease. That is lower by $1,771.88 . That difference alone almost makes up for the higher monthly payment. In addition most people who turn in a leased car and pay less than $300 in excess mileage charges consider themselves lucky.

So now instead of paying a fee, and all the closing costs for a new lease, you have some money to help you with your new purchase.

With the lease you have no choice as to turning in the car at 36 months. As I said earlier, your intentions are to trade in the car under the finance option at 36 months, but when the time comes you may decide to move the date.

You also expect to drive the car 12,000 miles per year. But one advantage of the purchase is that your trade-in value may go up if you should drive fewer miles. Should you drive 10,000 miles per year under the lease, only the dealer benefits.

BTW, this lease is a very good one compared to many lease options. Honda is clearly hoping that you will use these terms to buy a more expensive car than the stripped down one in the advertisement. The interest rate is 2.12% on the net capitalized cost $20,734.26, but considering the $595 acquisition fee was added the real rate is 3.31% .

There is also an understanding that you, or the person you are advising, can afford the $275.19 monthly payment and can still meet basic necessities, but the $219 payment just provides more disposable income. The Honda Accord is the 2nd best selling car in America, and is a good safe choice.

A 2010 Honda Accord LX Sedan 4D (basic model) according to Kelly Blue Book with 36,000 miles private party price for
Excellent ($13,768) Very Good ($13,268) Good ($12,868)

Which option would you choose or advise a friend from these two choices? "Neither" or "Other" is not a choice.

I almost always advise purchase over lease. Only exception is if the car will be written off as a business expense and you want to write off the payments as a current expense instead of just using mileage. The numbers here indicate you will end up very near the same financially. What they are trying to do is make sure you replace the car after 3 years. Again, unless used for business that is a crazy-short time to keep a car as depreciation will eat you alive.

Quote: AZDuffman

I almost always advise purchase over lease.

I think that there are mostly men on this forum, and they look at the numbers and think it is better to pay more each month, and have more the money at 36 months when you are going to trade it in.

I believe that leasing is a fraud that is primarily aimed at women. Women are more easily seduced into believing that leasing is a painless way to rent a car and turn it in before it is having trouble. I think they are much less willing to look at a long term loan and trade it in at 36 months.

I am not sure why it is easier to write off a lease payment than it is to depreciate an asset. I will have to defer on this point to someone who knows tax law better.

What lease payments end up being is the present value of 3 years worth of depreciations. For a car like Accord, it'd be about the same or purchase will be better. When leasing makes more sense is when you are looking into a luxuray car that depreciates a significant amount in the first three years. If you want a $60,000 BMW 5 series, leasing would be a viable option.

Lease vs. Buy from a tax perspective is a bit more complicated as it depends on business use miles vs. personal use miles, total miles driven each year, and what the latest changes are with depreciation.

The basic difference is that when calculating the deduction for the capital cost of the car, you use depreciation schedules times the actual cost of the car (with severe limits if your car cost over about $18,000) when buying a car and then add in interest costs.

When leasing, the lease payments combine to be your capital outlay and interest costs, but there are less restrictions of how much you can deduct as it relates to the capital cost of the car when leasing versus buying. There are some reductions in the maximum amount of a lease payment you can deduct, but they just work out to be much less restrictive than the depreciation for the same car.

I have found there is no hard and fast rule of which is better, but generally if you are purchasing a passenger car (a vehicle that does not weigh over 6,000 lbs.) particularly if it is a high end sedan costing $35,000 or more, leasing almost always gets you more current tax write offs vs. buying the same car and depreciating it.

Does the tax benefit of the increased deduction offset the negatives of the lease deal (as seen in your lease deal above), you have to weigh those against one another and even then, you may want to go with buying vs. leasing because you simply like the flexibility that the purchase offers vs. having to make a decision in 36 months.

Each client makes their own decision based on not only the financial but also the non-financial factors that they find valuable.

Quote: AZDuffman

I almost always advise purchase over lease.

Totally agree with AZ on this. Renting of any kind, and that’s what I look at a lease to be, always gripes me. Pay money, get use, but have nothing to show for it. Unless it’s a one off deal, like renting a specified tool you’ll rarely if ever use again, I can’t deal with it.

As you’ve shown, after 3 years of leasing you’re either going to give the dealer money (under mileage), come out even, or pay extra (either going over mileage or if you decide to buy). Buying you’ll either be ahead of the game (under mileage and therefore worth more), “even” (which is actually ahead since what you owe is less than what it’s worth), or more likely to be even if you’ve gone over mileage.

Even if you’re the type to “want a new car every three years”, buying still seems the safer, smarter way to go.

The only way leasing makes sense is if you absolutely can’t go with a cheaper car and your funds are stretched to the max, such that $50 p/mth will make or break you.

Sort of off topic, but it’s a Honda. At 36k it ain’t even broke in yet. Buy it, pay it off, and run it for a quarter million miles. Keep making payments to yourself after it’s paid off and you can buy a new car in cash by the time the Honda dies =)

Side question: why are interest rates so much lower for a new car. The only thing I can think, is higher risk to the financier on a used car. If it goes to shit, it's not worth anything.

I do this stuff for a living, and I lease mine. Actually, of the three cars we own, I financed one (0%, 2001 Malibu that's been paid for for years), paid cash for one (the '97 Miata, a "fun" car), and lease one ('11 Maxima, lease will be up in summer '14).

People look at it all wrong. Leasing, financing, and paying cash are all financial tools. None of them apply to everyone, nor to every financial situation. You need to take into account not just the terms of the deal, but also: how the vehicle will be used, its projected value at the end relative to the residual, what satisfies the customer (ie, does the customer prefer to pay to lease a more expensive car rather than own a cheaper one; not all of us live the same lives), and more.

My only advice that fits all situations is, "Do what you feel works best for you." There are people out there who can't stand debt; if you are that way, then 1% financing + the rebate won't make any difference; you don't believe in debt. There are people who are afraid of not having enough in savings; those people, you have to pry taxes and tags down out of them. There are people who want the nicest car then can get with a payment under $400; they'll lease.

It's a big world, with lots of people. Success at what I do is not really about what makes the most sense for the customer economically. If I acted that way, I would hear a lot of "Thank you for your time," and the follow up call would be, "Oh, you were really nice, but we bought a car from ABC Motors, the payment was only $xxx and we liked the color." Do what makes you happy. It's the only thing that is worth trading money for.

Quote: ewjones080

Side question: why are interest rates so much lower for a new car. The only thing I can think, is higher risk to the financier on a used car. If it goes to shit, it's not worth anything.

I think that is about half the story. The other thing is if you are financing a used car, basically the finance agency is getting money from you. But on a new car loan a car manufacturer is hoping you will buy several thousand dollars of highly profitable options, that you can now afford because the lease is back loaded. Or optionally the loan term has a good rate.

This article Should you get a 7-year car loan? contains the following statement: In addition, borrowers should consider how long they'll keep the car. Those who plan to sell in three or four years but sign up for a loan that runs a longer period could end up owing more on the car than it's worth when they try to unload it.

This comment seems seriously one sided. I think that people who are upside down, are ones that go deeply into excess miles, or have accidents. I refuse to believe that dealers are taking back leases for residual value the same or higher than the loan balance of a 7 year note.

Leasing has some valid points to it. It provides security against several unknown factors - true market value of a used vehicle, its rate of deterioration and depreciation, market conditions at the time you would want to sell.

For instance, lower-volume cars, especially sport-saloons like Quattroporte, can be seriously hit or miss, or one as a car and the other financially. You never know in advance if it won't start falling apart even with reasonable use once the warranty's out; if people will want that car used, or they won't care for it; and then the whole segment is volatile, as they're essentially money sinks. One has to be either pretty adventurous or easily able to absorb the costs to buy such a car.

On the other hand, Accord is just everything opposite. These Japanese boxes have been here for decades and aren't going anywhere, they're reliable and the parts are plentiful, and people buy them with their heads, based on practical metrics. It's a safe purchase with predictable residual value; the added certainty of lease terms over buy/trade-in is wasted on such a car.

Quote: debitncredit

When leasing makes more sense is when you are looking into a luxuray car that depreciates a significant amount in the first three years. If you want a $60,000 BMW 5 series, leasing would be a viable option.

Quote: BMWadvert

$449*/month for 36 months. $750 Loyalty Cash or Conquest Credit included in payment.
Vehicle Registered outside N.Y.
• $449 First months payment
• $3,000 Down payment
• $0 Security Deposit
• $725 Acquisition fee
• $4,174 Cash due at signing
*Lease financing available on 2013 BMW 528i Sedan vehicles, only at participating BMW centers on leases assigned to BMW Financial Services NA, LLC/Financial Services Vehicle Trust through July 01, 2013. Loyalty Cash or Conquest Credit is a $750 credit against the MSRP of the loan or lease on a 528i Sedan through July 01, 2013. $750 Loyalty Cash available for returning BMW customers only. Monthly Lease payments of $449.00 for 36 months based on MSRP of $51,325.00. Vehicle may need to be ordered. Total Lease payments are $16,164.00. Excludes tax, title, license and registration fees. Program available to qualified customers and not everyone will qualify. Subject to credit approval. See participating dealer for details. Dealer contribution may affect terms. Lessee must cover insurance and all items not covered under the BMW Maintenance Program. At lease end, lessee will be liable for disposition fee ($350.00), any excess wear and use as set forth in the lease agreement and excess mileage charges of $0.20 per mile for miles driven in excess of 30,000 miles. Purchase option at lease end for $33,361.00 excludes taxes.

Actually this lease looks pretty good. If I understand it correctly you are paying =$51,325-$3000+36*449-$33,361=$1200 in finance charges + $725 acquisition fee+$350 disposition fee. It is my guess that your average customer drives at least 10,000 excess miles and pays a $2000 penalty. Who would pay that kind of money for a car that you can only drive 10K miles per year?

Are you saying that the automobile will be worth a lot less than $33,361?

Quote: ewjones080

Side question: why are interest rates so much lower for a new car. The only thing I can think, is higher risk to the financier on a used car. If it goes to shit, it's not worth anything.

You are partially correct. A few things enter into it. I can say the following after doing 16 months in car loans:

First, are you looking at "promotional rates" from the manufacturer or rates at your bank? At the bank you will find maybe 1-2% difference. The manufacturer subsidizes loan rates to move the iron.

Second, new car values are easier to calculate. We just used sticker price (don't ask!) and they could get 120% of that (again don't ask!) Used cars you have to find a value source, adding to risk.

Finally, the life of the car is partly gone but buyers still tend to take out the longest loan they can to get the nicest ride possible. People see a used Range Rover and figure, $350/72 months? A stretch--but I love them! In year 3 they have a high payment on a vehicle near the end of its life.

Quote: pacomartin

Are you saying that the automobile will be worth a lot less than $33,361?

Not necessarily. I'm saying the hassle of having to sell a car in three years, the risk of the car going apes*** in three years and the stress of having a $50,000 debt following me around for 3 years are worth a few thousand dollars to me. (Also, you can buy extra miles at less than $0.20/mile at any time before the lease is up.)

$449*12=$5388 or 53.88 cents per mile. In addition there is the downpayment and the acquisition fee, and the turn in fee.

I guess if I was paying that kind of money to drive such a small amount, then I would hope that the car going apes*** is a very remote possibility.