Wednesday, April 01, 2009

Lease or Buy?

The recent financial crisis may have reduced the availability of great new-car leasing programs, but some are still available. This weekend’s newspaper, for example, includes an advertisement for the hot Mazda3 5-door (with automatic transmission) for a lease payment of $219 per month for three years. This sounds like a very affordable payment for a new car.

I believe it’s fair to say, however, that there is still quite a bit of mystery around auto leasing. Many consumers are simply scared of such programs and I think a lot of this has to do with a lack of knowledge about how these programs work. Unlike traditional car loans, the detailed financial terms of an auto lease don’t have to be (and as a result often are not) disclosed. In order to decide whether a lease is good for you or not, let’s review some of the basics.
What is a lease?
In simple terms, when you lease a car you are paying to use the car for a certain amount of time rather than paying for the entire purchase of the vehicle. In the example above, Mazda is offering the car for three years for a payment of $219/month (plus a down-payment of $2,814). This means that aside from taxes and other state fees, the lessee of this car will pay a total of $10,698 to drive the car for 36 months and 36,000 miles.

The terms of the lease are determined by a few things. First is the price of the car. This is called the “capitalized cost” in leases versus “purchase price” in regular financing. In the case of the Mazda, the base MSRP of a Mazda3 5-door automatic is $19,945. Note, however, that the capitalized cost for your lease doesn’t need to be MSRP. While many buyers are lured by the advertised payment and don’t ask many questions, if you negotiate the purchase price of the car, trade-in a vehicle on which you have equity, or take advantage of other discounts, the capitalized cost can go down… and thus your payments will as well. Of course, payments will also rise if you choose a car with more options than the one used to advertise the program or trade in a car on which you owe more than it is worth.
The second item is the amount the car is worth (or more accurately, projected to be worth) at the end of the lease term which is called the “residual value.” The small print on this Mazda lease offer indicates that the residual value will be $11,169 or roughly 55% of the MSRP of this car new. This residual value should not change because you negotiated down the capitalized cost… it’s based on a percentage of the MSRP of the car you chose.
The third component is financing cost. Unlike a regular loan in which we are all familiar with the idea of the annual percentage rate (APR) the finance cost on a lease doesn’t have to be disclosed by law. To further complicate matters, even if you do ask you will be quoted a “money factor” rather than a straight APR. This will look like some bizarre number taken down to eight to ten decimal places (e.g. 0.00001625). If you want a full description of how this cost is calculated, check out this site: If you aren’t as interested, simply know that you can multiply the money factor by 2,400 and you will have the approximate APR (the number above works out to 3.9%, for example). Also note that while you are making payments on the portion of the car you use you will be paying interest on the entire amount… after all, you are tying up the bank’s money for the full capitalized value for three years.
Your payment is then the value of the car lost during the time you drive it (capitalized cost – residual value) plus the financing fees.

Are there advantages to leasing?
In most states, there is an additional savings for lessees versus buyers - taxes. If you finance the car normally you will need to pay sales tax on the full value of the car up front. So buying a $20,000 car in a state with 6% sales tax will require you to add $1,200 to your cost up front (or included in your loan). On a lease one typically pays this sales tax only on the monthly payment… or in our example 6% of $219 or roughly $13/month or $473 over the term of the lease. If you don’t plan to keep the car for more than three years anyway, the additional taxes are purely a loss and that loss is larger if you live in a state like California with 9.75% sales tax.

Perhaps the biggest advantage to leasing is a lower monthly payment. For this example I am comparing this lease program to financing offered on the same car by Mazda at 3.9% over 5 years. I’m assuming that if you qualify for the lease you will also qualify for the best available finance rate. I’m also assuming, for calculations sake that sales tax is 6% in your state and I am ignoring registration and title fees which would need to be paid regardless of your purchase method. I’m keeping the cash down payment (called the “capitalized cost reduction” in leasing) equal between the two methods.

You can see that the monthly payment is about $79 higher for a traditional purchase (34% higher than the lease) even with the great financing APR.

Is leasing a good idea for me?
Whether leasing is a good idea for you depends on a number of factors.
First, do you plan to get a new car every few years anyway? If so, leasing may save you money in taxes and reduces your monthly payment. If you live in a state with higher taxes than my example the advantage is even greater. There is definitely something positive to be said for the idea of always driving a car with a factory warranty.

Can you live with the mileage limitations of the lease? The Mazda lease is limited to 36,000 miles during the lease period (12k miles per year is considered average for an American driver, by the way). Be sure to note the mileage allowance and the fee you must pay if you exceed this amount. In the old days, the overage fees could be exorbitant (25 to 50 cents per mile, for example). Mazda’s lease program charges 15 cents per mile over, so an extra 1,000 miles/year for three years would cost you $450… pretty fair. However, if you commute 100 miles each day or plan to take numerous cross-country road trips you would be advised to think twice about leasing or ask about a lease with more miles included… this will usually lower the residual value.

Are you comfortable knowing that you will need to make another car buying decision again in two or three years? When your lease is up you will need to turn the car back in and buy another or decide whether you want to buy the car you just leased. Typically you can purchase the car for the agreed-upon residual value. If you find that the residual value is lower than the cost of a comparable car on the used-car market this might be a good deal for you. If it’s higher, you can just turn it back in and let the leasing company take the hit. In fact, it’s this latter example which is partly responsible for the decline in available leasing programs. The banks and captive finance companies (like GMAC and Ford Motor Credit) used lease programs to move a lot of iron over the past decade. The recent sudden decline in the resale value of SUVs, as one example, means that they were left with a lot of lease returns worth considerably less than they planned for. Of course, if you were the lessee of a Chevy Tahoe this would seem like a blessing to you… the bank was left holding the risk, you met your obligations by making the monthly payments on the lease and now just walk away from the vehicle.

How important are monthly payments to your budget? In our example above for a moderately priced car with a very low 60-month finance rate the payments are lower for leasing... probably enough to cover the average monthly cable and telephone bill. Alternatively, some people choose to lease so they can drive a nicer car than they could otherwise afford for the same monthly payment.

In terms of long-term cost, however, leasing isn’t necessarily the most cost-effective choice. Assuming that you keep the car for a long time and make your payments for five years you will actually own the car. If you leased you don’t own a thing. No matter what the used Mazda will be worth in 5 years it’s safe to say that it won’t be zero. Cars do eventually wear out and get recycled, but even then there is some value to the raw materials! For comparison sake, the KBB private party value for a 2003 Mazda Protege5 (which was replaced by the Mazda3 Hatchback in Mazda’s lineup) with 60,000 miles is roughly $8,500. Assuming this Mazda 3 is worth around the same amount (though it does cost more new than the Protege5 did in its day) the cost to finance and drive the same car for 5 years then sell is only $1,800 higher than leasing it for only 3.

The outright least expensive way to own a car is to buy it and keep it until repair costs start to outweigh its value. Or, as many people prefer, to buy a car when it is already a couple of years old (perhaps being sold by the finance company after someone’s lease has ended) and it has already experienced its largest depreciation hit. However, many of us have limited budgets and lack the desire to deal with the inevitable inconveniences that come with older cars. If this describes you, leasing may provide a convenient and cost effect option now that you understand how they work. `


Anonymous said...

Hello !.
might , perhaps curious to know how one can make real money .
There is no need to invest much at first. You may begin to get income with as small sum of money as 20-100 dollars.

AimTrust is what you need
The company incorporates an offshore structure with advanced asset management technologies in production and delivery of pipes for oil and gas.

Its head office is in Panama with structures around the world.
Do you want to become really rich in short time?
That`s your choice That`s what you really need!

I feel good, I began to get real money with the help of this company,
and I invite you to do the same. If it gets down to choose a proper companion utilizes your savings in a right way - that`s the AimTrust!.
I take now up to 2G every day, and my first deposit was 1 grand only!
It`s easy to join , just click this link
and lucky you`re! Let`s take this option together to feel the smell of real money

Anonymous said...

Hi !.
might , perhaps very interested to know how one can make real money .
There is no initial capital needed You may commense to get income with as small sum of money as 20-100 dollars.

AimTrust is what you thought of all the time
The firm represents an offshore structure with advanced asset management technologies in production and delivery of pipes for oil and gas.

Its head office is in Panama with structures everywhere: In USA, Canada, Cyprus.
Do you want to become a happy investor?
That`s your choice That`s what you desire!

I`m happy and lucky, I started to get real money with the help of this company,
and I invite you to do the same. It`s all about how to choose a proper companion who uses your funds in a right way - that`s it!.
I take now up to 2G every day, and my first deposit was 1 grand only!
It`s easy to join , just click this link
and go! Let`s take our chance together to feel the smell of real money

Anonymous said...

You may probably be very curious to know how one can make real money on investments.
There is no need to invest much at first.
You may begin earning with a money that usually is spent
on daily food, that's 20-100 dollars.
I have been participating in one company's work for several years,
and I'll be glad to share my secrets at my blog.

Please visit blog and send me private message to get the info.

P.S. I make 1000-2000 per daily now.

[url=] Online investment blog[/url]

Anonymous said...

Hi there!
I would like to burn a theme at here. There is such a thing, called HYIP, or High Yield Investment Program. It reminds of ponzy-like structure, but in rare cases one may happen to meet a company that really pays up to 2% daily not on invested money, but from real profits.

For quite a long time, I make money with the help of these programs.
I don't have problems with money now, but there are heights that must be conquered . I make 2G daily, and I started with funny 500 bucks.
Right now, I'm very close at catching at last a guaranteed variant to make a sharp rise . Turn to my blog to get additional info. [url=]Online Investment Blog[/url]

Anonymous said...

Glad to greet you, ladies and gentlemen!

Let me introduce myself,
friends call me Peter.
Generally I’m a social gmabler. all my life I’m carried away by online-casino and poker.
Not long time ago I started my own blog, where I describe my virtual adventures.
Probably, it will be interesting for you to find out my particular opinion on famous gambling projects.
Please visit my web site. I’ll be interested on your opinion..

Anonymous said...

Uncooked egg yolk will get sticky, so create sure you fully wash away
after you're done after the 1 hour period. Make sure you purchase a pillow case that's smooth.
Many times, light versions of foods include simply reduced fat.

My webpage ... hairloss

Anonymous said...

This by no means is a full list of things camgirls do.
David Kamau is writes articles and dating service reviews at his site and blog.
They seem to have an efficient way for finding people who you're interested and try to make a connection.

Also visit my blog post -
Also see my web page - xxx webcams

Anonymous said...

[p]Hundreds of countless numbers of gals on the world put on?its strategy?diamond engagement ring [url=]tiffany rings uk[/url] as nicely as the signature bank silver allure bracelets . American Tiffany (Tiffany) Company (Tiffany [url=]tiffany rings[/url] & Co . Using a brushed metal dome and studding with small crystals that glint at every angle against the light . Depending on your setting a 40 [url=]tiffany jewelry[/url] watt bulb could work just fine . While considering Tiffany jewelry, you can find wide range of antique collections that are absolutely unique and rich to wear . Some [url=]tiffany stores[/url] Interesting stories Of Famous Celebrities

Luxurious diamonds jewelry, exquisite opals, pure and fresh pearls and so on . several will also be often executed with valuable [url=]tiffany & co uk[/url] stones of value . Select a slight unbolt cuff style which is to some extent supple so it can be adjust with the child's age.[/p]

Anonymous said...

Phentemine's growing reputation for being risk free, natural and safe for permanent weight loss treatment has helped it to become a best supplement today. Phen375 is secure, but shouldnt be administered to individuals encountering melancholy, or with a prior drug addiction nature. For that reason what negative effects could Phen375 have.

Also visit my web site; scam phen375

Anonymous said...

you are in reality a just right webmaster.
The site loading speed is incredible. It seems that you're doing any distinctive trick. Also, The contents are masterpiece. you have performed a wonderful task in this subject!

my webpage; know more

Anonymous said...

Fοr most up-to-dаte informatiοn you haѵе to go
to ѕee web and on іnteгnеt I found this ωeb ѕite as a finеѕt web ρagе for hotteѕt updatеs.

Μy ωeb pagе: hydroxatone

Anonymous said...

I usually do not crеate a lеaνе а resρonse,
but I bгowsed sοme гemaгks on this page "Lease or Buy?".
I ԁo have a couple of quеstiοnѕ for yоu if you do not mind.
Could it be simply mе or dοеs it look lіke like a few οf the commentѕ comе acгoss like
thеy аrе coming from brаin ԁеad folks?
:-P And, іf уou are wrіting on adԁitional
ѕoсial sites, I'd like to follow you. Could you make a list of every one of your social pages like your linkedin profile, Facebook page or twitter feed?

Feel free to surf to my web page :: Www.Prweb.Com

Anonymous said...

[p]99-carat tanzanite [url=]discount tiffany[/url] and diamonds set in platinum ? Photo: Tiffany & Co . Tiffany online shopping , I believe the main factors for girls of all ages going for silver jewelry is the fact that it matches every single dress and does not scratch that very easily so it is easy to wear it inside your each day use with no worrying that the silver shinning is going to go away or its going to acquire all rough . The bracelets from Tiffany, with [url=]cheap tiffany and co[/url] light elegance, splendor and romance, have previously turn into the fashion amongst females . Yes, you need . Originally thought to be sapphires, the gems fascinated a prospector who registered claims in the area to unearth more of the vividly colored crystals . Dare I say it, Avatar is recognized as a ought to see movie . Maybe every woman will be happy when their tiffany series product like tiffany necklace, tiffany bracelet, tiffany key pendant . 8) A Pair of sheep, Tiffany and co outlet someone in need receives a pair of sheep to help generate income and Tiffany & Co you or your recipient receives a card that talks Tiffany and co outlet about the Oxfam America's committment to fighting hunger, poverty and social injustice . Dare I say it, Avatar is recognized as a ought to see movie.[/p][p]Tiffany captures Valentine??s Day in brilliant color, Cheap Tiffany Charms too . President Lincoln later bought his wife, Mary Todd Lincoln, a seed pearl jewelry suite from Tiffany隆炉s . right after a prolonged fight with a large amount [url=]tiffany for cheap[/url] of turns and plot twists the Na'vi win . even though over a scouting mandate Jake turn out to be divided from your party and is also rescued through the Na'vi chief's daughter, Neytiri . Debenhams has a great line in designer garments at more affordable price 篓C look out for the diffusion path by designers such as Jasper Conran and Lulu Guinness . In 1841, [url=]cheap tiffany jewelry[/url] J . And sesiapa who does not love John Lewis? From [url=]tiffany and co sale[/url] fabric to feather boas, toys your kids shop fork blades are a lot of stock . The reaction is really as expected positively obviously.[/p]

Anonymous said...

Good post however I was wanting to know if you could write a litte more on this topic?
I'd be very grateful if you could elaborate a little bit further. Appreciate it!

My site ::

Anonymous said...

I drop a leave a response whenever I like a post on a blog or I
have something to contribute to the discussion. It's a result of the sincerness communicated in the article I looked at. And after this article "Lease or Buy?". I was actually moved enough to drop a thought :-) I actually do have 2 questions for you if you usually do not mind. Is it only me or does it look as if like some of the responses come across as if they are coming from brain dead individuals? :-P And, if you are writing at additional sites, I'd like
to keep up with you. Could you make a list all of all your social sites like your twitter feed,
Facebook page or linkedin profile?

my webpage:

Anonymous said...

As the admin of this web site is working, no question very rapidly it will be well-known, due to its quality contents.

my web blog - Womens Relic Watches

Anonymous said...

Hi there, its pleasant paragraph about media print, we all
be aware of media is a impressive source of facts.

my web blog: rc hobbies now

Anonymous said...

It's impressive that you are getting ideas from this post as well as from our argument made here.

my page ... acoustic guitar chords for beginners

Anonymous said...

Excellent beat ! I would like to apprentice
while you amend your web site, how could i subscribe for a
blog site? The account helped me a acceptable deal.
I had been a little bit acquainted of this your broadcast offered bright
clear concept

Here is my web-site

Anonymous said...

If some one wants expert view concerning blogging and site-building then
i advise him/her to visit this webpage, Keep up the good job.

my web site ...

Anonymous said...

I really like what you guys are
usually up too. Such clever work and coverage!
Keep up the excellent works guys I’ve added you guys to our blogroll.

Feel free to visit my page ... organic potting soil

Anonymous said...

Very rapidly this website will be famous among all blogging and site-building viewers, due
to it's pleasant articles or reviews

Feel free to visit my webpage ... vestal

Anonymous said...

I have been browsing online greater than three
hours as of late, but I by no means discovered any fascinating
article like yours. It's beautiful value sufficient for me. Personally, if all webmasters and bloggers made good content as you probably did, the web will likely be a lot more helpful than ever before.

My website ... akribos xxiv watches for women

Anonymous said...

Gгeеtingѕ! Very usеful adviсe within
this аrtiсle! It's the little changes that will make the most important changes. Thanks for sharing!

Also visit my web blog: garden

Anonymous said...

The all circuit in this sites is really intereting i attempt it
Im then a B. e(electronics)pupil this site is truly excellent.

My page:

Anonymous said...

Hello there! I just would like to give you a big thumbs
up for the great information you have here on this post.
I am coming back to your site for more soon.

Stop by my webpage :: gardening tips

Anonymous said...

Just want to say your article is as astonishing. The clearness in your post
is simply nice and i could assume you are an expert on this subject.
Fine with your permission allow me to grab your feed to keep up
to date with forthcoming post. Thanks a million and please keep up the gratifying work.

Feel free to visit my web-site: washer repair Odessa (