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      12-17-2006, 02:16 AM   #1
glennlee
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Leasing, Financing or Buying out now?

Hi.

I have to decide upon leasing, finacing or buying out. Currently lease rate in Canada is 6.9% and my dealer said I could get .5% off thanks to BMW loyalty program or something like that. I ordered a 328xi with premium pkg and automatic transmission. Residual is 64% with 20,000km/year.

If I lease, I would considering putting some chunk of money upfront to save interest.

Could you share your opinion on this?

Thanks.
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      12-17-2006, 02:27 AM   #2
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At the current lease interest rates it's worth putting money up front to reduce the overall cost of the lease IMO. I actually paid the whole lease when I picked up the car which saved me 4 digits.

Some people say you should never put money down on a lease but I honestly have yet to hear a compelling argument why... it seems to just be misinformation that people repeat without really knowing what they're talking about, like when people say don't get a plasma tv because of burn in.

Residual sounds good, make sure you get at least a 3% discount off the MSRP of the car and make sure they base the residual on the MSRP of the car NOT the discounted price of the car. Also watch out for all the little fees (admin fees, etc...) that dealers seem to be coming up with.

... and enjoy not having any provincial sales tax to pay!!
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      12-19-2006, 08:20 AM   #3
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I am considering buying out the E90. Provided that the interest expense during the 36 months of lease is about $6,000 if I do single lease payment, and that the single lease payment total is around $28000, I think I'll do better later in three years when I want to sell the vehicle. I think I'll spend $25,000 more now and try to get about $30,000 back when I sell it in three years. Residual value is 62% of $50300 MSRP.

How does it sound?
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      12-19-2006, 03:01 PM   #4
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Quote:
Originally Posted by findtom
Some people say you should never put money down on a lease but I honestly have yet to hear a compelling argument why... it seems to just be misinformation that people repeat without really knowing what they're talking about, like when people say don't get a plasma tv because of burn in.
From Edmunds.com:

Down Payment for Leasing

The strategy for leasing a car is the opposite of buying — no down payment is recommended (in leasing, the down payment is called a "cap cost reduction"). Often, consumers put down as much as $3,000 to lower their monthly payment. While it's true that the monthly payment is reduced, consider this: If the buyer gets into a serious accident in the first few months of his or her lease contract, and the car is totaled, the down payment is completely lost. Even with collision and gap insurance, no portion of the $3,000 down payment is ever refunded.

So, when leasing a car, take the $3,000 you wanted to put down on the car and open a separate bank account. Make higher payments out of this account rather than putting the money down on the car. You can go one step further and roll the "drive-off costs," which would normally be paid upfront, into your monthly lease payment. Drive-off fees are the related fees required to drive your car off the lot: security deposit, acquisition fee, etc. You drive off the lot with no money tied up in your car and all of it in your pocket (or bank account). After all, the appeal of leasing is to maximize your cash flow. How can you do that with your money tied up in a large down payment?
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      12-19-2006, 04:33 PM   #5
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Quote:
Originally Posted by Hawkshaw
From Edmunds.com:

Down Payment for Leasing

The strategy for leasing a car is the opposite of buying — no down payment is recommended (in leasing, the down payment is called a "cap cost reduction"). Often, consumers put down as much as $3,000 to lower their monthly payment. While it's true that the monthly payment is reduced, consider this: If the buyer gets into a serious accident in the first few months of his or her lease contract, and the car is totaled, the down payment is completely lost. Even with collision and gap insurance, no portion of the $3,000 down payment is ever refunded.

So, when leasing a car, take the $3,000 you wanted to put down on the car and open a separate bank account. Make higher payments out of this account rather than putting the money down on the car. You can go one step further and roll the "drive-off costs," which would normally be paid upfront, into your monthly lease payment. Drive-off fees are the related fees required to drive your car off the lot: security deposit, acquisition fee, etc. You drive off the lot with no money tied up in your car and all of it in your pocket (or bank account). After all, the appeal of leasing is to maximize your cash flow. How can you do that with your money tied up in a large down payment?
See the loss of the down payment doesn't make any sense as in the event of an total loss insurance claim (maybe different in the US) they go by the fair market value of the car vs. payoff amount on the lease. I know someone who had a full claim on a leased car recently and that was basically how it worked.

So in my case the balance owing on the lease is the residual ($24K)... I would get back from the insurance co. the difference between this amount and the fair market value in the event of a total loss. I actually have new replacement (gap?) insurance which means that supposedly they replace the totalled car with a new one on the same contract. So I don't pay anything or get money back but I can buy the car for the residual which would obviously be a good deal since the car would be much newer.
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      12-19-2006, 05:12 PM   #6
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Quote:
Originally Posted by glennlee
I am considering buying out the E90. Provided that the interest expense during the 36 months of lease is about $6,000 if I do single lease payment, and that the single lease payment total is around $28000, I think I'll do better later in three years when I want to sell the vehicle. I think I'll spend $25,000 more now and try to get about $30,000 back when I sell it in three years. Residual value is 62% of $50300 MSRP.

How does it sound?
I went though the same lease vs. buy issue.

For my car tax and everything came out to approximately $24K to lease or $48K to buy. I figured paying half to use 3 years and 72,000 kms on the car sounded about right so I leased. Plus I really hate dealing with selling a used car... low ballers, people wanting to drive it, getting less than you expect for it, phone calls, etc...

In hindsight the engines all being bumped up for 2007 would have been bad for resale probably so that was a plus for my decision to lease. The single lease payment was convenient as I didn't have to deal with monthly payments, but also didn't have to deal with selling the car.... also if I owned this car I would have almost certainly have taken a huge hit trading it in for a 335 so it's good it kind of locked me into driving this car for 3 years. That could have its downsides as well of course.

Hope the above is of some help. Like I said you're lucky to have low sales tax, leasing also means saving paying sales tax on 63% of the vehicle which is ~15% in Quebec.
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      01-06-2007, 07:18 PM   #7
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Quote:
Originally Posted by findtom
At the current lease interest rates it's worth putting money up front to reduce the overall cost of the lease IMO. I actually paid the whole lease when I picked up the car which saved me 4 digits.

Some people say you should never put money down on a lease but I honestly have yet to hear a compelling argument why... it seems to just be misinformation that people repeat without really knowing what they're talking about, like when people say don't get a plasma tv because of burn in.

Residual sounds good, make sure you get at least a 3% discount off the MSRP of the car and make sure they base the residual on the MSRP of the car NOT the discounted price of the car. Also watch out for all the little fees (admin fees, etc...) that dealers seem to be coming up with.

... and enjoy not having any provincial sales tax to pay!!
interesting info, thanks.
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      01-06-2007, 07:26 PM   #8
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Quote:
Originally Posted by findtom
Residual sounds good, make sure you get at least a 3% discount off the MSRP of the car and make sure they base the residual on the MSRP of the car NOT the discounted price of the car.

I just wanted to ask you about this comment you made...
I didn't check to see if they based their residual on the discounted price or on the actual MSRP...
To me common sense would be that they base their residual on the selling price of the car ( discount included)...
Can you please give me more info on this and i guess a reasonable argument that i can present to my salesman...
Thankx
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      01-06-2007, 08:03 PM   #9
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Quote:
Originally Posted by youyou
I just wanted to ask you about this comment you made...
I didn't check to see if they based their residual on the discounted price or on the actual MSRP...
To me common sense would be that they base their residual on the selling price of the car ( discount included)...
Can you please give me more info on this and i guess a reasonable argument that i can present to my salesman...
Thankx
Well, the principle of a lease is that you're paying for what you use.

The residual is the predetermined value of the car that you are returning at the end.

The higher that value is, the less you are "using" while you have the car.... and consequently the less you are paying over the course of the lease.

So, say for example if the residual value is 60% and the MSRP of the car is $50,000. That means the residual value is $30,000. So in that case you are "using" $20,000 worth of the car during the course of the lease. So you're paying at least $20,000 plus interest, etc...

Now, if I get a 5% discount on the $50,000 that means I'm paying $47,500 for the car. If the residual stays based at the $30,000 I am now using $17,500 worth of the car instead of $20,000.

However, if the residual is recalculated based on the new sale price it goes down to $28,500 (60% of $47,500). Subtract the residual from the discounted price and I am now using $19,000 worth of the car. Still a savings, but not as much as if you keep the residual value of the car based on the MSRP so your discount comes right out of the part of the car you're paying for instead of being spread over the residual value and the amortized (used) portion of the car.

Hopefully that makes sense. When I bought my car they had the MSRP of the car at the top with the discount shown separately and the residual with the % in brackets which you can verify is based on the MSRP. Audi on the other hand just plugged in the discounted price in as the MSRP... so even though the % discount they're giving you sounds good it's actually equivalent to less if it's being calculated properly.

If you buy the car at the end of the lease it probably evens out... but IMO if you want to end up owning the car and don't have the cash to buy it you should finance, not lease.
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      01-06-2007, 08:10 PM   #10
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Quote:
Originally Posted by findtom
Well, the principle of a lease is that you're paying for what you use.

The residual is the predetermined value of the car that you are returning at the end.

The higher that value is, the less you are "using" while you have the car.... and consequently the less you are paying over the course of the lease.

So, say for example if the residual value is 60% and the MSRP of the car is $50,000. That means the residual value is $30,000. So in that case you are "using" $20,000 worth of the car during the course of the lease. So you're paying at least $20,000 plus interest, etc...

Now, if I get a 5% discount on the $50,000 that means I'm paying $47,500 for the car. If the residual stays based at the $30,000 I am now using $17,500 worth of the car instead of $20,000.

However, if the residual is recalculated based on the new sale price it goes down to $28,500 (60% of $47,500). Subtract the residual from the discounted price and I am now using $19,000 worth of the car. Still a savings, but not as much as if you keep the residual value of the car based on the MSRP so your discount comes right out of the part of the car you're paying for instead of being spread over the residual value and the amortized (used) portion of the car.

Hopefully that makes sense. When I bought my car they had the MSRP of the car at the top with the discount shown separately and the residual with the % in brackets which you can verify is based on the MSRP. Audi on the other hand just plugged in the discounted price in as the MSRP... so even though the % discount they're giving you sounds good it's actually equivalent to less if it's being calculated properly.

If you buy the car at the end of the lease it probably evens out... but IMO if you want to end up owning the car and don't have the cash to buy it you should finance, not lease.

Great writeup, i really appreciate it.
I fully understand what your saying. I will definitely not be buying the car in 3 years. I never buy cars.
I lease my cars because A. i like to change cars quickly and B. all the other reasons you mentioned above...
Anyhow i will definitely look into it with my salesman on Monday...
But one thing i'm concerned about is if he tells me, No that's not how it works and we base our residual on the discounted price of the car...
What do i do then?
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      01-06-2007, 08:17 PM   #11
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Originally Posted by youyou
Great writeup, i really appreciate it.
I fully understand what your saying. I will definitely not be buying the car in 3 years. I never buy cars.
I lease my cars because A. i like to change cars quickly and B. all the other reasons you mentioned above...
Anyhow i will definitely look into it with my salesman on Monday...
But one thing i'm concerned about is if he tells me, No that's not how it works and we base our residual on the discounted price of the car...
What do i do then?
No problem. You can say thanks by giving me a wicked deal on a Cartier one day.

Didn't they give you a printed quote for the car when you ordered it? You must have signed some kind of price breakdown with the fees and taxes and everything... it should be on there. If not I would ask him to fax it to you or print one out for you to pick up.

I'm assuming they use the same software as Jalbert... and if that's the case it would show the MSRP as the discounted price with the discount showing $0, which I would point out to him is obviously not right.
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      01-08-2007, 12:59 PM   #12
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Quote:
Originally Posted by findtom
If you buy the car at the end of the lease it probably evens out... but IMO if you want to end up owning the car and don't have the cash to buy it you should finance, not lease.
This is the only part I don't agree with. It depends entirely on what the MFs look like vs. what you can get as a financing rate at the time, and what you can get as a market interest rate to invest what you would otherwise spend in the form of a downpayment on a finance deal.

If you're leasing to buy, you can structure the lease to essentially be cheap financing for your car. For instance, mileage allowments mean nothing, since you'll buy the car at the end. So you're free to buy the cheapest lease you can buy, invest what you would have spent on a down payment, and watch it grow. You can also buy down the MF with MSDs or the like, and amplify the leverage even more.

Leasing to buy can be fantastic in a couple of scenarios. For example, if something happens to the car that would cause it's resale value to plummet (anything that would cause significant reparable damage, or a significant mechanical or electrical problem), you can always just turn the car in at the end of the lease and walk away. If not, you can buy it at (or sometimes even below) the residual. Or if you really want to be adventurous, and financing rates fall steeply by the end of the lease, you can finance the balance and play the game all over again.
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      01-08-2007, 04:56 PM   #13
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Originally Posted by Lassaxi
This is the only part I don't agree with. It depends entirely on what the MFs look like vs. what you can get as a financing rate at the time, and what you can get as a market interest rate to invest what you would otherwise spend in the form of a downpayment on a finance deal.

If you're leasing to buy, you can structure the lease to essentially be cheap financing for your car. For instance, mileage allowments mean nothing, since you'll buy the car at the end. So you're free to buy the cheapest lease you can buy, invest what you would have spent on a down payment, and watch it grow. You can also buy down the MF with MSDs or the like, and amplify the leverage even more.

Leasing to buy can be fantastic in a couple of scenarios. For example, if something happens to the car that would cause it's resale value to plummet (anything that would cause significant reparable damage, or a significant mechanical or electrical problem), you can always just turn the car in at the end of the lease and walk away. If not, you can buy it at (or sometimes even below) the residual. Or if you really want to be adventurous, and financing rates fall steeply by the end of the lease, you can finance the balance and play the game all over again.
Yes, maybe true in some scenarios. FYI US lease deals seem to be much better than what we get but leaving yourself the option to drop it back off at the dealer at the end of the lease term for whatever reason is a good point.
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