Leasing vs Buying - What am I missing?

I know the lease vs buy debate has been discussed 1,263,458 times, but I wanted to run my scenario by you guys:

Bought a 2003 330i today....sticker was $37,620, settled on a price of $36,120. If I leased, the residual was set at 53% with a money factor of .0024. If I purchased, the interest rate was 4.99% for 60 months.

The monthly payment on a 3 year lease was $620, while the monthly payment on a 5-year loan to buy was $698.

My logic was this:
I have no problem keeping this car for 5 years. If I get into a habit of leasing every 3 years and always paying $620/mo., at the end of a 5 year period i will have only saved $4800 in payments and still not 'own' anything. If I buy, at the end of 5 years I will have paid $4,800 more but I 'own' an asset probably worth $10,000 (27% residual after 5 years). If I sell the car after 5 years for $10,000 I'm $5,200 ahead.

To me this was a no-brainer to buy, considering I have no problem keeping this car for 5 years. Am I missing something? Did I do the right thing.

I'd say you made a good decision. I think buying is always better, but leasing always gives you much better payments, and that's why lots of poeple do it.

If you can afford it, buy it. I think you did well, usually the montly payments to buy are bigger than a $78 difference I believe per month

Too late in the day to verify your logic, but here are a couple of ideas to think about.

1. If you intend to keep the car for 5 years, leasing is a bad idea. So, comparing a 36 month lease to a 60 month loan is comparing bananas to apples. Compare the numbers for selling the car after 36 month with the 60 month loan. What matters is how much the car costs you for the first 36 month. Anything after that is useless because the lease ends after 36 month and you either have to turn it in and get a new car or buy it. So after 36 month it's a whole new world.

2. Money factor of 0.0024 equates to 5.76% APR, so your lease has a higher finance charge. Use MSDs to get that down closer to 4.99%. Unfortunatley, with the new MSD program you can only get it down 5.16% or 0.00215

3. You're making an assumption, that your car is worth $10'000 after 5 years. You'll find out in 5 years how good that assumption was. 5 years is a long time! A lot happens in 5 years!

Hope this helps. Number 1 is pretty much what makes your comparison wrong.

If you can't deduct the lease, and you are willing to keep the car even 4 years, then you are right: this is a no-brainer. Buying makes more sense especially if the lease MF is greater than 0.0020

Originally Posted by Coop33

I know the lease vs buy debate has been discussed 1,263,458 times, but I wanted to run my scenario by you guys:

Bought a 2003 330i today....sticker was $37,620, settled on a price of $36,120. If I leased, the residual was set at 53% with a money factor of .0024. If I purchased, the interest rate was 4.99% for 60 months.

For my 325i purchase at 5% would have been 674.02 including tax. Lease was $440 w not a penny down, but I paid tax up front. Residual was .59. MF was about 1/2 at .0015.

I think you got a good purchase price, though, so the whole thing is irrelevant. That's one of the benefits of buying now, with the new MY coming. Residiuals are in the tank but so are purchase prices.

My 2 cents

Buying is typically smarter

Exception...

Leasing can be o.k. if you are fairly tough on a car, are looking primarily for a daily driver vehicle and not an attachment to the car, and know you will not keep it anyways.

I regularly see "leased" vehicles not washed regularly or cared for quite as well. This is not "always" the case but more common on the lease cars.

Since I consider myself to be the board's poster child for leasing, I have to jump in here. Pasted below are some comments I made about 10 weeks ago in a thread called "Joined the Club".

Leasing versus buying is a complicated issue. As others pointed out, a key variable is how long you want to keep a car. I don't have to trade every 2 or 3 years but I have learned, after having owned 4 Mercedes, that it's going to get very expensive/painful maintaining these cars after they reach 5 years/100k miles. Plus, depreciation, "the silent killer", is always more severe than any of us want to admit.

The key figure is cents per mile. In the case shown below, I am driving a loaded 330i worry-free under a full warranty a whole lot cheaper than it would have cost me to buy the same vehicle. And in 36 months I get to enjoy the experience of choosing and taking delivery of a brand new car. Maybe a M3 this time!

If you want the spreadsheet reference below, just drop me an e-mail with your e-mail address and I'll send it you. Good luck.

Quote:
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Originally posted by Leuc330Ci
Welcome.

Isn't that kinda high for lease pmt? My monthly payment is just a little more than that and i purchased it.
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We must not be comparing apples to apples. Let's look at the numbers.

$42,495 MSRP
$39,971 Sales Price (I estimate that's $1042 over cost)
$ 2,653 TT&L plus doc fee
$42,634 Drive Out

Now while I put down 10 security deposits ($6,000 in total), I will get that money back at the end of the lease. So for our comparison, I'm going to ignore that "investment". More on this later.

Now if you financed $42,624 over 60 months @ ZERO% APR, your monthly payment would be $799.15. My lease payment is $538.75 per month. For you to match my lease payment @ ZERO% APR, you would have to had bought the same car for $28,735 all in. I don't think even Jon could make that deal.

Let's talk about lease economics at little more.

BMW set the residual @ 59%. That's 6 to 8 points higher than what the banks/leasing companies are using. Higher residuals mean lower theoretical depreciation which means a lower lease payment.

BMW's finance charge for '03 325i/330i through May was 2.88% APR. They actually express it in terms of money factor, which is the APR in % divided by 2400. 2.88% APR translates to a money factor of 0.0012. In leasing calculations, the money factor is used to calculate the "interest" to be paid via the monthly payment.

To qualify for the standard 0.0012 money factor rate, you must put down 1 security deposit at closing. BMW has a not well known and even less well understood program which allows lease buyers to put down up to 9 additional security deposits. Each additional security deposit lowers the money factor by 0.0001. So by putting down 9 additional security deposits, my money factor was lowered to 0.0003. That's 0.7% APR.

Multiple security deposits (MSD) are akin to a 3 year bond. I'm "loaning" BMW $5400. In 3 years, they are going to give me my money back. In return, I earn interest on my "investment" in the form of a lower lease payment each month.

You might ask, "Okay, what interest rate is BMW paying me for the use of that money?". Would you believe more than 14.8% APR! And this is an after-tax return. Assuming a 36% marginal tax bracket, the pre-tax ROR is really 23.1% per year! This is why effective July 1 BMW is modifying the MSD program to limit the maximum number of security deposits over the required number to 5 and to reduce the money factor reduction to 0.00005 (half the previous rate).

So, bottomline, is leasing better than buying?

Depends. Let's compare the two.

Because we have money changing hands at different times, I like to look at things in terms of present value; or, more descriptively for this exercise, present cost. I'm going to use 5% APR as my discount factor because that's what I think I can earn on my money in a relativly risk-free investment.

So what does the lease cost?

Well, I'm paying $6000 down in security deposits at closing but I'll be getting all of that money back in 3 years. In terms of present value, $6000 in 3 years isn't worth as much as $6000 today, so there is a "cost" related to the time value of money. At 5% APR, the cost is $856. Then we have 36 monthly payments @ $538.75 per month. Just like the deposit, the $538.75 paid in month 36 isn't worth as much as the $358.75 paid in month one because of the time value of money. Again using the 5% discount factor, my 36 monthly payments, which total $19,395 really only "cost" me $18,051 in present value dollars. The last factor to consider is that BMW will charge me $350 at the end of the lease to process the lease return. That $350 will only cost $300 in today's dollars. So in total, my 3-year lease is going to "cost" me $18,907 or $0.42 pr mile. The only other "hidden" cost is a fee BMW charges to assign the lease to me. Generally that fee is about $500 but in this case BMWFS charged $725. That fee is buried in the lease payment but you need to know it if you try to plug these numbers into a lease calculator to check their math.

You'll remember, the drive out price for my car was $42,624. Let's assume I finance that amount for 60 months at 4.9% APR. The actual APR depends upon your credit quality but I think that's a pretty reasonable interest rate for today's market. Let's also assume we put the same $6000 down as a down payment. Your monthly payment would be $687 which is $148 per month higher than the lease. Now, let's look at the present value cost of purchasing.

We have the $6000 we're putting down at close. 36 months at $687 per month adds up to $24,732 but in terms of present value, the cost is only $23,006. Finally, there is the equity which we have accumulated. After the 36th payment, you would still owe $15,732 on the loan. To compare Buying to Leasing, at the end of 3 years, you would sell the car and pay off the note. In this calculation, I used a 51% residual factor and not the 59% used by BMW in the lease calculation becuase that's what the banks and leasing companies are projecting. BMW has "inflated" the residual to make their lease more attractive. 51% residual means the car would sell for $21,672 which means you would have $5,941 in equity at the end of 3 years. But again, as you won't be getting that money till month 36, the equity is only worth $5,094. Adding it all up, the purchase option would cost $23,913 or $0.53 per mile based on 45k. In term of absolute dollars, the extra cost to purchase id $5,006. That's a significant increment over the cost to lease.

I also looked at the purchase case @ 5 years/75K miles because that's how long I felt I would likely own the car. Based on an estimated residual value of 38%, the present value cost was $30,043 or $0.40 per mile. The cents per mile is slightly less than than that of the 36-month lease but the comparison may not be accurate. That's because as the car gets older there is increased maintenance and I haven't factored in any increased expenses in years 4 and 5. You would certainly be out of the warranty period and the free scheduled/unscheduled maintenance coverage that it includes.

In summary, I believe one would would not see a benefit to ownership until years 6 and beyond. In my personal situation, I would rather own a newer vehicle and not have to worry about unexpected repair bills.

Anyone who would like a copy of the spreadsheet I put together to look at all of this can e-mail me. I live in Texas and so it may not match your situation exactly but you shoud be able to modify it pretty simply.

I forgot to mention that the 14.8% ROR on the extra security deposits is after federal income tax. We don't have state or city tax in Texas. If you're in the 36% marginal (I can't rememeber the exact %, may be higher or lower) tax bracket, your 14.8% investment looks like it is yielding 23.1% per year.

So, BMW leases me a loaded 330i based on a discount to sticker that only leaves the dealer about a $1k profit; whose payment is based on a residual that is between 11 to 16% higer than anyone else and upon financing 100% of the purchase price, taxes and fees @ 2.88% APR; and then offers me the chance to invest up to $5400 in a 3-year note that pays me 23% per year!

When I figured all this out at 10:30 PM last Wednesday night, I was so pumped that I couldn't fall asleep till 4am the next morning and I was at the salesman's desk at 11 AM when he arrived.

In the ninth month of ownership of one Karl Bimmer, an excellent 325i, I have amassed some 22,000 miles; there is no way I could ever lease a car (only 10,000-12,000 miles????? )

Originally Posted by kyleschultz

Since I consider myself to be the board's poster child for leasing, I have to jump in here. Pasted below are some comments I made about 10 weeks ago in a thread called "Joined the Club".

Leasing versus buying is a complicated issue. As others pointed out, a key variable is how long you want to keep a car. I don't have to trade every 2 or 3 years but I have learned, after having owned 4 Mercedes, that it's going to get very expensive/painful maintaining these cars after they reach 5 years/100k miles. Plus, depreciation, "the silent killer", is always more severe than any of us want to admit. .......

Excellent writeup kyleschultz. You actually took the time to write down what's in my head. What everyone should look at when buying/leasing a car is Total Cost of Ownership. Leasing tends to have a lower Total Cost of Ownership as your example shows, thanks to inflated residuals, free maintenance, warranty etc. Most people's arguments in the leasing vs. buying debate show just how uninformed most car buyers are. There seems to be this misguided fascination in owning a car. Unless you reduce your Total Cost of Ownership by owning the car, because maybe you wanna keep it for 10 years, drive a ridiculous amount of miles per year or whatever your deal is, there's really no point in owning it. I deliberately ignore all the enthusiasts, who live and work for their car. That's a whole other world that I don't understand. I prefer to put my money somewhere else.

Why Lease? Guaranteed buyer at guaranteed price in three years. If the guaranteed price is less than market price, buy it. If the price is higher than market, let 'em have it and pick out a new car.

Even if you put 20K per year on the car, you can still lease. Just buy the car at the end. You don't get a report card from BMW every month to check the number of miles.

Originally Posted by marcelgood

I prefer to put my money somewhere else.

Very good points Kyle. Plus you have an added benefit if you can write it off and don't plan to keep the vehicle 7 years.

Somebody here simplified it like this: buy appreciating assets and lease depreciating 'assets' whenever possible.

Aside from the cost of ownership argument, it just doesn't make sense to tie your money up in something unless it's going to give you some kind of return.

--SONET

Originally Posted by beware_phog

Why Lease? Guaranteed buyer at guaranteed price in three years. If the guaranteed price is less than market price, buy it. If the price is higher than market, let 'em have it and pick out a new car.

Even if you put 20K per year on the car, you can still lease. Just buy the car at the end. You don't get a report card from BMW every month to check the number of miles.

Well, that's a good point, but the finance cost on leases are sometimes really, really high. They calculate the rent based on the sum of cap cost and residual. That's not the bad part. The bad part is that the rent is fixed for the entire term of the lease. So if you're planning on buying the car (or even if there is a good chance you are buying it) you're better off with a straight simple interest loan, where your interest costs decline over time.

The expections, of course, are when the lease can be deducted as a current expense (that's a no-brainer if you're in a top bracket) OR if you get a really nice promotional rate on a car that BMW is trying to move.

Originally Posted by flashinthepan

My 2 cents

Buying is typically smarter

Exception...

Leasing can be o.k. if you are fairly tough on a car, are looking primarily for a daily driver vehicle and not an attachment to the car, and know you will not keep it anyways.

I regularly see "leased" vehicles not washed regularly or cared for quite as well. This is not "always" the case but more common on the lease cars.

I'm not a big lease fan, yet I leased my ZHP. go figure. Actually it worked out that I could get a money factor of 0.0003 (yes 0.0003) and my residual was high - 3 years 58%. Plus the car was barely over invoice, yet lease payments come off the msrp. So if the residual is high and the actual buyout is low, mixed with an insane MF, you end up paying very little in interest.

I'll pay .72% (or so) or about $720 in interest on my ZHP over the next 3 years. At the end of 3 years I've spent 17k and the buyout is 25k. Will my ZHP be worth 25k in 3 years? I HIGHLY doubt that as the newer 3 will be out and going strong. But if I determine I want the car, I can finance the remaining 27k (tax, ttl) for at least 6% and pay 30kk more for a grand total of 47k spent over 6 years.

In contrast a 5 year loan on 44k (40k car, plus 10% ttl), at BMW's 2.9% = 47k!

So I'll spend the same money over 6 years that I would have over 5, BUT, if my car sucks or I just don't want it, I can part ways with it for 17k total outlay. There's no way in hell, I could resell my ZHP after 3 years and only take a 17k hit.

Originally Posted by blueguydotcom

I'm not a big lease fan, yet I leased my ZHP. go figure. Actually it worked out that I could get a money factor of 0.0003 (yes 0.0003) and my residual was high - 3 years 58%. Plus the car was barely over invoice, yet lease payments come off the msrp. So if the residual is high and the actual buyout is low, mixed with an insane MF, you end up paying very little in interest.

I'll pay .72% (or so) or about $720 in interest on my ZHP over the next 3 years. At the end of 3 years I've spent 17k and the buyout is 25k. Will my ZHP be worth 25k in 3 years? I HIGHLY doubt that as the newer 3 will be out and going strong. But if I determine I want the car, I can finance the remaining 27k (tax, ttl) for at least 6% and pay 30kk more for a grand total of 47k spent over 6 years.

In contrast a 5 year loan on 44k (40k car, plus 10% ttl), at BMW's 2.9% = 47k!

So I'll spend the same money over 6 years that I would have over 5, BUT, if my car sucks or I just don't want it, I can part ways with it for 17k total outlay. There's no way in hell, I could resell my ZHP after 3 years and only take a 17k hit.

Now that's an example of an excellent lease deal. I would take that, even though I've bought most of my cars. It goes to show you that anyone who says "leases are dumb" or "buying is dumb" haven't looked at how many different deals there are out there. It all depends on the deal.

Now if I could get a deal like that on the M3...

Kyle,
Excellent writeup. You assumed a residual value of 59%, while BMW wouldn't budge above 53%. You also used a money factor less than half what I was quoted. If I got your deal I would've probably leased too.

Originally Posted by Coop33

Kyle,
Excellent writeup. You assumed a residual value of 59%, while BMW wouldn't budge above 53%. You also used a money factor less than half what I was quoted. If I got your deal I would've probably leased too.

Didn't assume- that was the residual in May and June. The 2003 residuals are going down with time.

Here's another leasing trick. Have them quote a 2004. Unless they are giving you a significantly bigger discount to sticker on the '03, your lease payments may be the same OR LOWER on a 2004. How can this be? It because of the depreciation component of the lease payment. A 2004 will have a much higher residual % than the 2003. Higher residual means less value lost through depreciation which means a lower lease payment.

I can't help you on money factor other than to tell you to visit the Financing forum @ Edmunds.com. There, a guy named Car_man will give the current buy rate from BMWFS. I promise you, that unless you let the dealer know that you know his true cost of money- his buy rate, they will generally inflate it in order to make another buck. I'm not saying the dealer is not entitled to make a buck. I just want them to be fair and consistent.

The buy rate in May/June was 0.0012. That's 2.88% APR. Interest rates have gone up since then and so I don't think you could get that same rate. I don't understand why they would quote a 4.99% APR to buy and a higher APR (0.0024 MF= 5.76%) to lease other than they were trying to make an extra buck on the lease.

Oops- reread your original post and remembered that you've already made the deal. I'm going to leave this message anyway in case someone else might benefit. Enjoy your new bimmer!

Originally Posted by m3again

Well, that's a good point, but the finance cost on leases are sometimes really, really high. They calculate the rent based on the sum of cap cost and residual. That's not the bad part. The bad part is that the rent is fixed for the entire term of the lease. So if you're planning on buying the car (or even if there is a good chance you are buying it) you're better off with a straight simple interest loan, where your interest costs decline over time.

BS!. Please don't spread wrong information if you don't understand the math behind it. The monthly rent charge on a lease is an averaged finance charge, based on the average loan amount over the term of the lease. They can do that because the residual is know up front. The reason for the sum of cap cost and residual is because of how you calculate a linear average:

(cap cost + residual) / 2

The division by two is factored into the money factor for simplicity. The money factor is nothing else as APR / 2400. For example 5.76 / 2400 = 0.0024. And here is how they arrived at 2400. Here's the full formula for calculating the monthly rent charge:

(cap cost + residual) * APR / 2 / 100 / 12 or

(cap cost + residual) * APR / 2400 or

(cap cost + residual) * Money Factor

You pay the same amount of finance charge in a lease compared to a loan given the same APR. The difference is that on a lease you pay the same amount per month over the term, and on a loan you pay more in the beginning and less and less over the term. In the end you pay the same amount no matter what.

Originally Posted by marcelgood

BS!. Please don't spread wrong information if you don't understand the math behind it. The monthly rent charge on a lease is an averaged finance charge, based on the average loan amount over the term of the lease. They can do that because the residual is know up front. The reason for the sum of cap cost and residual is because of how you calculate a linear average:

(cap cost + residual) / 2

The division by two is factored into the money factor for simplicity. The money factor is nothing else as APR / 2400. For example 5.76 / 2400 = 0.0024. And here is how they arrived at 2400. Here's the full formula for calculating the monthly rent charge:

(cap cost + residual) * APR / 2 / 100 / 12 or

(cap cost + residual) * APR / 2400 or

(cap cost + residual) * Money Factor

You pay the same amount of finance charge in a lease compared to a loan given the same APR. The difference is that on a lease you pay the same amount per month over the term, and on a loan you pay more in the beginning and less and less over the term. In the end you pay the same amount no matter what.

Ok, I see. That makes more sense. Thanks for the explanation.

So if the MF is better than say 0.0023 or so, it makes sense to lease. I might have to rethink my loan.

I have one simple question because I went with a lease...

Does BMW charge $350 at the end of lease to process a lease return?
If so, is there any way to get out of this? $350 sounds too steep, a $100 sounds more reasonable...

Originally Posted by Coop33

To me this was a no-brainer to buy, considering I have no problem keeping this car for 5 years. Am I missing something? Did I do the right thing.

Lease is for short term ownership. I'm not sure they even have 5 year leases.
In a typical lease period (2 to 3 years), you would still come out ahead by buying, but not that much. That small amount pays for the convenience of having the car pre-sold, while you will have to go through the trouble of selling it yourself.
Lease also provides you with a easy way to file for reimbursements and tax deductions. If you buy, you'd need to figure out and provide proof of depreciation during the period you owned (it may be difficult to find those numbers out before you sell).

Originally Posted by jk330i

I have one simple question because I went with a lease...

Does BMW charge $350 at the end of lease to process a lease return?
If so, is there any way to get out of this? $350 sounds too steep, a $100 sounds more reasonable...

They will waive it if you buy or lease another BMW.

I leased my first BMW. I bought (used) my second. When I think of the total cost of ownership of that second car, my mind boggles. Given that the chance of me ever keeping a car for more than 24 months is essentially zero, leasing the third one was a no-brainer.

I don't have much to add to kyle's excellent post, but I will say that the stigma that some attach to leasing is pure stupidity. When it makes financial sense to lease a car, you should do so.

Originally Posted by jk330i

I have one simple question because I went with a lease...

Does BMW charge $350 at the end of lease to process a lease return?
If so, is there any way to get out of this? $350 sounds too steep, a $100 sounds more reasonable...

Only if you don't lease another BMW.

Originally Posted by SONET

Somebody here simplified it like this: buy appreciating assets and lease depreciating 'assets' whenever possible.

That's a tough one to follow.
Most people buy computers, not lease...

Originally Posted by JetBlack330i

In a typical lease period (2 to 3 years), you would still come out ahead by buying, but not that much.

I highly doubt that for two reasons:

1. Looked at the used car market lately? The resale values are in the gutter. I just saw an ad of my dealer over the weekend. They advertised CPOs and the headline said: "Over 135 CPOs in stock!" You do the math.

2. The way loans are structured. The payment schedule of a typical loan is progressive like m3again mentioned above. Which means, that the portion of your monthly payment going towards paying off the loan is increasing over the term of the loan, because the interest amount is decreasing as your loan balance decreases. The problem with that is that you pay most of the interest in the first half or so of the loan period. So you penalize yourself if you sell your car before the end of the loan term. Mortgages are a very good example. Have you ever looked at the payment schedule of a typical mortgage? You will see that for the first 3 years your monthly mortgage payment is about 100% interest and you hardly pay off the mortgage. After 3 years you slowly start building equity. A car loan is not as extreme as a mortgage, but it's the same principle. Since you payed most of the interest already by the time you think about selling the car, you might as well keep it, otherwise you start a new loan and the whole game starts over.

Okay, here's another question in regards to the terms and conditions at the end of lease return.

How critical are the inspections when I turn in my bmw for lease return?

I've heard some horror stories that they charge for every little knick and scratch, and on the other hand I hear good stories that they really don't care unless the damage is far beyond normal wear and tear. SO when it comes down to judgement, and if they are too critical about it, how can you challenge the charges and claim assumption it is a matter of normal wear conditions?