How does leasing work?

[expat]

Can someone explain to me how leasing works on a new car worth say US$25,000.

What's the cost benefits/drawbacks including any breaks in US tax (if any) for a personal lease arrangement?

Thanks for any help.

Mark

[Adam]

If it's set up as part of a salary package, the payments (rentals) would most likely come from pre-tax salary, meaning that the car is paid for, tax free. That's how it works here in Aust, and I doubt it's much different for the USA.

Typically, leases are better geared for a predominant business usage or complete business use (ie company-funded car). Usually, whatever percentage of business use is claimed is proportional to the percentage of costs that are tax deductible.

[cegerer]

For non-business use, I really don't think there's much difference financially. Even for business use, I'm not sure it matters much. I just began switching from leasing my employees vehicles to purchasing them. Maybe one of the financial guys will chime in here .....

From a reality point of view, the drawback to leasing is it leaves you with few options. You're commited to the end of the lease term, whether you like the vehicle or not - I highly recommend a 2-year lease max!! Mileage limits are sort of an issue. Although, many inaccurately describe the $.15 or $.20 per mile fee over the specified mileage limit as "a mileage penalty". It's not. If you owned the same vehicle, each of those miles over the 'limit' would in theory reduce the value of the vehicle by a like amount anyway.

The good part about a lease is you usually get in for $0 down and just start making the payments instead of tying up your cash for a downpayment. At the end of the lease? Just drop the vehicle off at the dealer and walk away - pretty simple.

[expat]

Thanks guys.

If you elected to buy the car at the end of the lease, is there a standard depreciation value/percentage applied or will this vary with
a) type of vehicle
b) condition of vehicle

[Purrybonker]

I've done the leasing thing a few times - it makes great sense in some cases (even putting tax consequences aside) - but you really have to shop and be on top of your game. I like leasing because it removes some of the ownership administrative burden -like disposing of the car when it's time for a new one for instance.

Lease payments are lower than loan payments because you only make principal payments on the depreciation, not on the whole value of the car.

When you buy a new car there is really only one basic point of negotiation - the price. Leasing brings in a whole new set of parameters, many of which vendors will do their very best to try to turn to their advantage. With a huge percentage of new vehicles being leased these days, the sellers/lessors are definitely on top of their game.

Leasing has three basic parameters - start price, lease rate (interest rate) and end value. Basically your lease payments cover three things; depreciation over the term of lease, interest burden on the undepreciated (lease-end value) and interest burden on the declining depreciation amount. These numbers all may vary from car to car and even from lessor to lessor on the same car. It all depends on how much vig the lessor wants and how much the lessor is prepared to gamble on the value of the car at the end of lease. Keep in mind that a few dollars difference on a monthly lease can add up to hundreds over a lease term. I wont go into all the permutations here, but do the following if you decide to lease (at least this method has worked for me):

Send an email to every dealership and major independent vehicle leasing company in a reasonable sized area (as far as you are willing to travel) asking for quotes on:

1) Cash price on defined (list all options and variations) vehicle.
2) Monthly lease payment with zero down over desired term (24 or 36 I would suggest). Forget BS about "lease rates" - compare payments, that's all that counts.
3) Lease end buy out value.

You might be suprised at how the lowest guy on number 1 might be the highest on number 2. Do your number crunching and figure out what makes sense for you. Don't forget to consider manfacturer cash rebates in lieu of supposed bargain lease deals.

Generally you want the highest lease-end buy out you can get(this makes monthly payments lower). But that can work against you if you decide to buy the car at the end. I just did that and ended up paying about $1k more than retail because I really wanted to keep the car. I couldn't bring myself to let it go and try to replace it with a similar car. But I guess in the long-run it all shakes out, I benefited from lower payments for a couple of years.

[turbo6bar]

For business purposes, when you lease a vehicle, you get to right off the cost immediately (spend $4000/yr, your writeoff is $4000/yr). If you buy a vehicle for business, you can writeoff the maintenance expenses or take mileage, but you can only depreciate the vehicle. For example, you might spend $6000/yr on payments, but can only depreciate $3500 that year. SUVs and heavy trucks get special treatment with regards to depreciation.

For personal use only, there are no tax advantages for leasing or buying outright.

I don't think leasing is financially smart, but can be good for other reasons.

Some guys will buy off-lease company cars. I suspect the buy-out price is good perhaps because the employer pays a high monthly lease price (good writeoff). Note the market is flooded with tons of off-lease cars selling at bargain basement prices, so I'd imagine the prices are very low. All pure speculation on my part.

If you know what you want, buy a clean off-lease car. I bet the monthly payments would be far less than leasing a new model, and you'd own a car that has already taken a huge depreciation hit. Of course I have been accused of being a cheap b@st@rd.

Jürgen

[Dantilla]

I asked my accountant a few years ago to explain this. He just laughed and said that it is always cheaper to buy.

But I'm another cheap-skate. I always pay cash for used vehicles.

[nostatic]

to me, leasing equals renting. I don't like to rent cars.

[DonDavis]

Ever wonder why dealers are always pushing the lease thing so much? It's the MOST expensive way for the average consumer to get a car. There are tons more average consumers than "business types" for which its beneficial.

My company provides me with a vehicle leased through GE Fleet. I put a butt-load of miles on it and all maintenance/repair is taken care of by fleet. The MRI scanners I maintain CANNOT be held up by car problems. It makes sense for a company as big as GE to lease by the hundreds.

Leasing can have a "sophisticated" apeal to the average consumer and they almost always go over the allotted miles, and at turn in have to pay a heavy fee. The buy option is NEVER worth it. They want more than dealer retail.

The low payments are just to get you in it, then you're hooked by all the "Got'chas".

Please research extensively before you get into this. Be certain it makes long term financial sense to your situation.

[Icemaster]

I LOVE leasing.

especially the part where I get to buy the just-off-lease car used (usually) with a bit of a remainder of the warranty for real cheap.

[CamB]

What Purry said: "Basically your lease payments cover three things; depreciation over the term of lease, interest burden on the undepreciated (lease-end value) and interest burden on the declining depreciation amount."

This is exactly how I understand it. Alternatively, you could ask yourself - "what am comparing the lease to". It is like borrowing the money to buy the car, and making payments which amortise the principal down to the sale price of the car at the end of the lease. You then sell the car at the end of the period and pay back this amount (still owing).

Leasing is therefore a good idea if:

- the sale price is lower under the lease than for a cash purchase (unlikely)
- the interest rate payable under the lease is lower than what you can borrow at from some other source (or if you can't borrow!)
- the lease end price is higher than what you could sell (or trade) the car for privately (also unlikely)

However, there are a couple of other important considerations:

- some leases include maintenance (usually only used by businesses)
- tax considerations --> depends on local laws, basically

The way I look at it, in New Zealand you can't tax deduct any portion of the lease payment as a private individual. I have to assume that the purchase price and the end of lease sale price are the same whether leasing or buying --> therefore the interest rate becomes my only consideration. Therefore, if you are paying an interest rate of 7% under the lease (I dunno what it actually is) and by taking that lease leave yourself with money in the bank (the purchase price of the car) - that money in the bank needs to earn 7% grossed up for tax (say 10%) to get you ahead. You might as well buy the car...

If you have a mortgage, it is an even easier choice - which has the lower interest rate --> the car lease or the mortgage.

[expat]

Thanks for the info and advice.

Looks like from all the details I've read here and in some forums that leasing is not for me.

Like Todd said, its like renting a car. Still I've asked my financial guy to investigate this a bit further for me in LA as I am speculating too much and dont know enough about the tax rules and market in Cali.

Once again, thankyou. You have helped me refine my search and enquiries.

Cheers
Mark