Leasing Deals on Vehicles

[panacea]

Have any of you looked at auto lease deals lately? I've always deliberately avoided leasing because it's generally more expensive than buying. You know, more money for the middle man means less money for me. My philosophy has been buy gently used and drive the vehicle for as long as possible.

For example, our last purchase was a 2003 Toyota Highlander purchased in 2005. We don't put many miles on our cars, so we just turned 100,000 on it last month. We could probably have this car for another 10 years pretty easily. I'll die of boredom before the car dies I think.

Anyway, recently one of my coworkers who was shopping for new cars came in and asked my opinion on leases - mostly I think because he knows I don't like them. As it turns out, he already signed the papers to lease a Honda Odyssey for 36 months. But here's the really weird part- the overall cost to lease the vehicle for 3 years and buy out the lease at the end was cheaper than buying the car outright. How does that even work? I kept at him for more information (of course he didn't have the contract with him to take a look at it), but he said he went through the math a number of different times and kept coming up with the same answer... lease it! There was a trade-in involved, but it was included in both the buy and the lease offer. Totaling the 36 lease payments and the buyout amount was slightly less than to finance the purchase, which I think he said was a .9% financing deal. The buyout seemed particularly low for a 3-year old decked out Odyssey- maybe only $20,500. I just looked up a 2011 with 36,000 miles and the good condition price was around $25,000. That doesn't seem to make sense either.

It's possible he overpaid a little bit for the van but probably not because he obtained cost figures from KellyBlueBook.com and again, the two deals (buy and lease) were based on the same values.

This is tough I know, because we can't see the numbers and I'm only providing the limited details I have but have any of you run into this recently? Can you think of anything I'm missing? Have any of you discovered situations where the overall cost of leasing was lower than purchasing the vehicle?

 

[REWahoo]

Have any of you discovered situations where the overall cost of leasing was lower than purchasing the vehicle?

Not here in Texas, largely due to the requirement of the lessee to pay sales tax (6.25%) on the full value of the vehicle during the term of the lease. Most states tax only the amount the lessee actually pays up front, then the monthly payments.

I understand Arkansas, Illinois, Maryland, Oklahoma, and Virginia have similar lease tax laws.

 

[aja8888]

I have never leased a vehicle, but have bought many over the years. And I have been to the Mannheim auctions with a dealer friend and watch the action.

Kelly Blue Book figures are not to be taken as gospel since the real wholesale/retail values of autos are generally not made available to the public. Loan officers in banks and those with dealer licenses have access to current regional pricing guidelines, which change periodically based on demand.

 

[panacea]

Not here in Texas, largely due to the requirement of the lessee to pay sales tax (6.25%) on the full value of the vehicle during the term of the lease. Most states tax only the amount the lessee actually pays up front, then the monthly payments.

I understand Arkansas, Illinois, Maryland, Oklahoma, and Virginia have similar lease tax laws.

So in Texas you're saying you have to pay tax on the buyout value also even if they don't buy out the lease?? Is that all paid as part of the upfront cost and then the taxes on the payments are pay as you go??

 

[marko]

So in Texas you're saying you have to pay tax on the buyout value also even if they don't buy out the lease?? Is that all paid as part of the upfront cost and then the taxes on the payments are pay as you go??

Where is the car dealer lobby here?! Seems this is thwarting sales! Even here in Taxachusetts, you only pay a percent of each month's "sale"; i.e. the sales tax on the monthly payment.

 

[braumeister]

I've thought about leasing several times, but it has always been out of the question for me. I average 20,000 miles a year on my cars, and have done so for decades.

 

[REWahoo]

So in Texas you're saying you have to pay tax on the buyout value also even if they don't buy out the lease?? Is that all paid as part of the upfront cost and then the taxes on the payments are pay as you go??

Here's a real world example of a guy who paid the sales tax for the full value of the vehicle during his three year lease, then paid sales tax again on the depreciated value of the car when he purchased it at lease end. Looks like is as much a dealer problem as a tax problem...

Auto Leasing: Are You Being Taxed Twice?

 

[jerome len]

two factors......buy a car at 50k, pay 7% sales tax....$3500. Lease car, 36 months, turn it in, total payment cost $15000.....7% sales tax, $1050.

Next.....interest rate....manufacurer has cheap lease rate.....2%.......purchase interest rate.....4%......big savings during lease term compared to payment.

It's complicated.....manufacturers like to lease since they potentially sell a new vehicle every three years.....unless you drive high miles or keep your cars for 10 years, leasing can be cheaper.....I like a new car every few years.....I save money leasing.

Finally, leasing I always have a warranty, never have to buy tires, my maintenance costs
are really minimal.....and, I waste very little time at a dealership.

 

[ERhoosier]

.....Finally, leasing I always have a warranty, never have to buy tires, my maintenance costs
are really minimal.....and, I waste very little time at a dealership.

Generally true IF you keep your lease term shorter than the bumper-to-bumper warranty. In that sense, driving an older car is self insuring vs major repair bills. While older car is usu cheaper overall in long run, I have a few relatives with horrible luck in their used cars. Something major always seems to be going wrong & over time they are spending more than a low-end lease would cost.

I've leased cars before, but only a few times when the car maker was offering BIG incentives to move a specifically-equipped model. Adding just a few options (or dealer add-ons) can balloon the cost from a great deal to a sucker contract.

 

[38Chevy454]

I view leasing as essentially renting the vehicle. You are paying the depreciation, hence the residual value amount at the end of the lease.

Since new cars take the most depreciation during the first 1-3 years, and most leases are for similar period, you are paying the highest cost possible. But you do get to drive a new car, and have no concerns for any problems since it should be all within the warranty period. Again you are paying for this convenience.

As to the OP original question, it does not make sense to be cheaper to lease and purchase at end vs initial purchase. The only things that I can figure is the lease is factored at very low interest rate, or the vehicle purchase price at the end is lower than actual. It just does not make financial logic for the total of lease payments plus end-of-lease purchase to be less total cost than initial purchase.

For businesses, leasing is used since the total cost of the lease can be written off on taxes, vs a purchase you can only take depreciation based on a schedule. The depreciation may be less than actual costs, unless accelerated depreciation is available.

 

[panacea]

Here's a real world example of a guy who paid the sales tax for the full value of the vehicle during his three year lease, then paid sales tax again on the depreciated value of the car when he purchased it at lease end. Looks like is as much a dealer problem as a tax problem...

Auto Leasing: Are You Being Taxed Twice?

This is really interesting, and you're right it largely sounds like an issue with the leasing company and the dealer. Yikes!

 

[panacea]

two factors......buy a car at 50k, pay 7% sales tax....$3500. Lease car, 36 months, turn it in, total payment cost $15000.....7% sales tax, $1050.

Next.....interest rate....manufacurer has cheap lease rate.....2%.......purchase interest rate.....4%......big savings during lease term compared to payment.

It's complicated.....manufacturers like to lease since they potentially sell a new vehicle every three years.....unless you drive high miles or keep your cars for 10 years, leasing can be cheaper.....I like a new car every few years.....I save money leasing.

Finally, leasing I always have a warranty, never have to buy tires, my maintenance costs
are really minimal.....and, I waste very little time at a dealership.

Not sure this all makes sense to me... certainly sales tax matters but the analysis I was looking at was before taxes.

On the interest rate issue, they can call it whatever they want but it's all interest. If it's through the manufacturer their cost of money should be the same. If there's a leasing company involved that could be different.

Can't disagree with you about the cost if you get a new car every three years. That's certainly possible, given the upfront depreciation of new cars. However, I could never bring myself to replace our cars that frequently. Vehicle and home expense are two of the biggest drags on building wealth in my mind.

 

[panacea]

As to the OP original question, it does not make sense to be cheaper to lease and purchase at end vs initial purchase. The only things that I can figure is the lease is factored at very low interest rate, or the vehicle purchase price at the end is lower than actual. It just does not make financial logic for the total of lease payments plus end-of-lease purchase to be less total cost than initial purchase.

Agreed- just doesn't make logical sense. Thanks for your reply!

 

[ERhoosier]

...As to the OP original question, it does not make sense to be cheaper to lease and purchase at end vs initial purchase. The only things that I can figure is the lease is factored at very low interest rate, or the vehicle purchase price at the end is lower than actual. It just does not make financial logic for the total of lease payments plus end-of-lease purchase to be less total cost than initial purchase......

This is usu the case, but not always. Run the numbers for yourself. I've seen more than a few cases when low lease finance rate, residual value, and car maker "lease cash" incentives all align to make leasing + end-of-term purchase the best option. Plus you have the added flexibility to turn in the car at lease end if it happened to be a 'lemon' or you just don't wish to keep it after all.

 

[robnplunder]

Perhaps, the dealer over quoted purchase price to sell the lease option as cheap? That's the only one I can think of.

 

[CoolChange]

Lease Negotiating Service

Anyone ever used a lease negotiating service similar to the car buying services that were discussed in an older thread?

If so, please share experience, advise, etc.

I am currently considering looking into a lease for the first time, mostly based on some advertised deals I have recently seen. But, I have not actually started digging into these deals yet.