[msimon18]

Keep giving away $3-$4-$5K over a dozen years and you'll never have REAL money.

[Molly]

Originally Posted by Dr_Dirt

---Leasing Pitfalls---
If you lease make sure you don't put any money down. If you wreck and total the car, BMW gets the insurance money and you will be out of a car and your downpayment. Oh yeah when you lease you need the additional GAP insurance to pay off the lease to the end in the event of a total.
You may not be able to leave the country and some lemon laws don't apply to leased vehicles.

hmmm... "owners choice" is sounding better all the time.

This does not sound right. If you put a lot down, for example prepay the lease, why would the finance company collect all of the insurance payout when you paid for half of the car? I would be suprised if that where true. Anyone have any insight??

[TinkySD]

Originally Posted by Molly

This does not sound right. If you put a lot down, for example prepay the lease, why would the finance company collect all of the insurance payout when you paid for half of the car? I would be suprised if that where true. Anyone have any insight??

Because you never own the car and are not financing to buy it. THat's not to say some special deal couldn't be worked out with BMW but in general money up front on a lease is lost money if something where to happen.

As far as the comment about gap insurance isn't that no longer an issue since they are guaranteed residual values?

[Molly]

That one guy you said was making XX on his 90K in the bank, well you calced it incorrectly. Yes the first month he will make his 9% on 90k, but the second month he will make 9% on 90K - the payment he draw out of it. It goes down every month, and in the end he won't have made that 9% on 90K for three years at all. You could easily amortize it in Excel to see what he really makes over the three years.

[Molly]

Originally Posted by TinkySD

Because you never own the car and are not financing to buy it. THat's not to say some special deal couldn't be worked out with BMW but in general money up front on a lease is lost money if something where to happen.

As far as the comment about gap insurance isn't that no longer an issue since they are guaranteed residual values?

This makes no sense. For simple numbers, say the car is $60K, residual 66% or $40K. Your depreciation is $20k, so say you make a cap cost reduction of $20k. Now you have basically paid your depreciation off (not counting interest and tax, etc for now). Say the car is totaled in month 1. Say insurance determines its worth $50k. Well they are paying out ACV actual cash value (unless you have a stated value exotic car policy or something odd like that) and they are writing a check for $50K. You owe the residual at this point of $40K. You keep the extra $10K. You lose 10K because the ACV is alway lower than the price of the car but that have zero to do with the lease. So no, prepaying a lease or paying down a huge (or all) of the your lease payments up front does not imply you will lose money in a total loss, thats just nonsense.

[HPIA4v2]

Check, money magazine, msn, cnn, forbes etc.

If you change cars every 3-4 years, deduct the payment(like real-estate agent as part of business expense), drive close to the lease terms usually 12k/15k a year then lease make sense. Anything else buy makes more sense.

To use the money invested to gain 9% (like the above posts) is just gambling. If you think that makes sense, why not go further, take out equity home loan at around 7% right now and buy stocks which on average return 12% over the last 30 years.
You may live in your leased car before long if you do.

On the story about 5 mil bank account and financing, is that Paris Hilton by any chance.
It just show some people with alot of money is not very smart.
"Oh I need cash flow so I finance my car, but I have 5 mill in the bank"

[jbake]

I never want to fully own a car unless it is a collector's item of some sort. I'd rather lease and someday OWN my home. It is so hard at least in California to come out ahead when you sell car on your own.

[Nikki]

Besides the numbers I like leasing because if your car is in an accident you can turn it in at the end of the lease after repairs and not have to worry about trying to sell a car that doesn't have a clean carfax. No one will buy a used car that's been in an accident for that much money, they'll just find one that hasn't.

[mrbelk]

Originally Posted by Molly

This makes no sense. For simple numbers, say the car is $60K, residual 66% or $40K. Your depreciation is $20k, so say you make a cap cost reduction of $20k. Now you have basically paid your depreciation off (not counting interest and tax, etc for now). Say the car is totaled in month 1. Say insurance determines its worth $50k. Well they are paying out ACV actual cash value (unless you have a stated value exotic car policy or something odd like that) and they are writing a check for $50K. You owe the residual at this point of $40K. You keep the extra $10K. You lose 10K because the ACV is alway lower than the price of the car but that have zero to do with the lease. So no, prepaying a lease or paying down a huge (or all) of the your lease payments up front does not imply you will lose money in a total loss, thats just nonsense.

Unfortunately, you are mistaken...

In your example, you are essentially setting the terms of the lease to have the depreciation portion of the payment be zero (by paying the 20k depreciation), and the "rent charge" portion would be (cap cost + residual) * money factor.

Don't forget the lease payment formula:

payment = ((cap cost - residual)/term) + ((cap cost + residual) * money factor)

The first part of the payment is called the "depreciation charge" and the second part is called the "rent charge" (essentially the "interest" paid).

Prepaying the lease is completely different to making a giant downpayment to lower the cap cost on which the lease based (and hence reducing the depreciation portion of the lease payment). The difference is that in the lease prepayment scenario, that comes _after_ you make whatever cap cost reductions (down payments) and the terms of the lease have been set. In the "huge cap cost reduction" scenario, the terms of the lease are being modified and the lease payments haven't been calculated yet.

Under lease prepayment scenario, if your car were to be totalled or stolen:
If you were to prepay a lease on which you made no (or a very minimal cap cost reduction), you would certainly be entitled to a prorated portion of the lease prepayment in the amount of the number of monthly payment * months remaining on the lease.

Under large cap cost reduction scenario, if your car were to be totalled or stolen:
If you simply make a large cap cost reduction in order to reduce the monthly lease payment, you will _never_ see that downpayment money ever again.

I hope I was able to explain myself clearly enough.

-MrB

[Lassaxi]

Originally Posted by Molly

That one guy you said was making XX on his 90K in the bank, well you calced it incorrectly. Yes the first month he will make his 9% on 90k, but the second month he will make 9% on 90K - the payment he draw out of it. It goes down every month, and in the end he won't have made that 9% on 90K for three years at all. You could easily amortize it in Excel to see what he really makes over the three years.

You're assuming he is drawing his payment form the same $90k that he would have used for a down payment. I'll bet he isn't.

[Lassaxi]

Originally Posted by HPIA4v2

Check, money magazine, msn, cnn, forbes etc.

If you change cars every 3-4 years, deduct the payment(like real-estate agent as part of business expense), drive close to the lease terms usually 12k/15k a year then lease make sense. Anything else buy makes more sense.

Unfortunately, it just isn't that simple. There are an awful lot of assumptions built into those articles that end up in the money magazines. You need to know all the numbers to know whether that's true or not.

Originally Posted by HPIA4v2

To use the money invested to gain 9% (like the above posts) is just gambling. If you think that makes sense, why not go further, take out equity home loan at around 7% right now and buy stocks which on average return 12% over the last 30 years.
You may live in your leased car before long if you do. .

People do things like this all the time. I wouldn't do this with a home equity loan, but if I had $300,000 sitting around and wanted to buy a house, would I pay the cash or get a 30 year mortgate at 6%? Depending on the associated costs, I would probably take out the mortgage, because over 30 years I am virtually certain to beat the 6% interest rate (which is actually less than 6% after taxes) in the market.

[DCJAX]

Side note,

The fact auto financing companies even exist disputes the idea that it's always smarter to lease and invest your money elsewhere. Perhaps we should call Capital One and tell them that they could get a much better ROI if they stopped lending for auto loans at 6% and instead invested their money like the average e90post member?

[mrbelk]

Originally Posted by Lassaxi

People do things like this all the time. I wouldn't do this with a home equity loan, but if I had $300,000 sitting around and wanted to buy a house, would I pay the cash or get a 30 year mortgate at 6%? Depending on the associated costs, I would probably take out the mortgage, because over 30 years I am virtually certain to beat the 6% interest rate (which is actually less than 6% after taxes) in the market.

And don't forget the ability to deduct the interest payments on the mortgage.

-MrB

[Lassaxi]

Originally Posted by mrbelk

And don't forget the ability to deduct the interest payments on the mortgage.

-MrB

That's what I meant by "which is actually less than 6% after taxes."

[Molly]

Originally Posted by Lassaxi

You're assuming he is drawing his payment form the same $90k that he would have used for a down payment. I'll bet he isn't.

Then that introduces another chunk of cash flow into the scenario, which has its costs as well.

[Molly]

Originally Posted by mrbelk

Unfortunately, you are mistaken...

In your example, you are essentially setting the terms of the lease to have the depreciation portion of the payment be zero (by paying the 20k depreciation), and the "rent charge" portion would be (cap cost + residual) * money factor.

Don't forget the lease payment formula:

payment = ((cap cost - residual)/term) + ((cap cost + residual) * money factor)

The first part of the payment is called the "depreciation charge" and the second part is called the "rent charge" (essentially the "interest" paid).

Prepaying the lease is completely different to making a giant downpayment to lower the cap cost on which the lease based (and hence reducing the depreciation portion of the lease payment). The difference is that in the lease prepayment scenario, that comes _after_ you make whatever cap cost reductions (down payments) and the terms of the lease have been set. In the "huge cap cost reduction" scenario, the terms of the lease are being modified and the lease payments haven't been calculated yet.

Under lease prepayment scenario, if your car were to be totalled or stolen:
If you were to prepay a lease on which you made no (or a very minimal cap cost reduction), you would certainly be entitled to a prorated portion of the lease prepayment in the amount of the number of monthly payment * months remaining on the lease.

Under large cap cost reduction scenario, if your car were to be totalled or stolen:
If you simply make a large cap cost reduction in order to reduce the monthly lease payment, you will _never_ see that downpayment money ever again.

I hope I was able to explain myself clearly enough.

-MrB

I wish I could understand your explaination but I don't. Please tell me how, in terms of my example, one would never see their downpayment - in my example, there is $10K extra left after paying off the lease. I know you still have to cover your rent and taxes, but the rent stops at that point because the loan from the leasing company gets paid in full. So yes, in my example you would owe them the $40K residual, plus some remaining rent, but if the car is worth $50k, you keep the rest, which repays you for some of your cap cost reduction. I can't see how it would work any other way. Please explain. I really just want to know if large a CCR is more risk, which at this monent I don't think it is. But I will not reject it if I turn out to be wrong - I will be glad I learned to stop doing large CCR on leases. Go.

[John 070]

I'm really quite amazed at this thread as far as how it started out in unanimous agreement on the merits of leasing, one would think that leasing is smart and buying is dumb. I must have flunked high school math since I put nearly 50% down and financed at 5.5%.

The folks at BMWFS must be so dumb that they wrote their leases in the favor of the lessees!

[John 070]

Originally Posted by DCJAX

Side note,

The fact auto financing companies even exist disputes the idea that it's always smarter to lease and invest your money elsewhere. Perhaps we should call Capital One and tell them that they could get a much better ROI if they stopped lending for auto loans at 6% and instead invested their money like the average e90post member?

*LOL* No matter if anyone wants to admit it or not, leasing is all in favor of the lessor, i.e. BMWFS. Just like renting an apt. in Manhattan. What leasing accomplishes is it allows a lessee for any given payment or outflow of cash, to get more car. Anybody with say $550/mo. can drive a BMW 335, with little cash. That's not the case if they actually wanted to own the car. It takes over 50% down to get a loan payment that low, and we're talking around 60 mos. A bean counter would realistically ask, if you plan on buying this leased vehicle 3 yrs. down the road, just where would you actually get that lump sum, realistically speaking, if you don't have it today?

But I like your logic and analogy to CapOne. In my case, Bank of America is accepting 5.5% from me for 60 mos., why would they do that instead of doing what these e90post members are doing?

Finally, even if a person still thinks leasing is in their favor, less is still better, so why not lease a Honda Accord? Because whether they want to admit it or not, they're only looking at the difference between the $550 and the $299 per month, i.e. the monthly payment. Even a convenience store clerk can afford $550/mo. if he really wants to. What he can never realistically achieve on that salary if he also has living expenses, is ownership of a BMW.

[John 070]

Originally Posted by Lassaxi

Unfortunately, it just isn't that simple. There are an awful lot of assumptions built into those articles that end up in the money magazines. You need to know all the numbers to know whether that's true or not.



People do things like this all the time. I wouldn't do this with a home equity loan, but if I had $300,000 sitting around and wanted to buy a house, would I pay the cash or get a 30 year mortgate at 6%? Depending on the associated costs, I would probably take out the mortgage, because over 30 years I am virtually certain to beat the 6% interest rate (which is actually less than 6% after taxes) in the market.

In my short career, the two Fortune 100 companies that I worked for paid cash for their capital equipment. I do hear what you're saying, but realistically, 300k is a requisite downpayment on a house where I live (around 20-30%). So lets just say I had a million dollars in the bank, would I pay cash for the house? Maybe I'd put 500k down, finance the other 500k for 15 years. My point is it's not smart as a general rule to never pay for anything assuming "I can do better than that by investing said monies." It's simply not sustainable and a bad recipe for disaster over the long run. Why pay for anything at all? Keep a 100% invested portfolio and then, why stop there, use leverage, keep only 35% equity. The amount that one could lose on a bad day on Wall St. can be astronomical relative to our salaries...

[Lassaxi]

Originally Posted by John 070

In my short career, the two Fortune 100 companies that I worked for paid cash for their capital equipment. I do hear what you're saying, but realistically, 300k is a requisite downpayment on a house where I live (around 20-30%). So lets just say I had a million dollars in the bank, would I pay cash for the house? Maybe I'd put 500k down, finance the other 500k for 15 years. My point is it's not smart as a general rule to never pay for anything assuming "I can do better than that by investing said monies." It's simply not sustainable and a bad recipe for disaster over the long run. Why pay for anything at all? Keep a 100% invested portfolio and then, why stop there, use leverage, keep only 35% equity. The amount that one could lose on a bad day on Wall St. can be astronomical relative to our salaries...

The problem with your argument is that you've taken it to an illogical extreme. As a factual matter, it simply does not make sense to finance every purchase you make, because you can't always beat the costs of the transaction in the market. It also does not make sense to pay cash for everything, because there are instances when you can make more money by financing and investing. There is no single answer for every situation.

For example, if you had a million dollars in the bank and wanted to buy a million dollar home, the question of whether to pay cash or to take out a motgage depnds a lot on what you can get as a mortgage rate, and what the associated costs of the mortgate are. If you could get a $1 million, 30-year mortgate for 5%, you would be a fool to pay cash for the house. If the mortgage was 8%, things might be different. If you are scared of leverage, then a 15-year mortgage might be more to your liking, in which case the calculus changes yet again.

The decision to lease vs. buy is not a theoretical one, which is why the advice you get in Forbes magazine is wrong more often than it is right. An individual's personal financial situation can change the calculus substantially. For example, if a car costs $50,000, but I only have $20,000, my choice is not between paying cash and leasing. My choice is between leasing and investing $20,000, and financing with a $20,000 down payment. Similarly, if I can only afford to pay $500 per month, I am not deciding between a 3-year lease and a 3-year finance, because the payment on a 3-year finance program is probably going to be too high for me. It's more likely that I'm deciding between leasing for 3 years or financing for 5 years, which is a much different calculus. In that scenario, after 5 years, I will probably pay less out of pocket if I buy, but I might have more cash in my pocket if I lease, invest, and buy the car at lease end. And this is all before breathing a word about depreciation.

And, what if I have a second car that isn't paid off yet? Instead of pouring $20,000 into a down payment, I could lease a new BMW, pay off my other car, and invest whatever is left from my $20,000. In this scenario, I would actually own one car instead of owning zero cars, as I would if I "bought" the BMW, and I still have cash left over to invest. And finally, what about retirement savings? Let's say I'm 25 years old. If my choice is between financing a car with $5,000 down or leasing with $0 down and putting the $5,000 in a Roth IRA, where it will grow tax-free at an average 9% annualized rate for the next 40 years, guess which is going to be the smarter choice?

What you and everyone else needs to understand is that there is no one-size-fits all answer to the lease vs. buy decision. It is not a theoretical decision- it depends on the actual choice that an individual has before him or her at the time, based on actual, not theoretical, numbers. Leasing is not best for everyone, but neither is buying.

[Lassaxi]

Originally Posted by John 070

But I like your logic and analogy to CapOne. In my case, Bank of America is accepting 5.5% from me for 60 mos., why would they do that instead of doing what these e90post members are doing?

If you think Capital One or Bank of America is making its money off of car loans, you know very little about the financial services industry.

[John 070]

Originally Posted by Lassaxi

If you think Capital One or Bank of America is making its money off of car loans, you know very little about the financial services industry.

Businesses, unlike humans dealing with personal finances, don't look at things as coulda shoulda woulda. They need to sustain returns over the long run. When you have cash, it's very difficult to find suitable investments. Why the **** would there be private equity firms taking public companies private?

Where are all the lessee's now boasting about their big wins in real estate, especially in Miami and Phoenix? Imagine leasing a BMW and using the so-called cash flow to invest in Miami real estate last year. Talk about a wake up call in June 2k7. Or Boston for that matter, poor return since 2k2 and high initial investment. There always has to be something very real justifying valuation over the long run. Leasing a car is no bargain, but often it's the only practical way to get that much car for that little cash flow.