| Mike624 |
Getting close to making a move on a 2008 Sport. Had always planned on buying, but now I'm at least contemplating leasing. Having never leased before, I was hoping someone could answer a question or two (JeffK?).
Besides the cap-cost (I'm currently at $500 over invoice), what's negotiable in a lease?
I'm looking for 36 months with no money down and the tax rolled into the monthly payments. Beyond that, are things like the residual value, money factor, included miles, mileage overage charges, and various fees negotiable? Are there any fees that I should absolutely refuse (i.e. bank, acquisition, disposition, etc.)?
I think my preference is still to buy, but trying to get decent money for my trade has been such a pain in the ass that I at least want to negotiate the the best possible lease deal and then compare the numbers.
Thanks in advance for your help,
-Mike |
|
|
| JeffK |
Dear Mike:
Getting close to making a move on a 2008 Sport. Had always planned on buying, but now I'm at least contemplating leasing. Having never leased before, I was hoping someone could answer a question or two (JeffK?).
Glad you are considering leasing. Hope I can help.
Besides the cap-cost (I'm currently at $500 over invoice), what's negotiable in a lease?
Remember a "cap cost reduction" is nothing more than a down payment. It is subject to tax and in the event your car is stolen or destroyed in an accident you forfeit your cap cost reduction. This is the main reason I strongly advise not making a cap cost reduction.
I'm looking for 36 months with no money down and the tax rolled into the monthly payments.
Correct procedure. Put as much into the lease payment as possible.
Beyond that, are things like the residual value, money factor, included miles, mileage overage charges, and various fees negotiable? Are there any fees that I should absolutely refuse (i.e. bank, acquisition, disposition, etc.)?
Residual is a function of length of lease and mileage.
Money factor (multiply money factor by 24 to arrive at interest rate) is function of your credit rating and length of lease.
Mileage is negotiable, but of course the residual goes down with an increase in mileage.
Bank fee is the same as acquisition fee, there should be only one not both. Disposition fee is usually set: There is or there isn't and it varies from lease company to lease company. Usually not negotiable.
I think my preference is still to buy, but trying to get decent money for my trade has been such a pain in the ass that I at least want to negotiate the the best possible lease deal and then compare the numbers.
You have hit on one the main reasons to lease: the inability to get a good return on investment: A car is a depreciating asset, and every day you wait to find a buyer, your car is worth less. By leasing you fix your costs. I also never, repeat never, lease beyond the warranty period.
If you do a spread sheet and use only 5% as use of money (money tied up in buying a car) you will find your break even point on buying vs leasing to be, at a minimum 6 years. That means you must own a car for more than 6 years before owning is cheaper than leasing. Beyond six years, owning is cheaper, even taking into consideration repairs and replacement (tires, brakes, hoses, etc.) However, you are now driving a 6 year old car, with 6 year old safety features and the reliability of a 6 year old car vs. a new car.
Most programs that compare leasing to owning, fail to take into account use of money (money tied up in car, money that should be earning after taxes a minimum of 5% per year).
Additionally there are tax savings: In New York for example, tax is collected on the purchase price when you buy. When you lease tax is collected on the lease payments, a fraction of the purchase price. This tax savings more than offsets the bank/acquisition fee.
So at the end of the day, the interest component on the lease payments is significantly less than the use of money cost on buying (a savings)* and you have eliminated the hassle of selling when you want a new car. Couple in the fact that the residual is almost always higher than the value of the car for additional savings. *(the total of the lease payments is signigicantly less than the cost of the car. So interest component at even 6% on the lease payment is less than 5% use of money on buying.)
The downside is that in a change of circumstances it is very expensive to get out of a lease. However, if you owned the car and wanted to get out fairly quickly, the depreciation would also be quite significant, probably equal to or greater than the cost of getting out of the lease.
Also by leasing you get a new car every 36, 39, 42 or 48 months (your lease term). This is either a positive or negative, but I believe it is a positive - if you really love the car at the end of lease and must have it, you can buy it at the residual price!
For the past two years, if you want to buy, most residuals are negotiable.
This then becomes a win/win for leasing.
JeffK |
|
|
| Mike624 |
Hi Jeff,
MANY thanks for the lengthy response and all the info.
You definitely make a compelling argument for me to consider leasing more seriously. That said, I'm surprised you peg the break-even point at 6 years of ownership; I've always been under the impression that leasing is NEVER a better a deal than buying, but that the premium is worth it (to some people) because you get a new car every few years and don't have to deal with the hassle of selling or going out of warranty coverage. However, you seem to be the leasing guru on this board and it's a new process for me, so I'll take your word that's how the numbers work out.
Heard back from my dealer by e-mail with the following numbers (for a 2008 Sport model):
$712.74 for 36 months/12K miles per year (57% residual)
$738.60 for 36 months/15K miles a year (55% residual)
Money factor is .00247 (5.928%) for both leases, as is the negotiated purchase price of $42,807 ($500 over invoice, including destination).
While the dealer hasn't run my credit yet, based on our casual discussions he seemed to think that I would have no problem qualifying for the current 2.9% financing special available for purchases. Does that mean I should expect a lower money factor? Or does Honda Finance lock in specific rates for leases?
Also, the residual values strike me as being out of whack for a 3 year old car from a company with traditionally high resale values. Shouldn't the 12K mile residual be somewhere in the low 6x% range, or am I completely off the mark?
The lease payments for the 12K mile deal total $25,658.64. Given even a 57% residual value, I calculate that I'm "using" $18,407.01 of the car (43% of the purchase price of $42,807). Even after finance charges and tax, it seems like the payment total is way too high.
Based on a suggestion you wrote in a separate thread, I plugged the numbers I have into the calculator at LeaseGuide.com. Despite your initial suggestion, I DID include sales tax (estimated at 8.5%, will register in NYC and blanking on the exact rate) because the figure without it just seemed too low. Unfortunately, the dealer did not provide a breakdown of the fees in the lease price, just that they were already included, so I estimated them at $500 (won't be able to get a breakdown until after the holiday -- probably Saturday).
Anyway, the calculator spit out a monthly figure of $704.52, not terribly far from the $719.xx quoted by the dealer.
Again, the primary questions this raises for me are:
1) Am I getting screwed by a 57% residual, and can I do anything about it?
2) Should I be demanding a lower money factor or am I at the mercy of Honda Finance?
Thanks again in advance for your thoughts on this (or anyone else's). I realize no one HAS to be on this board and it's just people helping people -- it's very much appreciated. I'm very comfortable with the buying process (it ain't rocket science), but as I've said, I'm learning about the finer points of leasing as I go...
Thanks (and happy Thanksgiving),
-Mike |
|
|
| kencivic |
I'm looking at MDX with Navi in Alabama was quoted:
MSRP $44,410
selling price $42.250
money factor .00247
36 month 15,000 year
residual .57
monthly payment $652.63
up front cost $1500
Dealer doesn't seem interested in moving off these numbers |
|
|
| JeffK |
Dear Mike:
You definitely make a compelling argument for me to consider leasing more seriously. That said, I'm surprised you peg the break-even point at 6 years of ownership; I've always been under the impression that leasing is NEVER a better a deal than buying, but that the premium is worth it (to some people) because you get a new car every few years and don't have to deal with the hassle of selling or going out of warranty coverage. However, you seem to be the leasing guru on this board and it's a new process for me, so I'll take your word that's how the numbers work out.
I will do the math for you:
Negotiated price: $42,807
Tax 3,639
Total $46,446
Use of money $ 6,967 (5% per year for 3 years)
Total cost $53,413
MSRP $46,510
Residual $26,510 (57%)
Actual cost $26,902
Leasing cost: $25,659 (36 months @$712.74 per month)
Savings by leasing $1243.
However, this is assuming you will actually be able to sell your car at the end of three years for $26,510. I suspect you will not be able to. In that case owning will cost even more as compared to leasing.
In the event your car is worth more than $26,510 and you lease, you can buy the car and keep it or buy it and sell it for a profit.
As you correctly point out, by leasing you will not have the hassle of selling the car at the end of lease, which I think is worth money.
Also I assumed a cost of money of only 5%. If you have money in mutual funds, etc. and are getting a return of more than 5%, and use that money, than the cost of money increases and the savings by leasing increase.
Heard back from my dealer by e-mail with the following numbers (for a 2008 Sport model):
$712.74 for 36 months/12K miles per year (57% residual)
$738.60 for 36 months/15K miles a year (55% residual)
Money factor is .00247 (5.928%) for both leases, as is the negotiated purchase price of $42,807 ($500 over invoice, including destination).
While the dealer hasn't run my credit yet, based on our casual discussions he seemed to think that I would have no problem qualifying for the current 2.9% financing special available for purchases. Does that mean I should expect a lower money factor? Or does Honda Finance lock in specific rates for leases?
I believe the money factor rate you have been quoted is for top tier (best) credit. I would not expect better.
Keep also in mind that with the Honda/Acura lease, there is a provision that the first $1,500 of damage, $500 per incident is waived.
Also, the residual values strike me as being out of whack for a 3 year old car from a company with traditionally high resale values. Shouldn't the 12K mile residual be somewhere in the low 6x% range, or am I completely off the mark?
If you check KBB.com for values of 3 year of MDX with 36,000 miles (use trade in value in good condition which is close to wholesale) you will find that most MDX do not even hold 57% of their value. As I have posted, one of the reasons that most people at the end of their lease turn in their car, is that the car is not worth the residual.
The lease payments for the 12K mile deal total $25,658.64. Given even a 57% residual value, I calculate that I'm "using" $18,407.01 of the car (43% of the purchase price of $42,807). Even after finance charges and tax, it seems like the payment total is way too high.
Based on a suggestion you wrote in a separate thread, I plugged the numbers I have into the calculator at LeaseGuide.com. Despite your initial suggestion, I DID include sales tax (estimated at 8.5%, will register in NYC and blanking on the exact rate) because the figure without it just seemed too low. Unfortunately, the dealer did not provide a breakdown of the fees in the lease price, just that they were already included, so I estimated them at $500 (won't be able to get a breakdown until after the holiday -- probably Saturday).
Thanks for reading my prior posts. Again, you can do the calculations using LeaseGuide by knowing the MSRP, negotiated price, bank fee ($700) residual, money factor and length of lease in months.
The problem with tax is that in New York, there is a tax on the tax. I usually calculate the lease cost without the tax and then multiply the payment by 10.5%. This approximates the tax when wrapped into the lease. (I live in Nassau County, tax rate of 8.625%)
1) Am I getting screwed by a 57% residual, and can I do anything about it?
No: See explanation above
2) Should I be demanding a lower money factor or am I at the mercy of Honda Finance?
You can shop other leases, but remember the $1500 allowance for damage with the Honda lease.
Thanks again in advance for your thoughts on this (or anyone else's). I realize no one HAS to be on this board and it's just people helping people -- it's very much appreciated. I'm very comfortable with the buying process (it ain't rocket science), but as I've said, I'm learning about the finer points of leasing as I
You are welcome.
JeffK |
|
|
| Mike624 |
Now that I'm fully recovered from Thanksgiving, I've had some time to go back and dig into this a little more.
I've built a pretty detailed spreadsheet to help me weigh all the variables involved. After comparing a variety of scenarios, I've calculated the break-even point of buying vs. leasing to be somewhere between years 4 and 5. The exact point in this range is dependent on multiple factors, including financing terms (rate/duration), expected residual value, and how one invests their money not tied up in the purchase (or as you call it "use of money"). The use of money is further complicated by the wide range of returns one might expect (I'm a professional investor), as well as varying tax liabilities. Additionally, the actual residual value can vary greatly depending on whether one disposes of the car by trade-in or private sale (hassle vs. value). My model allows me to change all these figures on the fly and the 4-5 year break-even time has been consistent throughout.
Keep in mind that the break-even point only takes into account financial issues, and not the intrinsic value of having a newer car if you leased rather than owned.
I've also tried to factor in maintenance costs that might be associated with keeping a car 5 years rather than 3 (5 years being about how long I would keep a car if I bought it). My soon-to-be 5 year old Accord has been very reliable, and I assume an MDX would be similar. While I could probably make it through a lease on the original tires, I would likely need to replace the brake pads one-time whether lease or buying (I base this on my current ownership experience). The MDX's warranty is good for 4 years (drivetrain for 6) and I figure the maintenance costs between year and disposition would be minimal. Even if I factor in the cost of an extended warranty, the break-even is still under 5 years in most scenarios.
Regarding the numbers you listed in your example for leasing vs. buying, I think your model assumes paying cash, rather than financing. In that case, yes, you give up quite a bit re: use of money. However, if financing, you can still invest the amount that you haven't yet paid off. That said, I was shocked to see (in my model) just how much more cost-effective leasing is over a 3 year period -- your estimate of $1,243 is actually way too conservative by thousands of dollars. However, because of the nature the declining rate of depreciation on cars (i.e. not nearly as big a drop in years 3-5 vs. 1-3) those savings from leasing are eaten up if bought and held for an additional 18 to 24 months.
All this said, I'm still undecided about leasing vs. buying; I must have changed my mind 6 times in the past day. Depending on the variables, the savings of buying vs. leasing can range from a few hundred to a few thousand. What I'm trying to figure out now is whether that intrinsic value of a new car after 3 years and zero hassle at lease-end is worth the difference.
Thanks again for the help. Talking this through is definitely helping in the decision process.
-Mike |
|
|
| JeffK |
Mike:
You are correct: I did not consider financing. I either pay for the car or lease. When financing rates are lower than 5% use if money, then the break even point would change.
For me the deciding factor is not having the hassle of a trade in or selling privately.
I also do not like to have an expensive car beyond the warranty period. I am really spooked by a shop hourly rate of nearly $100.
To me, owning must be much, much cheaper than leasing. If it is not, then passing the risk of depreciation on to a third party is really a benefit to me.
Think of it this way: As you correctly point out, the break even is beyond 4 years, the warranty period. Lease for 4 years. You are ahead of buying. At the end of the lease, you have an option that cost you nothing. As a private investor, where else can you buy a 4 year call (if you buy) or a put (if you turn in your car) at no cost?
BTW, on my first MDX an '03, I was on the original brakes and tires when I turned it in at 48,000 miles. The battery was weak. Nothing but routine maintenance. The residual was about $3,000 over trade in - so I was really way upside down. I then leased an '06 for 3 years at about the same monthly payment as I was leasing my '03. So for 7 years I am in a new car!
JeffK |
|
|
| Mike624 |
quote:
Originally posted by JeffK
Think of it this way: As you correctly point out, the break even is beyond 4 years, the warranty period. Lease for 4 years. You are ahead of buying. At the end of the lease, you have an option that cost you nothing. As a private investor, where else can you buy a 4 year call (if you buy) or a put (if you turn in your car) at no cost?
JeffK
Jeff,
Good analogy re: options.
In principle, I agree with everything you're saying. There is definitely a non-monetary value in getting a new car every three years, I just haven't decided yet if that subjective value is worth it to me.
I'm lucky enough that the financial impact won't make or break me either way. However, it's the part of me that likes getting the best deal possible that's having a hard time making peace with the thought of leasing.
At the moment, I could see myself going either way. That said, I'm itching to get a deal done and will probably decide in the next few days.
Will keep you posted.
Thanks again,
-Mike |
|
|
| JeffK |
Mike:
Good analogy re: options.
As an investor I thought you would. It really puts leasing into the proper prospective. If anything, you would expect the options would cost extra when the contrary is true. By leasing you take in money (like selling an option) but you actually own it! Best of both worlds
In principle, I agree with everything you're saying. There is definitely a non-monetary value in getting a new car every three years, I just haven't decided yet if that subjective value is worth it to me.
I was brought up very, very conservative when dealing with finances. It took me many years to convince my father to lease rather than to buy. He never every bought on time - he lived through the depression.
Finally I used this analogy which worked: Our business always rented our office space in Manhattan. I asked him "Why not buy rather than rent?" He said, "only if it is cheaper - why should we tie up our capital when our needs can change. Renting gives us flexibility" I then said "We would only buy rather than rent, if there was a significant monetary advantage." He replied "exactly". I said OK, you are not leasing your car, you are renting it. He then smiled and said "OK".
And remember that if we bought we would be buying an appreciating assets, where a car is a depreciating asset.
The problem with leasing has been that the dealers often talked monthly payment and they were able to charge more for a leased car than a purchase. That is no longer true. The price is the same whether you lease or buy.
The real question now is "Why would anyone ever buy if you can lease for less?"
I have never found a satisfactory answer to that question. I have been leasing since the mid '80's.
I'm lucky enough that the financial impact won't make or break me either way. However, it's the part of me that likes getting the best deal possible that's having a hard time making peace with the thought of leasing.
From your posts, I had the feeling this was more of getting the best deal. I realized that either way was not going to change your life style.
I just do not like throwing money away, hence I lease rather than buy.
At the moment, I could see myself going either way. That said, I'm itching to get a deal done and will probably decide in the next few days.
Take your time! These cars are no longer in demand. The prices will not go up - I guarantee that - and you can take that to the bank.
Remember the dealer is not your friend. Once a dealer said he wanted to be my friend. I said I couldn't understand why, I just walked into his showroom. All I wanted him to be was straight and honest. Of course this was far more difficult than being my friend.
JeffK
PS: Tax consequences: Except in rare instances (stock transactions at the end of the year for example) I do not think business decisions should be made because of tax savings. During the term of the deal, the tax laws can be changed, wiping out any potential gain. In other words the business deal should stand on its own, regardless of tax consequences. Having said that, if there is a tax advantage, it is a bonus, not a reason to make the deal.
If you are in a position to expense out a car on your or your business return, leasing is much, much better than owning. Every accountant I have every spoken to has told me that 99 out of 100 times IRS accepts the lease payment as a tax deduction. It is simple and clean and often substantially more than depreciation and mileage when you own.
JeffK |
|
|
|
