Advice on leasing a used car please

[FastCarFan]

I am seriously considering a pre-paid lease on a certified used BMW, either a 135 or a 335. With a lease you are essentially paying for depreciation + interest. I will pre-pay, so there will be no interest. And since a car takes its biggest depreciation hit in the 1st year, the depreciation from year 2 to year 4 (for example) should be significantly less. Finally, leasing a certified used BMW means it has been thoroughly checked out & it comes with a warrranty.

I have a few questions for the Pelican braintrust....

Am I missing anything? Are my assumptions correct?

My primary question is how does the dealer calculate the depreciation? When leasing a new car they simply look at their leasing guide to determine the residual value. But as I understand it, there is no leasing guide for used cars. So how can I know they are calculating the depreciation in a fair way?

My initial thought is to use Kelly Blue Book, Edmunds & similar sites to determine the price on a 2009 BMW 335 (for example) & then look at the price on a 2007 version of the same car, & then calculate the depreciation %. I would add 30,000 miles to the 2007 car to account for the miles I expect to drive. Is it as simple as that?

Has anyone here leased a used car before? If so, what was your experience like?

Thanks in advance for your help & advice.

[GH85Carrera]

Why not just buy the car and OWN it and when you want something else SELL it?

[racer]

How long would you lease it? At what year/mileage does a BMW CPO warranty run out (ie, would your lease term outlast the warranty?)

While perhaps overblown, read up on HPFP failures on these cars and any warranty coverage that would cover a failed unit.

As to GH85s post, I agree, why "lease" a used car. Folks usually want to lease a new car, or they BUY a used car.

After my only lease experience (and it was not a business write off), leasing just isn't for me. If I am going to spend thousands of dollars, I want to OWN it, not turn it back in and start over again.

[teenerted1]

so you are renting it for how long?

[aigel]

Why not buy the car and drive it a few years longer? I only buy cash - I do not want payment responsibilities in this economy.

George

[FastCarFan]

Thanks guys, but I wasn't asking about the merits of buying vs. leasing. I am fully aware that leasing is "renting".

Without boring you with the details, I have decided to lease my next car, & I simply have some questions.

Can anyone help?

And to answer questions some have asked, I will probably do a 2-year, 15,000-miles/year lease on a 2-year-old car. I believe BMW offers a 100,000-mile (limited) warranty, so that should be plenty for me.

[Rick Lee]

They tell you upfront what the sales price will be at lease end, it's non-negotiable and it doesn't change over the term of the lease. So, if you get a car that gets desireable while you have it and is hard to find in good used condition, then you could very well buy it and flip it at lease end. If their price is more than they're going for then, you just turn it back in and start again with another car. Do the math on how much $$ you'll be out for the same car over the same amount of time with leasing and buying. Warranty stays the same either way. The benefit of leasing is that you know you can buy it for a fixed amount at lease end, even if it's worth a lot more. And if it's worth a lot less, you wash your hands of it and let the dealer eat it.

I saw an ad on tv the other day to lease a 2011 328i sedan for $10 a month less than my wife is paying to own her 2008 328i coupe. She bought it for about $17k less than the new 328i sedans are going for. But she'll own it outright at the end. Not so with a lease. She's basically paying $600 more over the same period of time and she'll be able to sell it for at least $10k. Her warranty is for five more years and another 50k miles.

[Steve Carlton]

Originally Posted by FastCarFan

With a lease you are essentially paying for depreciation + interest. I will pre-pay, so there will be no interest.

Plus sales tax I'm sure (non-issue, I'm sure). Don't be so sure there isn't interest! Most pre-paid leases I've seen have interest, maybe reduced, maybe not.

Originally Posted by FastCarFan

Finally, leasing a certified used BMW means it has been thoroughly checked out & it comes with a warrranty.

Will you even be out of warranty before your lease is up? Making a car a CPO costs money, but perhaps it's required for the lease- I'd check.

Originally Posted by FastCarFan

My primary question is how does the dealer calculate the depreciation? When leasing a new car they simply look at their leasing guide to determine the residual value. But as I understand it, there is no leasing guide for used cars. So how can I know they are calculating the depreciation in a fair way?

There must be a formula. Ask the dealer.

Originally Posted by FastCarFan

Has anyone here leased a used car before? If so, what was your experience like?

It's been a long time, but most used car leases I've seen didn't look too attractive. Who knows what BMW offers. I did a lease for a friend on a early water-cooled 911 and the deal was excellent for him. Find out what a good lease would be on a new BMW and use that as a benchmark. Find out what the terms are for buying or flipping the car at the end. See if you have to pay the tax in order to re-sell it.

[zippy_gg]

While this may not answer your question on depreciation, I see an advantage to leasing; you only pay sales tax on a monthly basis for the duration of the lease, as opposed to buying (new or used does not matter) where you pay sales tax up front based on the value of the new car.
This is important in California where sales tax is 7.75% (in LA County).

[Rick Lee]

The sales tax thing is different from state to state. I think you do pay the whole thing on leases in some states.

[kaisen]

Paying cash, taking out a loan, leasing.... they all have their merits and pitfalls. A used vehicle lease can also be good or bad. Intial depreciation is a NON ISSUE. It ONLY matters how much they calculate the depreciation to be from here on out. In other words, if a new BMW was $50K and they guaranteed lease-end at $35K, you're paying on $15K. If a used BMW is $40K and depreciates to $25K, you're still paying on $15K. In that scenario, why wouldn't you just get the new one? It *should* work out where the used vehicle depreciates less from here on out, but don't bet on it. BMW is very aggressive on new-car leases as it is their main mechanism of incentivizing sales.

Also, paying cash up front (one-pay lease with no payments) HAS A COST ASSOCIATED. If you left your money where it is, earning interest, that is your opportunity cost. On new-car leases, BMW often offers lease rates less than 1%. So paying a two year lease up front, even at 0%, would be foolish.

I can help you calculate what you're paying if you give me the variables.

And, yes, ALG does calculate used vehicle residuals just the same as new.

[FastCarFan]

Thanks Eric for your great comments. I worked in the car business for a major manufacturer for 14 years, so I know about leases, just not used car leases. I read somewhere that there are no residual tables for used cars, but maybe that was incorrect.

I do understand that car companies subsidize leases, so I would definitely consider leasing a new car if the numbers work out.

My primary question was about how the used car residual is calculated (if not from a table). I wanted to make sure that the price I am quoted values the car fairly at the end of the lease.

I know I can negotiate the price for the used car, but not sure if I can negotiate the residual value too. If they use a leasing guide, perhaps not. But if it is calculated in another way (e.g., based on KBB or some similar source), it is possible that the residual could vary from one dealer to the next.

Thanks.

[kaisen]

Originally Posted by FastCarFan

Thanks Eric for your great comments. I worked in the car business for a major manufacturer for 14 years, so I know about leases, just not used car leases. I read somewhere that there are no residual tables for used cars, but maybe that was incorrect.

I do understand that car companies subsidize leases, so I would definitely consider leasing a new car if the numbers work out.

My primary question was about how the used car residual is calculated (if not from a table). I wanted to make sure that the price I am quoted values the car fairly at the end of the lease.

I know I can negotiate the price for the used car, but not sure if I can negotiate the residual value too. If they use a leasing guide, perhaps not. But if it is calculated in another way (e.g., based on KBB or some similar source), it is possible that the residual could vary from one dealer to the next.

Thanks.

Dealers don't typically hold their own 'paper', they use a bank or lease company. Lease-end-values (residuals) are typically underwritten for loss. So they usually use the ALG figure. The real ALG guide book gives a dollar amount for a car of a given age and miles, and has adjustments for big equipment and higher or lower miles at lease end. I've seen where ALG guarantees a car to be worth $10K two years from now on a four year old car, but you can buy that car today for $11K. The lease will be pretty cheap! Obviously the lease-end-value will be way off... but that's how it goes. So the only difference is that new car residuals are typically expressed as a percentage of original MSRP because that's easy to verify. A used car is expressed as a dollar amount, but loosely the same as the percentage when it was new, i.e. if a NEW BMW was $50K and ALG expresses a 48 month residual at 50%, or you get that same car two years old and lease it for two years, it still comes back four years old and for $25K. Although the starting points are different, the bank/lease company will own the cars for the same amount. They might be wrong, or they might be right.... the best reason to lease!

[kaisen]

Originally Posted by FastCarFan

I wanted to make sure that the price I am quoted values the car fairly at the end of the lease.

Who cares about fair!? You WANT them to be wrong, and to guarantee it to be too high...that means YOU paid less! Higher residual = good for you

I know I can negotiate the price for the used car, but not sure if I can negotiate the residual value too.

It's not likely. The residuals are set in stone because that is their money. If it's too low, like Rick said, YOU get the first right of refusal. Buy it if it's a good deal. Sell it and keep the 'profit'. If it's too high, then you really won because you used up more of the car than you paid for. WIN!

[FastCarFan]

Originally Posted by kaisen

Dealers don't typically hold their own 'paper', they use a bank or lease company. Lease-end-values (residuals) are typically underwritten for loss. So they usually use the ALG figure. The real ALG guide book gives a dollar amount for a car of a given age and miles, and has adjustments for big equipment and higher or lower miles at lease end. I've seen where ALG guarantees a car to be worth $10K two years from now on a four year old car, but you can buy that car today for $11K. The lease will be pretty cheap! Obviously the lease-end-value will be way off... but that's how it goes. So the only difference is that new car residuals are typically expressed as a percentage of original MSRP because that's easy to verify. A used car is expressed as a dollar amount, but loosely the same as the percentage when it was new, i.e. if a NEW BMW was $50K and ALG expresses a 48 month residual at 50%, or you get that same car two years old and lease it for two years, it still comes back four years old and for $25K. Although the starting points are different, the bank/lease company will own the cars for the same amount. They might be wrong, or they might be right.... the best reason to lease!

I never thought they would use the same ALG book that they use for leasing new cars, but it makes sense. So I guess I just have to negotiate the best "purchase price" & make sure they use the ALG residual value.

I understand the possibility fo buying & flipping at the end of the lease.

Thanks for the great comments & advice.

[89911]

I used to lease years ago when it was the most common way to have a new vehicle. I won't go into benefits versus drawbacks other then I seemed to always to be waiting for the lease to end and hated the idea that you can't do anything with the car until that point.

[Cloggie]

.....there are many places on the web that will do the lease vs. purchase calculations, but always remember that there is the time value of money involved for both your money that you did not have to put to work if you chose to buy or the cost of the dealer's money that you are in effect borrowing.

Easiest way is to build a monthly spreadsheet for the lease payment stream, straight line depreciate the car from its current assessed (as in price it would be if you purchased it outright now) to the lease final purchase price.

Compare it to borrowing the money, add your interest rate and any other costs you might have that are buried in the lease and then compare the two.

You can make a swag for the final sale price at the end of term if you choose to purchase and it will be as good as any.

Used to do this all the time with equipment for business, basic conclusion there was that unless it was an operating lease that gave you operational options (e.g. ability to swap out equipment for newer/better at favourable lease extension terms) it was always better to buy as the company I worked for had a very low cost of capital. Most effective interest rates on leases are about 150% of bank rates if not higher, so it made it almost punative to lease.

D.

[kaisen]

Originally Posted by 89911

I used to lease years ago when it was the most common way to have a new vehicle. I won't go into benefits versus drawbacks other then I seemed to always to be waiting for the lease to end and hated the idea that you can't do anything with the car until that point.

Such a common fallacy...... you can do whatever you want with your leased car at any point in the term. You have the same options as if you had a loan, plus the ability to give it back. I truly think people don't understand leasing.