F10: Buy or Lease?

Originally Posted by Kamdog

So, leasing makes sense to you because you are having other people pay for your ride.

Yes. If I haven't said so before, thank you for your support and your tax dollars.

Originally Posted by njstrane

This is very simple. Leasing is more costly than owning. There is a caveat. You should own and keep a car well maintained for 8-10 years.

Let's talk about the duration of adulthood.

Let's for argument sake say from 18-68, you leased a car for $900/month. By age 68 you would have spent $540,000 in car payments.

Bad assumption. Lease on a $50k car is $600 a month. So you would spend $360k on car payments -- most have which would have been tax deductible if it's a business writeoff.

In contrast, let's say you bought a $50,000 car every 10 years. During those 10 years your cars were well maintained. For those worried about maintenance, let's for argument sake say there were an average of $1,000 in repairs and maintenance yearly from years 6-10 out of warranty. Each car with taxes, interest, etc would cost about $60,000. This would be $55,000 if bought out right with cash. By age 68, you would have spent only $300,000 on car payments.

So you spent an extra 60k over 50 years or an extra $100-$150 a month pre tax using your math, depending on cash up front or financed.

There's something to be said for dribbling out a fixed amount of money over a long period of time for something that depreciates and ultimately breaks. Yes it's more expensive in the long run but the costs are fixed and hopefully tax deductible.

Originally Posted by pony_trekker

Bad assumption. Lease on a $50k car is $600 a month. So you would spend $360k on car payments -- most have which would have been tax deductible if it's a business writeoff.



So you spent an extra 60k over 50 years or an extra $100-$150 a month pre tax using your math, depending on cash up front or financed.

There's something to be said for dribbling out a fixed amount of money over a long period of time for something that depreciates and ultimately breaks. Yes it's more expensive in the long run but the costs are fixed and hopefully tax deductible.

And $100-$150 a month for always driving a new or nearly new car... Priceless!

For a good example on how leasing can save money, even if you want to buy the car, check out this thread:

http://bimmerfest.com/forums/showthread.php?t=503267

Buyout price is about 6k below the residual cost at lease end. The people who bought the car have to absorb that loss, but the lessee gets BMW to take the hit.

Even after subtracting out extra interest costs on the lease, and the acquisition fee - in this case, the lessee makes money regardless of whether they buy out the car, or turn it in for a different car.

A friend of mine bought a used 2002 540i 18 months ago with 70k miles. He now has 101k miles. His total cost of repairs, not maintainence, thus far is ABSOLUTELY ZERO, Nada, zero, nothing. These car are made to last. He bought it from a person privately he knew well and had taken good care of the car. If you buy a car new and take good care of it then the calculation is the same. If you buy a used car from a dealer or someone you don't know then you have no idea how well it was cared for. But if you buy it new and take care of it yourself then you know for sure that it is well cared for. That is a big advantage of buying new cars and not used cars, and keeping them for a long time. You save a bundle in depreciation and don't have a lot of repair costs as the car ages.

If you own a business the business can purchase the car instead of leasing and deduct the depreciation every year from it's tax return and you can take the difference in salary. You can also ultimately take the absence of a lease payment after the car is paid off as additional salary or profit from your business. In the first year there might even be some sort of investment tax credit from the purchase. When I owned my own business I still purchased my cars personally and kept them for 5 or 6 years. I just deducted the business usage from my personal tax return. I took the money my business didn't spend on a car lease as additional salary. Buying a car new and keeping it a long time saves a lot of money regardless.

BMWs, like my wife's Accord which is 11 years old with 90k miles, are built to last a for long time if cared for properly. If you just want to drive a car that is less than 3 years old all the time, there is nothing wrong with that. But it does cost a lot of money to do so.

But then you pay income tax on the additional salary saved by not leasing.

When I retire, though, it is going to be "Drive it into the ground."

The MOST cost-effective way is to buy it and do as little maintenance as possible and just double up on the prayer.

Originally Posted by Rafa

And $100-$150 a month for always driving a new or nearly new car... Priceless!

That'd be $50-75 a month after taxes.

Originally Posted by richschneid

A friend of mine bought a used 2002 540i 18 months ago with 70k miles. He now has 101k miles. His total cost of repairs, not maintainence, thus far is ABSOLUTELY ZERO, Nada, zero, nothing. These car are made to last. He bought it from a person privately he knew well and had taken good care of the car. If you buy a car new and take good care of it then the calculation is the same. If you buy a used car from a dealer or someone you don't know then you have no idea how well it was cared for. But if you buy it new and take care of it yourself then you know for sure that it is well cared for. That is a big advantage of buying new cars and not used cars, and keeping them for a long time. You save a bundle in depreciation and don't have a lot of repair costs as the car ages.

I have friends who have never gotten into an accident - maybe they should just ditch insurance.

It just boils down to risk. I had a 1999 Honda Civic that had a number of repairs, including the entire AC system ($1200!!). Even with the reliable brands, sometimes you get unlucky. And even with something like a Range Rover, known for their unreliability, there are a few lucky owners who own a perfect, bulletproof example.

I use the price of official extended warranty plans as a proxy for how reliable the manufacturer thinks their cars will be. There's a profit level built in for them, but it gives you a good idea of their estimation (and they should know better than anybody).

Of course you pay taxes, but you're still ahead. Besides, you are still deducting the business use mileage from your personal tax return, so the tax savings of leasing are less than you might think. No one has yet figured out a way to avoid death and taxes. Taxes are still less than 50% so you keep half the savings, at least. For most people you end up keeping around 65%.

I think there are also limits to how much the business is allowed to deduct for lease payments every year. Having never leased a car in my life I'm not conversant with the limits of the tax deductability of lease payments by a business. Does anyone know if there are limits and if so what the current limits are?

Originally Posted by Newmanium

I have friends who have never gotten into an accident - maybe they should just ditch insurance.

It just boils down to risk. I had a 1999 Honda Civic that had a number of repairs, including the entire AC system ($1200!!). Even with the reliable brands, sometimes you get unlucky. And even with something like a Range Rover, known for their unreliability, there are a few lucky owners who own a perfect, bulletproof example.

I use the price of official extended warranty plans as a proxy for how reliable the manufacturer thinks their cars will be. There's a profit level built in for them, but it gives you a good idea of their estimation (and they should know better than anybody).

The warranty plans must use the average level of repairs plus a profit. If you own the car and take care of it then it will have lower than average repair cost. So, by not getting the warranty you will likely save their profit plus the lower repair costs on a well cared for car. $1200 is not much money in repairs on a 1999 Civic. My wife spent $3000 for a tranny on her 1999 Accord, which she bought new, three years ago. But that is the only major repair she has out outside of warranty over the last 8 years. That averages out to a whopping $375/year. I have owned several 8 cylinder BMWs outside of warranty and haven't had much in the way of repair costs. But I bought them new.

The only major repair I have had was on my 2002 M5. Something with the engine gaskets. This was because I bought it when it was 3 years old and the car had previously lived in Florida in the heat and I think it may have been abused by the previous owner. In any case BMW fixed it for free. Repair costs for a well maintianed BMW in years 5-8 will usually be less than the cost of the extended warranty, and almost always less, usually a lot less, than the difference in depreciation costs compared to a new BMW. This is just the law of averages. But if psychologically you don't want to take the risk of the low probability of being a statistical outlier who incurrs large repair costs, then paying to extra money to always be under warranty is reasonable. For me I think it is a waste of money, so I have never done it. To each his own.

One may want to consider a lease since it is a first year model, and it has its own issues regarding drivability. Can help to avoid buyer's remorse.

There seems to be a few things missing in this discussion of buying vs leasing.

1) cost of money - In lease the rent component represent the interest that one is paying for the car. But when I own the car outright, I have an issue with cost of money. I pay 60-80K up front for a 550 + sales tax. How much money will this 60-80k make for me if I lease the 550instead? No one seem to touch this finance cost for owning a car. The interest rate in this cost of money discussion depend on how much money you can make with your investment. If someone has a big credit card bill and is paying 18% interest on credit card loan but owning a car outright (dumb move), his cost of money is 18%.. If you have cash that you put it in the bank making 1.5% in a cd, then you cost of money is 1.5%. The amount of money earning the interest is the average balance of money after I pay for the lease payment e.g. 65000 sales price, 5000 sales tax, lease payment 750 a months for 36 months. The money you can earn interest is per month is (65000 + 5000 + (65000+5000-36x750))/2= 56500. If you can make 5% a year, it means $8475 (56500x0.05x3) but make sure you subtract your income tax.

2) Why does leasing and owning has to be mutually exclusive? One advantage of leasing is the fact that the manufacturer is taking the risk of guessing the residual wrong a few years down the road. So BMW decided that a 2011 550 has a residual of 55% for a 36 months 12K mi/yr lease. But what if the residual come in at 45% instead? someone point out already that it is the manufacturer that take the hit. Manufacturer is offering us a free option to buy or not buy the car at the end of the lease period depending on the value of the car at that point. Why not take advanage of the offer?

3) Incentive difference between buying and leasing.. We have 3 cars in our houshold and we keep each of them about 3 to 4 years on an average. One of the car qualify for business use. So that one is always lease. But the other 2 are more or less evenly split between buying and leasing. It has a lot to do with the incentive available at the time for each deal. Sometimes manufactorer like to move their car via leasing and provide artificially high residual and/or money factor (interest rate). Other time manufactorer provide big rebate for purchase and zero percent finance. How can anyone compare lease vs purchase decision without factoring in the incentive available in each case?

4) different treatment on sales tax in different state. In state like California, sales tax on lease is caculated on the lease payment and not the sales price of the car (please spare me,my state is different speech. I know that some state charge the sales tax on the entire price even for a lease. Other allow trade in value to deduct from teh sales price of a new car to reduce sales tax.. But you need to factor the tax difference in your calculation to make it a fair comparision) vs buying a car mean paying sales tax upfront for the entire purchase. It make a big different if you end up keep the car only 3 or 4 years. In the above example (65000 car), the sales tax to pay up front for purchase. In California, the sales tax is about $6337 for a 65K car purchase. The tax pay on a 3 years lease of 800 a month is about $2808 for the entire duration of the lease.

5) lease has a built in disadvantage of acquisition fee of anywhere between $550 to $850 depending on manufacturer..

6) keep an old car running forever. There seems to be no discussion about those wearable items. tire can easily cost 200-250 a tire including tax, balance/mount. Brake can easily cost a couple hudred (and rotor can cost 400-500). And if you want to have the same level of service as the free maintenance that BMW include during the first 4 year, you have to budget a lot more money. A 15000 miles service can easily cost 800-900 (yes, you can do it yourselves or find a cheaper place to do that.. But is it a apple to orange comparision then since the servcie you get it different)

6) how do one value a gap insurance that come with a lease? The gap insurance allow you to walk away form the lease by simply giving the insurnace check to the car company. It doesn't matter if the check is less than what BMW think you still owe them (if the check is higher, you got to keep the extra). If you have the pleasure to total a car in the first 3 years of ownership, you will know how painful it is to be upside down on a car loan...


In dec of 03, I lease an 04 Accord EXL for my kids in California and I bought myself an 04 Accord EXL in Arizona. The difference boiled down to the tax treatment (in Arizona, you can deduct the trade in value from the value of purchase that I need to pay tax on). The difference is only a few hundred dollars between buying and leasing over 3 years.. At the time, I builded a spread sheet to try to factor everything I can think of.. And I vowed not to do that again.. If I really dig into it (instead of a debate in a forum setting), there are so many minor cost and variable that I end up has to guess. And with enough guesses, there is no point of doing the analysis since the end result is no good anyway.. The best strategy I can think of is finding the incentive and let it help me decide if I should lease or buy.. A big rebate on purchase only and zero percent finance always means purchase for Honda and Toyota. A high residual, big rebate on leaseing and low money factor will point me to leasing only.. If I really like a car but not sure of the reliability and long term resale value, leasing it is...

Originally Posted by pony_trekker

Bad assumption. Lease on a $50k car is $600 a month. So you would spend $360k on car payments -- most have which would have been tax deductible if it's a business writeoff.



So you spent an extra 60k over 50 years or an extra $100-$150 a month pre tax using your math, depending on cash up front or financed.

There's something to be said for dribbling out a fixed amount of money over a long period of time for something that depreciates and ultimately breaks. Yes it's more expensive in the long run but the costs are fixed and hopefully tax deductible.

Well, it won't be $600 with $0 down. You're looking at several thousand down, on top of that $600 payment.

Originally Posted by xofruitcake

There seems to be a few things missing in this discussion of buying vs leasing.

1) cost of money - In lease the rent component represent the interest that one is paying for the car. But when I own the car outright, I have an issue with cost of money. I pay 60-80K up front for a 550 + sales tax. How much money will this 60-80k make for me if I lease the 550instead? No one seem to touch this finance cost for owning a car. The interest rate in this cost of money discussion depend on how much money you can make with your investment. If someone has a big credit card bill and is paying 18% interest on credit card loan but owning a car outright (dumb move), his cost of money is 18%.. If you have cash that you put it in the bank making 1.5% in a cd, then you cost of money is 1.5%. The amount of money earning the interest is the average balance of money after I pay for the lease payment e.g. 65000 sales price, 5000 sales tax, lease payment 750 a months for 36 months. The money you can earn interest is per month is (65000 + 5000 + (65000+5000-36x750))/2= 56500. If you can make 5% a year, it means $8475 (56500x0.05x3) but make sure you subtract your income tax.

++++1 - I elected to lease my wife's 08 Highlander due to the following: good price, extremely low money factor (about 1.5%), reasonable residual, and the ability to use the cash saved to pay off a 6.55% investment related loan. At the time of the lease, I was also concerned about a possible dramatic increase in fuel prices at the pump which could potentially destroy resale of SUVs...(let Toyota take the depreciation risk). This lease will conclude this month and I have decided to purchase at the residual value, which approximates "high trade in". For me, lease inception costs (about $595) more than offset the opportunity cost of using my cash to purchase the vehicle outright. The lease also allowed me to mitigate depreciation risk......a risk that did not materialize.

decided to purchase at the residual value, which approximates "high trade in".

It may be better to look at what is on the market (same model year and similar options) either through craigslist or autotrader.com. Those trade in value published by KBB are foo foo and completely out of reality. The only surefire way of know what the car is worth is finding out the auction result for similar car in your area.. Short of that, just take the cragslist and autotrader number and subtract some discount from their asking price. I leased an 05 CLK55 and the lease end residual was at 48K in 08. Mercede offered us to buy the car at 40K. KBB is about 40K as well.. But when I looked around, there are a couple of 05 CLK 55 in dealer lot asking for 35K (asking not actual transaction) and we end up just turning the car in and let Merecede eat the loss.. But we purchased an 07 G35 after our lease ended becuase the asking price for lesser equiped cars of the same year is more than our residual.. BMW and Mercedes are very hard car to buy at lease end. The residual tend to be very optimistic and fixing the car without a warrently can be budget buster (4 brakes for a CLK55 will cost about $1000 (rotor additional and it is from a tire shop not Mercedes dealer)..and a tire cost about 250+ include tax and mounting. Alignment need to be done in dealership since tire shop doesn't have the equipment to align it properly.)

Considering the residual would be a few grand around a realistic market price of a car. I'd say it would be worth it, to pay more for a car that you've "raised", and you know all the stories of. If I REALLY love the car, and nothing else is interesting me at the moment of turn in time, I'd rather buy mine over someone else's previous ride, even if I'm spending a bit more (there is a limit, it's heart VS mind).