Quote:
Originally Posted by kaisen
Cash is never 0%, there is always an opportunity cost having your money tied up in a depreciating "asset" like a car. You'd earn something having that money elsewhere. Have a mortgage? I'm sure it's more than 2.5%. Put it there, to start.
There are two variables that make a lease more attractive than buying with cash
1) Sales tax calculation. When you buy a car, you are taxed on the full purchase price. When you lease a car, you are taxed on the lease amount. And it's typically due as it accrues, each month. So instead of paying 100% all up front, you pay less than 50% over 3 years, monthly, with no interest. If you end up buying the car at the end of the lease, you'll pay tax on the remaining balance, but you deferred that obligation for 3 years (or whatever the term). If you don't buy the car at the end, you saved thousands in sales tax. In the case of a $60K car and a 7% sales tax rate, this is a significant factor. More than interest!
2) Guaranteed future value. A lease is based on a residual...a guaranteed floor of what it will be worth at the end of the lease. If it's worth less than that, give it back and you didn't pay for the real cost of depreciation. If it's worth more than that, you have right of first refusal to buy your car for less than market value. So you can win, but you can't lose. It can save you thousands of dollars over owning the car and being at the whim of the market when it's time to sell. Want to keep your car "forever"? Then buy another just like yours for market value and you still saved the money. Or team up with your dealer or a guy like me and buy your exact car from the auction when the lease company disposes of it. I've done that a few times, saving one guy almost $7000 from the stated residual value.
In addition, there can also be an advantage in how a leased vehicle can affect income tax calculation for business use, which 89911 may benefit from. I've had doctors lease $100K cars, writing the lease in both their practice/business name and their personal name, buying tens of thousands of extra miles so the payment is high and the residual very low, then personally buying out the lease at the end for tens of thousands less than market value. The business wrote off 100% of the lease -- right off the top line. No worries of depreciating it too much an realizing a gain later.
It's just a financial instrument. Leases get a bad rep from those who didn't understand all the variables.
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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.