Really dig these current generation of Audi’s. The S4, S5, and S7…fine looking machines. Looking forward to see how they hold up long term.

Eric, that's more what I expected. Not arguing your point, but that equation varies per person. The amount of ROI that people receive is highly variable, ask 10 people and you'll get 10 different answers. Right now you're lucky to get 2.5% out of a CD.

Then you completely missed my point about sales tax and residual

And the mortgage.

Thanks for the info. I usually dont deal in cars in that range so taxes arent that big a deal but it's something to consider.

You do bring up some good discussion points, especially from a business standpoint. Being able to deduct capital depreciation and interest as a business expense definitely has its advantage. However I still disagree that a lease is a good thing from a non-business standpoint.

The sales tax thing is a valid point, and one which I haven't ever heard of before.
In my last lease agreement, I did save $200 by leasing the car for four years rather than paying for the 3% tax up front. I would have paid $700, but really only paid $500. Not really a big deal.

The part I disagree on is that the interest charged by dealers is no where close to 2.5%. Lease interest is not as clear cut as regular financing interest and requires more math to figure it out. My wife leased a car and the calculated interest was 6.1%. This was not negotiable by the dealer and it was a provided value by VW credit. I've never heard of the money factor being negotiable by anyone. Please speak out if you experienced differently.

The one point I don't think you really covered is the fact that you are borrowing money to rent a car. This just doesn't make sense. Looking at my wife's last lease agreement, we paid $16,000 to rent a new car for four years. Plus we were charged $350 for "wear and tear" items that had to be fixed on return. $12k was the loan on the depreciation and $4k was the interest charge for this loan.

I could have bought the exact same car, had a much lower interest rate (1.9% vs. 6.1%), and still have some capital in the car to use on the next new car (10K vs 0.) I've done the math and leasing a car isn't a better financial decision for personal use.

The current Nov '12 special lease rate through VCI/ Audi financial is, indeed, 2.52% and they offer 1.9% financing on a regular loan as well.

Your math and analysis is missing some key components

First, nothing is better or worse until compared to the alternative. You say you paid $16K to rent a car, how would you have fared if you owned it? How much depreciation? Do you know for sure? How much interest? How much sales tax? If you know all of those answers, then make the comparison. $16K may have been a great deal, or you may have been screwed. Hard to say.

Second, your flawed math. Your "loan on the depreciation" (principle) wasn't calculated on $12K as you suggest. That may have been the total depreciation (net capitalized cost minus stated residual) but you also carried that residual for four years without ever touching that principle (by design). Think of it as a loan that takes you from what you paid for the car to the residual value. You may start at $22,000 (capitalized cost) and four years later end at $10,000 (residual) for a $12,000 depreciation. But your first payment's interest was calculated at $22K and your last at $10K. Your average daily balance was roughly $16K.

Using that example but with a real 2.52% rate ($22K cap cost, $10K res, 48 mos, 2.52% MF), the lease payment would be $284/mo

If you had taken a 48 month loan for $22K at 1.9% the payment would have been $476

The lease "saved" $192 per month for 48 mos for a total of $9216, plus whatever opportunity cost from that cash flow. But the loan is paid off and the car should be worth $10K, right? If it is, you're $784 better off with the loan ($10,000 residual minus $9216 difference in payments).

But what if it isn't worth $10K? What if they were wrong and it's only worth $9K?

Now that $784 savings evaporates, and then some.
Plus the cash flow difference each month (put that extra $192/mo towards your mortgage each month and tell me the effect after 4 yrs!).
Plus the sales tax difference.
Sales Tax on Purchase = 7% of $22K purchase price = $1540.
Sales Tax on Lease = 7% of $284 payment each month = $19.88 x 48 months = $954.24
Sales Tax advantage on lease = $585.76

Now do this on a car that costs more than 2.5 times as much as our example

Oh, and your wear-and-tear "penalty" would exist if you owned the car outright and went to sell/trade the vehicle then too. Scratches, tires, dings, stains, more miles, etc devalue a car no matter how they were paid for.


YMMV


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I'm impressed that your math matches my spreadsheet calculators! (Most people just use funny math and make up $hit)

You are correct, the one value I didn't account for was the "saved" money from having the smaller payment with the lease. This should be accounted for appropriately as you suggest. (I added that to my fancy spreadsheet and it does change the comparisons a bit)

Here is one interesting difference that not many people know about leasing.
Even if you pay the entire loan of "depreciation" up front, you still have to pay some interest on the residual value of the car through the whole lease.
And the higher the residual value, the more interest is charged!

In our example, if you pay the entire 12K up front on the lease you will still get charged $1k in interest on the 10K residual.

If you have the cash to buy the car outright you can get ahead of the lease by saving on the interest charges. This is my plan...

No, I didn't. But everything about your case is fuzzy except for sales tax savings which can be easily quantified. POTENTIAL ROI on cash vs lease expense. POTENTIAL savings on residual value. In some cases you are undoubtedly correct, in others I'm certain you are not. With purchasing a vehicle outright I know exactly what I am getting, and not having a car payment is pretty nice. I also don't have any mileage limits (we've put 14k on my wife's 2012 F150 in 7 months), and no concerns about turning in a lease and getting nothing for my money.

Yet you owe money on your mortgage

Yes, because unlike a car I can't afford to pay cash for my house. If I could, I absolutely would. Less payments bring peace of mind, that is difficult to quantify.

Ah you added this

If you buy, lease, take out a loan, pay cash, whatever......

vehicles will depreciate based on miles

Put 20,000 miles per year on your truck or 15,000 miles per year on your truck. Which is worth more 2 years from now?

One has 40K miles (out of warranty) and the other has 30K miles (still under warranty)
Which one is worth more? How much more?

See, you can't tell me how much more....you're at the whim of the market. I can tell you that, right now, a 2011 (two year old) F150 with 30K miles is worth $2800 more than one with 40K miles. Therefore, each of those 10,000 miles cost you 28 cents per mile. Yet you can purchase miles up-front on a Ford Credit lease for 12 cents per mile.
In other words, the lease wins by over $1600. You knew it cost you $1200 up front, worst case, when you signed the lease. If you paid cash for your truck and sold it two years later, you had no idea those 10K miles would cost you $2800.

You can put as many miles on a lease as you want. The limitation is all in your head. Regardless of what you signed up for. Let's say you signed up for 15,000 miles per year and ended up putting on 20,000 miles per year. At the end of your two year lease, you have options. Option 1: turn it in and pay a 20 cent-per-mile "penalty". That's $2000. Still a better deal than owning it and taking a $2800 hit. Option 2: Buy out the lease. If the stated residual is $10K, you can buy your truck for $10K.....whether there's 8,500 miles on the odometer or 85,000. If you think you can do better that way, sell it or trade it (same options you'd have if you owned it). Just choose the better option. Sometimes paying a "penalty" saves you money.

Again, miles are going to cost you one way or another. With a lease you know EXACTLY how much, up front.

Oh, and let's say you bought those extra 10,000 miles up front. But at the end of the lease you didn't use them. Guess what, they're refundable with Ford Credit. 100% You get your money back. Or, if you want to keep the truck, you owe that much less in residual. That money doesn't go away. A+B=C

If I had bought a $64K 2010 Audi S4 for $55K (realistic, $500 over inv), paid $3850 in sales tax up front (7% of $55K) and went to sell it three years later with 45K miles to find out it's worth $32K dollars (actual value today), what did I have to show for my money?

If I leased it, retained my $58,850 and paid 36 payments of $708 (incl tax) and had a $34,560 residual (these are the ACTUAL Audi Financial numbers this month, btw, not made up), I'd have spent $25,500, what did I have to show for my money?

Well, to own it I spent $58,850 up front and recouped $32,000 when I sold it, for a TCO of $26,850. To lease it I spent $25,500 *AND* retained my liquidity, all my cash, to invest, bury, blow, or burn as I saw fit. Again, what would a lump $58,850 principle payment into my mortgage have done for me over 3 years?

What don't you get?

Very easy to quantify. Take what you paid for your truck, apply it to your mortgage balance and calculate the impact.

That's your opportunity cost.

The rest is mental masturbation and "warm fuzzies"

I don't doubt your numbers, but all are based upon short term ownership. In the case of my wife's truck I expect we will own it 5+ years, unlike myself she isn't prone to frequently switching vehicles.

Mental masturbation and warm fuzzies - perhaps so. But here's what I know. I have the titles for all of my vehicles, and can do whatever I damn well please with them. If I lose my job I don't have car payments to worry about. And frankly, I don't like owing people money. It's an old-school mentality, but I tend to think of things in this light - if you don't have the cash for it, you can't afford it. My house is my only debt because it's simply not practical to save enough money to purchase a house, but if I had a financial windfall I would pay off my house before doing anything else. All I can do right now is finance significantly less than what it is worth in today's market. Conservative? Sure, but being conservative also never landed anyone in bankruptcy. Being overly leveraged, on the other hand......

Good read. Cash, finance or lease all depends on each individuals case but since most of the talk here is of leasing, could mention the cons. One biggie is early termination penalty.

Edit: Back when, I had a customer who purchased a new Audi for cash and only because he had no credit but was filthy rich living off a trust his entire life. Funny because we tried to justify the exact comments like Eric (above) about leasing. The customer agreed and we would have picked up some profit too. Only thing was his credit was off the radar.

Look, nowhere did I say, nor would I say, that leasing is always the best solution. It depends on the situation, certainly.

But it's tremendously misunderstood and you constantly hear people talking about how bad it was for them without really knowing what the alternatives would have looked like. They simply don't understand the variables, as I said earlier.

The devil's advocacy to what you posted is that retaining cash may help someone weather a job loss or other economic hardship. Have all your cash stuck in a depreciating car or truck? I'd rather have $30K in the bank to draw from to make my bills, including a $400 lease payment. Because if you are forced to sell the truck to extract equity or regain liquidity, you're going to take it in the shorts. When SHTF and no one has jobs, inflation is rampant, and loans have double digit rates to counter inflation (if you can get approved), and gas goes to $6 a gallon......how much is that truck worth?? Leasing is the best hedge against a bad economy. They guarantee future value. You know the worst case scenario. If things go really south, you flip them the keys and THEY take it in the shorts. Then you have the liquidity to capitalize on the new opportunities.

Leveraging cheap money (without getting overextended) isn't always a bad thing. In fact, it could be the smart play. I thought you were doing the MBA thing?

Although I used the mortgage example, I'd retain a mortgage right now, not pay it off. My parents just financed one of their properties for 2.15% for 15 years fixed, no closing costs. Hedge against inflation, if nothing else. I'm not sure why you wouldn't.

What's the penalty if you have a loan and give it back to the bank early? (You don't have that option, really, it's called a repo or voluntary surrender -- same thing)

What's the penalty if you paid cash and sell it earlier than planned?

Let's look at the lease's options:
You can give it back early and accept the penalty.
You can pay off the balance of the lease payments, and give it back early. (you've lived up to your contractual obligation)
You can pay off the entire balance (just call and get a payoff, just like a loan) and own the vehicle. Maybe this is cash, maybe you took out a traditional loan. You can then sell it. If you trade it, the dealer can pay it off, saving you the refi step.

All you have to do is figure out which is the least painful.

Let's say you do this 30 months into the 36 month Audi lease we outlined above.
You have 6 payments of $708/mo left, or a $38,500 total payoff. If the vehicle was really worth $32K at the end of 36 mos (see above), let's say it's worth $35K now.
Option one, paying a $3,000 early termination PENALTY
Option two, pay the $4,250 remaining payments, then give it back
Option three, pay off $38,500 and recoup $35,000 for a $3,500 net impact

Paying a $3000 early termination penalty looks good, right??

Or, back to our "paid cash" scenario, you've paid out $58,850 and YOU OWN IT (title is in your safe) but it no longer works for you (why you'd terminate the lease early too) and you sell it for $35,000. It cost you $23,850 to drive it 30 months.

Compare that to what we decided was the best option on the lease to take a $3000 "early termination PENALTY" and we paid 30 payments of $708 for $21,240 in payments plus our $3000 "PENALTY" for a total cost of $24,240

In this example, paying cash beats the lease by $410.....until you realize that you kept $58K invested. If you didn't earn $410 on $58K in 30 months, you'd better get a new advisor.

We get all worked up over the word "penalty" when it may represent a great option we wouldn't have had otherwise.



YMMV



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I must say that I've never come across a pro-lease point of view that actually did have some fair points with math to back it up.

I definitely learned a few things about leases that makes them less bad from a financial sense. I'll keep these in mind when discussing leasing vs. buying with people.

I would still lean toward buying with cash vs. leasing though. I would still prefer knowing I owned the car flat out and don't have to worry about making any payments. This reduces risk for when life happens.

Also, I think most people would not invest/save the monthly lease savings as prescribed in the financial plan. If they blow the money, they just lost any advantage they might have gained. That is probably why most financial advisers steer people toward buying with cash. Most people aren't disciplined like this and the numbers don't work without it.

I'm looking at the white S4 today and its looking like it might be a go if the numbers work with a trade. It's funny how your choices can change. I have had mostly black and dark cars and never, never, white. But it has slowly grown on me and there is something about the monochromatic look with white and Audi's that looks cool. My friend has one and I thought it was cool. Will know more soon. As far as buy vs lease, I have done it both ways. When I leased it felt like I never owned the car, was keeping it nice for its eventual owner, knew that I had no other choices until the end of the lease for changing vehicles, and was always weighing its use of miles with the mileage limits. After hanging on to cars 6-12 months longer then I would of because of the lease, I vowed I wouldn't do it again. I know, my issue but thats how I feel.

Very cool, I think the white looks fantastic on that car. Good luck, and sorry for the semi-derail of your thread. Make sure you post your feedback, as I said before I'm curious how it drives and your opinion of the SC V6. Particularly with your history of an M5 and 550i.