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Author: mark99ant One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 736860  
Subject: Car Leasing vs. Purchase Date: 2/2/2001 2:15 PM
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I just had a dealing with a car sales manager that proceeded to tell me that the only "smart" way to drive a car is by leasing it.

Well, I have a very different opinion of that and told him my thoughts, which he proceeded to tell me I didn't know what I was talking about and that all the car salesmen had leases, which to him seemed to justify the thought.

I don't know if this is the place for this but I thought I would share my thoughts on this subject, because I think the sales manager's thinking is part of why people have so much trouble getting ahead in their lives. "If I can afford the payments I'm ok."

I've made some assumptions to make it simple to understand, from my perspective.

Assumptions: (based on the sales managers numbers for a potential lease or a potential purchase from him)

Car costs $20,000. Lease would cost $300/mo. Loan to purchase @ 6% for 48 months (monthly payments of $469.70/mo for 48 months) yields a total financed cost of $22,545.62. I always drive my cars 10 years or longer.

1) The lease is easy. It costs $3,600/year to drive the leased car. Assuming you can renew this lease at this cost for 10 years it stays stable (unlikely however)

2) The financed car costs $22,545.62/10 years = $2,254.56/year to drive.

3) The outright purchase of the car costs $20,000/10 years = $2,000/year to drive.

I don't think it takes a rocket scientist to figure out that the best way to buy a car is to pay cash (if you can) and drive it as long as you possibly can. The next best is to finance it under the best terms available and pay it off a quickly as possible and drive it as long as you can.

Put the extra money in your IRA or 401K or what ever savings program you have.

What people fail to understand with leases and financing is that the financial world does not make a profit unless you borrow money from them. Leasing is the worst case of borrowing I can think of. It is only natural for the financial world to try to convince you to borrow as much as you can afford. It's called leveraging (and has its usefulness), but it is also dangerous. You can lose it all much quicker on a bad turn.

I hope this helpful and I'm sure there are many differing opinions out there. I'm also sure I will hear some of them in reply.

Thanks for the opportunity to express my opinion.
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30441 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 2:21 PM
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mark99ant writes,

I don't think it takes a rocket scientist to figure out that the best way to buy a car is to pay cash (if you can) and drive it as long as you possibly can.

I didn't study much "rocket science" in engineering school, but paying cash for a new car and driving it for 7 or 8 years was one of the things I did that enabled me to retire in 1994 at age 38.

Glad to see you're smarter than a car salesman. <grin>

intercst

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Author: Melman Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30443 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 2:51 PM
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I don't think it takes a rocket scientist to figure out that the best way to buy a car is to pay cash (if you can) and drive it as long as you possibly can. The next best is to finance it under the best terms available and pay it off a quickly as possible and drive it as long as you can.

Under normal circumstances, what you say is true. However, I bought my last vehicle on a 2.9% loan. I didn't need to finance it but was more than happy to accept the manufacturer's below-market financing.
Prior to that, I leased a small truck for 2 years at $150/month and no money down. Again, this program was heavily subsidized by the manufacturer and could easily be recognized as a good deal.

Otherwise, leasing "may" make sense if you know that you are the kind of person that doesn't drive their vehicles into the ground, likes to have them under warranty at all times, etc. Unfortunately, many such people put such abnormal wear and damage on their vehicles that the damage charges at the end of the lease more than offset any (possible) savings.



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Author: rocker Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30446 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 3:42 PM
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mark99ant--Well, I have a very different opinion of that and told him my thoughts, which he proceeded to tell me I didn't know what I was talking about and that all the car salesmen had leases, which to him seemed to justify the thought.

rocker----one of my cars is a 13 year old toyota camry....it runs just as good as the day i bought it.....and it has been paid off for the last 10 years.....can you imagine how much money i would have spent leasing a camry for the last 13 years??? and the opportunity cost lost investing in the markets over that period of time, compounding along the way.....this is a no brainer, in my opinion....

since all the car salesmen had leases, it is easy to see why they continue to put on ties in the morning, slicker their hair and sell cars all day, sometimes at night, and on the weekends and i get the opportunity to retire early!!!!

they certainly don't make "cents" to me <grin>


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Author: mark99ant One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30448 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 3:54 PM
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Melman says, "I bought my last vehicle on a 2.9% loan. I didn't need to finance it but was more than happy to accept the manufacturer's below-market financing."

I agree. I got my wife's Explorer on a 0.9% financing. I can't afford to pay that off. Those are not usual deals, however.

Also, if a person's ego dictates that he drive nothing older than 3 years old, then a lease makes a little more sense. They're inclined to blow their money anyway. And of course those are the types that the salesmen prey on.

The warranty issue is somewhat valid, however, my experience has been that after the warranty period, very little goes wrong until they are about 7-8 years old. Then it isn't catastophic expenses unless you have a lemon, that you will know about usually during the warranty period.

Thanks for your comments.


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Author: Army88 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30449 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 3:59 PM
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First time post, but have long enjoyed reading this board.

The finance manager at the dealership where I purchased my vehicle this past year made an interesting statement/axiom that I haven't quite figured the logic to. He was trying to persuade me not to use my home equity loan (roughly 10%, which I did use to purchase my car) but use his company's roughly 7% rate to finance my car. He said to generally not use a loan from an appreciating asset (the house) to purchase a depreciating asset (the car). The two rates seemed roughly equal counting the home equity tax deduction.

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30450 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 4:03 PM
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"Car costs $20,000. Lease would cost $300/mo. Loan to purchase @ 6% for 48 months (monthly payments of $469.70/mo for 48 months) yields a total financed cost of $22,545.62. I always drive my cars 10 years or longer.

1) The lease is easy. It costs $3,600/year to drive the leased car. Assuming you can renew this lease at this cost for 10 years it stays stable (unlikely however)

******** you also have to include all the other charges that come with a lease, including but not limited to: acquisition charge, life insurance charge, disposition charge, lease and sales tax (sometimes higher), documentation charge, and any potential damage charges and mileage overage. These can be thousands of dollars over the lease 'cost'. They don't tell you all about these things up front. And don't forget the down payment, which you pay up front. Any scratches, bumps, dents, windshield chips, stains on seats/floors, no matter how minor, are going to cost you bucks.

You can lease some used cars, that came off the first three year lease, for a whole lot less. Lexus and others are offering leases on 3 year old cars, with some remaining warranty.

Car salemen have to drive new cars for appearance sake. They also get one heck of a better deal than you or I in buying cars.
___________________________________________________

2) The financed car costs $22,545.62/10 years = $2,254.56/year to drive.

**********if you borrow elsewhere, you can often talk the dealer down 15% off MSRP, maybe more. If you finance at their shop, you likely won't get the discount (ie, accept their 2.9% financing with no discount). If you finance, shop around all over for best rate on car, and also get the car priced without their 'discount financing' , which basically means you don't get a discount off the price, and the 10-15% you don't get goes to make up the difference in interest rate. there is no free lunch.

______________________________________________

3) The outright purchase of the car costs $20,000/10 years = $2,000/year to drive.

******** The purchase of a car, and other alternatives, has to take into account the cost value of the money. If you didn't buy a new car, and had/left $20,000 in the bank, it would earn 6% interest a year, or $1200/yr, compounded. If you want to find out what it is really costing you, you need to take that into consideration.

After you have paid off the car, you have spent $22,000, but that $22000 could be sitting in the bank getting interest at 6%, or in the market earning hopefully 10% a year, compounded.
_____________________________________
"I don't think it takes a rocket scientist to figure out that the best way to buy a car is to pay cash (if you can) and drive it as long as you possibly can."

****IMHO, the best way to buy a car, for cheapest bucks/mile, is to buy a several year old car, and drive it till it falls apart. That beats buying a 'new car' by a small margin. Of course, it is nice to have your own new car, take care of it, and drive it till the wheels fall off. My travel car has 181,500 miles on it and still going strong.

______________________________________________

The difference between a Toyota or Honda Accord vs a Lexus or Infiniti or similar is about $500,000 bucks, if you take the difference at age 25, and invest it instead for 40 years.
____________________________________________________


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Author: Kaell One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30452 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 4:05 PM
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mark99ant:

1) The lease is easy. It costs $3,600/year to drive the leased car. Assuming you can renew this lease at this cost for 10 years it stays stable (unlikely however)

2) The financed car costs $22,545.62/10 years = $2,254.56/year to drive.

3) The outright purchase of the car costs $20,000/10 years = $2,000/year to drive.


I agree with your ultimate conclusions, but your figures are misleading. They assume there is no time value of money. If you lease, you're out $3,600 a year, but $3,600 ten years from now (even increased for inflation) is worth a lot less to me than $3,600 right now.

The financed car costs $5,636.40 per year for the first 4 years, or $2,000 more per year, or $8,000 more over the first 4 years. The lease doesn't eat that up until partway into year 7 (that's the break-even point, where you've paid the same under each approach). Furthermore, you can invest the $2,000 annual difference over the first 4 years; by year 7 the capital gains would probably cover payments until year 8 (rough estimate).

This ignores the advantages of having a new car every three years via leasing, with safety advances, greater reliability, etc.

The lease-vs.-outright purchase analysis is similar, and is left as an exercise for the reader.

Kaell
(who financed and is paying off ahead of schedule)

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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30457 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 4:18 PM
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"The finance manager at the dealership where I purchased my vehicle this past year made an interesting statement/axiom that I haven't quite figured the logic to. He was trying to persuade me not to use my home equity loan (roughly 10%, which I did use to purchase my car) but use his company's roughly 7% rate to finance my car"

Salesman makes no money on financing if you don't finance at dealer. He doesn't care what you pay for interest rate, he wants to make money. He has to sell you on financing through dealer.

If you finance through regular car loan, you will likely also pay insurance charge (to make sure they get their money).

If you take dealer financing, they usually will not give you same discount as if you paid 'cash'. The 'cash' can come from your home equity loan.

Have you thought about saving up, and making a big downpayment (or paying all) using your saved money, rather than 'borrowing'?



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Author: telegraph Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30458 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 4:32 PM
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"
The financed car costs $5,636.40 per year for the first 4 years, or $2,000 more per year, or $8,000 more over the first 4 years. The lease doesn't eat that up until partway into year 7 (that's the break-even point, where you've paid the same under each approach). Furthermore, you can invest the $2,000 annual difference over the first 4 years; by year 7 the capital gains would probably cover payments until year 8 (rough estimate).

This ignores the advantages of having a new car every three years via leasing, with safety advances, greater reliability, etc."

Huh? I for one don't follow the math.

A lease on a 4 year old car should be a lot less than a lease on a new car. then again,you go through and pay another set of acquisition charges, disposition charges, retainment fee, title/contract fees, life insurance fees, etc, just to keep the car you were leasing. How many people take a second lease out on the car they were driving? I'd venture it is near zero.

If you buy a car, after 4 years, you own it. If you have leased it, after 4 years, you own ZIP. Having a car worth $10,000 plus bucks is a big difference. Those lease payments, plus the upfront costs, plus the dispostion costs, will be a lot more than 36xmonthly lease payment.

Second, most people who lease a car are going to leave $2000 plus on the first day with the dealer, to cover this, that, and every other charge under the sun. That first year of lease will likely cost you $5000 if you count the 'downpayment' and other charges.

Third, as far as I can tell, there haven't been any significant changes in 'safety' to cars in six or eight years. My 1990 car does not have airbags...but just about everything after 1994 does. Nothing else has changed as far as I can tell. What safety feature, other than the newly arriving 'slow deployment' airbags, are you talking about?

Most new cars will go 100,000 miles with near zero repairs. Change oil, rotate tires, replace tires, replace battery, change air filters, and keep on driving. Tune up due at 100,000miles now.

I don't think new cars have any more inherent reliability that five year old car did. They are both made well. The 1994 has gone 181,500 miles with 2 water pumps and two alternators and 2 batteries and one master cyclinder.....total repairs about $1500 over 7 years, and a lot of miles.

The older your car, the lower the insurance premiums, another savings.



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Author: bill2975 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30465 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/2/2001 5:26 PM
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With regard to leasing, my impression has always been that it is better to get a "subvented" lease (meaning, in effect, that the cost is subsidized by the car manufacturer in an effort to increase sales) than to get one somewhere else. And the costs (percentage, etc.) for used cars were always much higher than for new ones whenever I looked into them.

On the topic of minimizing car costs, though, if you really want to drive a nice car and tie up minimal dollars (not as few as driving 10 year old wrecks, of course), the best way (IMHO) is to buy one of those vehicles coming off lease, preferably without too many miles on it and with all the toys/features you might like to have and that the first guy leasing it already paid for. Generally you can negotiate a pretty good price, particularly if you get it from the dealer where the sucker, er, original buyer turned it in to lease his next one. Pay cash for the vehicle.

Drive it for 5 or 6 years, or more if your experience is good, and then sell it yourself and buy another 2-3 year old previously leased vehicle.

This works if you're not overly choosy about color, accessories, etc. If you are, then buy the vehicle new and drive it for ten years, recognizing that this will probably be more expensive. If you're buying a new European model, and if you have lots of money, consider taking advantage of the dealer's discount program for European delivery and pick the car up in Europe, drive it around for a while, and let them ship it back for you. The discount may nearly offset the cost of the vacation.

bill2975, who does like nice cars, but now routinely keeps them until they are 7-8 years old, having learned during his days of spendthrift youth that a new car every couple of years is an expensive proposition, even though the dealers, the insurance company and the sales and excise tax people will all love you

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Author: Vitruvius One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30503 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/3/2001 1:09 AM
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Well, I'd wager that the cheapest route is to purchase a one year old car and drive it for the remaining nine years as suggested. The 25 or 30% discount you'll get is well worth the effort of some additional searching for the options and finishes you'd like.

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Author: galeno Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30528 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/3/2001 6:41 PM
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I guess one of the reasons we retired at age 38 is because I still drive the same 1986 Toyota Corolla I bought 12 years ago. My wife drives a 1990 Chevy Astro Van.

My advice: buy a 3 to 5 year old used car and drive it until it falls apart. That's what we do.

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Author: baanista One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30571 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/4/2001 12:11 AM
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The thing that bothers me about leasing is that I would have to take better care of the car than if I owned it. When you are planning to run the car for ten years or more, condition at disposal isn't as big a deal. Does it run? Does the A/C blow cold?

I suspect that there are two tracks for end of lease vehicles. Leasing another from us? Your car is in great shape! You're not leasing from us? Your car is a disaster and you owe us money!

Regards,
Baanista

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Author: dgthepiper Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30675 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/5/2001 9:56 AM
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Well, I have a very different opinion of that and told him my thoughts, which he proceeded to tell me I didn't know what I was talking about and that all the car salesmen had leases, which to him seemed to justify the thought.

I would ask to see the leases, then go to another dealer. It's hard to do business with someone who lies every time they open their mouth.

Leases are a great deal for the dealer, not the customer.



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Author: mark99ant One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30999 of 736860
Subject: Re: Car Leasing vs. Purchase Date: 2/9/2001 12:17 PM
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Yes, I understand the time value of money, but to avoid having a 10 page disertation I made basic assumptions to emphasize my points.

I told the sales manager, that as an example (also simplified) I paid cash for a new truck at $32,000 in Oct 1999. Those stocks that I sold to do it went down in 2000 by 12%. I saved an 8% loan at the time. So for simplicity sake I made about 20% on my money, by paying cash.

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