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In This Issue
Lease vs Purchase
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Lease vs. Purchase
I was sitting around the house wondering what I’m going to write about next and my wife comes around the corner and asks if I called the Lease Co. to see what our buy out option is on the Navigator. Then it hit me…leases versus purchase. Yeah that’s a good topic.
Where do I start? First let me say, the best way to purchase a car is to pay cash. But how many of us can walk in to a dealership and drop $20k to $40k on a new car? Not many. So the next option is to finance or lease. Also, I want to everybody to know that 99.999% of cars for sale will be a loss. This means, almost every car will drop in value…heck, the second we drive it off the lot it drops in value. So the goal here is to minimize our losses. Basically there are 3 options; cash, finance or lease. I already spoke about the cash and that is the best way to minimize your losses.
“But when should I buy and when should I lease?” I work in the financial industry and there is a rule that you should never own a depreciating asset. What this means is you should lease a depreciating asset…let the owner take the loss. Again, I am only comparing financing and leasing.
The first thing you need to do is plan how long you think you are going to own the car. I will tell you upfront that if you plan to own the car for a while, then purchasing is the way to go. However, if you flip cars like I do, almost every 3-4 years then leasing is better. I will show you why.
The second thing you need to understand is if you do lease, plan on keeping the car the entire term of the lease. This means if you sign for a 3 year lease, you got the car for 3 years. Know that for sure.
The third thing you need to know is that leases are NEGOTIABLE! People think that what ever the dealership comes up with, they have to accept it. There are 3 factors that you have to negotiate when signing a lease, the residual value of the car, the cents per mile above your “allotted” mileage and the money rate. “What are you talking about, Joseph?” I will skip to the answers…the highest residual value is the best…the lower the cents per mile is the best…and the lowest rate or “money factor” is the best.
Let’s put numbers to what I’m talking about. I will use a common car, the 2008 Ford Mustang and a 60 month purchase versus a 39 month lease. I also want to assume that we shopped around and found the best car at the best price, that’s a given right? In other words I will be using Trade-in Values found at kbb.com.
Cash: $19,500k for a brand new 4.0litre V6 car. A similar 2003 (5 years old, 12k miles per year) Mustang is worth $7,000 in good condition, a loss of $12,500 or $208 per month. Or after 39 months, the value is $10,000, a $9,500 loss or $243 per month.
Finance: Using the payment calculator, 6% interest rate and nothing down, the payments for 60 months will be $377 or $22,620 for a loss of $15,620. However, for comparison we need to look at selling the car after 39 months. We know that the first 2 years of payments all go to interest and that if we sell the car it would just pay off the balance of the loan. So, $377 times 39 months is a loss of $14,703.
Lease: I use leasecompare.com because it automatically finds the best leases across the nation. I entered in the values and the best 39 month lease is $395 per month or $15,405. However the value of the car after 39 months is $10,000 and the residual value is $7,600. Here’s the catch, you have the choice to turn it in! You should assess the value of the car and if it less than the residual value, then turn it in. If the car is worth more then sell it yourself and keep the difference. Is this case, we should make $2400. Factor that in to the monthly payments and total loss, its $334 per month or $13,005.
There is one more myth that I want to dispel, the mileage argument. “Joseph, I drive 20,000 miles a year and can’t do a lease.” The kbb.com trade-in value for a 5 year old Mustang with 100,000 miles is $5,000. This means $2,000 for 28,000 extra miles or 7.1 cents per mile. Remember when I said you can negotiate the cents per mile? You can get it down to 8 cents or 10 cents/mile for extra mileage. However, if you sell it before you hand it in (like you would if you purchased it) you do not need to worry about the mileage, the hand-in fee or the condition of the car.
What have we learned? We want to minimize our losses. If you choose the lease, expect to keep the car for the entire term, negotiate the terms and know you will have a payment for life. You should choose the finance option if you plan on keeping the car for 5 years or more. However for me, I change cars like my wife changes her mind (I’m sleeping on the couch tonight), I will always have the warranty intact and a new car every 3 years. Also, what happens if the value of the car drops like crazy? Like a 2006 Lincoln Navigator that gets 10 mpg and the Big 3 can’t give their SUV’s away. Can’t wait to hand my lease company the loss.
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