NEXT AUTOMOBILE, BUY OR LEASE? THE FINAL WORD!
By Eric Lars Hanson
Many drivers have first impressions about different approaches to a Lexus ownership.
There are some popular “reasons” to reject the idea of a lease ownership before even looking at terms.
It may surprise you to learn that all but “Reason” #4 above, are always dead wrong! And “Reason” #4 is only sometimes a reason not to lease.
And excluding incentives to make a conventional purchase (like the recent CARS "Cash for Clunker" program, a Lexus Financial Services Lease is more often the BETTER WAY to own.
Before the lease-o-phobes among you (I know you are out there) go screaming back to the used car listings consider just one admittedly extreme illustrative example:
Say you are offered a price of $30000 and a 90% residual value on a $32,000 car. Can we agree you would be a darn fool not to drive around this car for $33.33 plus tax ($3.25 depending upon your County) to total not more than $36.58 a month?
Of course you will also not likely be inclined to buy-out the then 3 year old car at lease end for $28,800 (the residual value in this scenario), but no matter how you slice it, you'd be a whole lot smarter than your neighbor whom bought the same car for the same $30000 and paid up front $2930.36 in sales tax and a likely payment of more than $653 for five years? And remember in the above illustrative scenario you paid just $117 in sales tax in the lease. And, even if you were crazy enough to buy it out at the unrealistic residual, you still deferred the rest (that your neighbor paid up front.)
What have we accomplished with such a seemingly absurd example? The answer is easy! We now (hopefully) understand that the question of lease vs. buy is not "which is better", but more of one of which terms are better. In many cases the terms are closer and in that case it will come down to more of a case by case which weighs clear benefits of a lease against what is sometimes, but not always, a higher "cost of money" on a lease.
Some of you may not immediately accept as “dead wrong” the “Reasons” #1 to #3. So these should be addressed.
More often than any other, “Reason” #1, “I drive too many miles” has been the first offered by those whom might be reluctant to lease.
They may also have a story about how an improperly structured lease (with a poor estimate, or even more likely a deceptively low mileage amount just to dazzle with the lowest possible payment) have left owners with a surprise in punishing per-mile charges at lease end.
This is really not a question of the value of leasing as much as the terms of a specific lease. If the per-mile charges either in a lease structured allowance or at lease end are wildly out of line with the actual depreciation impact of those same miles (as indicated by Kelly Blue Book for example) than a conventional purchase may indeed prove wiser for a high mileage driver. With Lexus Financial you can lease presently up to 100,000 total miles… so that means 36 months of 33,333 per year or 48 months at 25,000 per year are possible.
In some cases clients choose to lease as many miles as they can (beyond what they will drive) so that the company pays more per month and at the end they have a cheaper option to buy-out the same lease.
If however the cost-per-mile is even with or possible even lower than (as I have seen with Lexus Financial programs) than that same expense in a conventional ownership, than the higher mileage drive should prefer the lease.
But what about the 2nd reason… “I want to ‘own” my car”. Usually people do not feel that they “do not own” a car that has a loan (for some reason). And where there is freedom to own something, most financially savvy prefer to own something more of an asset and not so much a depreciating liability. In all cases, whether you lease, finance or have the pink slip in your shirt pocket, no banker with wing tip shoes will be asking to borrow your car keys (at least while payments are kept current.) So the important thing to remember is you “own” exclusive use of the car, and your ownership is a lot more real and practical than most American’s enjoy with their homes.
Since you will be driving the same car and probably to and from the same places, a more meaningful way to define the value of a lease vs. conventional purchase is to compare the actual cost of leasing vs. cost of owning. Is not value ultimately determined by “how much you pay” against “how much you gain” for anything in life.
In all cases either form of automobile ownership is best defined by the sum of six costs:
3. Maintenance & Repairs
6. Cost of Money
In order to compare the overall true cost of ownership, it only makes sense that we need to account for each of these individual components.
When you buy and ultimately sell it (whether you drove the wheels off or not) your ultimate depreciation expense is as simple as subtracting your purchase price less whatever you sell it for. Divide it by however many months and then that was basically your monthly "lease" payment, at least in depreciation dollars.
When you buy a car with your own cash (either out of savings or realized via a loan)... you can only guess at the depreciation component of your monthly operating cost. What is usually the most significant of all six operating costs is limited only to the entire purchase price and will be very much affected by external factors like the economy, as well as more tangible owner controlled and experienced factors like smoking, wear and tear, mileage and accident history.
If you are in a major accident and the insurance decides your vehicle is not a total loss, you can expect that when you find a buyer, they will be offering often thousands less.
A lease ownership in comparison eliminates any unexpected negative affect of the above external factors along with many of the owner controlled and experienced. Most importantly it protects the owner with a set residual and sets a ceiling (not a floor) to the maximum monthly operating cost in depreciation.
It probably goes without saying that your gas will be for the most part the same as will the corresponding monthly operating cost. Perhaps you might be more concerned with choosing a trusted name brand on a car you are more committed to (as in a conventional ownership) and it has no impact on your lease agreement if you choose to frequent Rotten Robbie's or Valero's.
MAINTENANCE AND REPAIR
Your lease agreement does call for you to properly maintain a vehicle, although there is nothing in the fine print to require dealer servicing. You will want to use your insurance to repair any damage beyond the "normal wear and tear" of chips and minor door dings. Saving on the insurance deductable side can of course be converted to an increase in depreciation expense whether you own or lease, but to avoid "bad feelings" in receiving an invoice at lease-turn-in that are probably still less than the dollars charged out of the vehicles value in the case of selling or trading a car from a conventional ownership.
There is presently NO difference in the minimum insurance requirements to carry on a leased car as compared to one on which there is an open loan (conventional financing).
Many years ago litigators in pursuit of the deep pocket would pursue the lease company for damages in driver liability cases. That was put to an end with a court ruling which established that leasing was basically an alternate form of "financing" and all liability belonged solely to the lease-owner, and not to the underwriter.
COST OF MONEY
Cost of money is a variable that applies to lease, conventional loan and even a cash purchase. The lease cost-of-money is described as a Money Factor. A comparable APR can be derived by simply multiplying this number by 2400. For example a fairly average lease money factor of .00315 should be equivalent to an APR of 7.56%. Depending upon factory incentives lease money factors can be as low as (.008) which with the same math works out to just 1.92%!
Leases also include another cost of money that is either paid as part of the initial payment or added to the monthly amount. This is called an Acquisition Fee. When comparing your conventional loan APR, you should consider the Acquisition Fee combined with Money Factor. Note that most good leases include GAP insurance which is about the same amount extra on a conventional loan as the acquisition fee is on the lease.
In all cases the equivalent money factor is overall a better deal than the APR on a loan when other lease terms are not unreasonable.
Depending upon where you live... Sales Tax is the biggest of these. There is also annually collected property tax on your vehicle usually called "Registration Fees".
The lease has the advantage of deferral or even elimination (if you turn in the car) of the residual percentage portion of Sales Tax.
If you change cars routinely, you are overpaying sales tax (in most States) with a conventional ownership. Whereas Texas only charges sales tax on the difference of value (between a trade-in car and a new or used vehicle purchased), California hits you with the whole amount every time. The only way to emulate the Texas method here is to lease.
TRUE COSTS OF OWNERSHIP REVIEWED
OK., so perhaps now you might be open to thinking of a vehicle ownership in terms of the aforementioned true costs.
To quickly summarize these costs and more specifically as they might be effected in your choice of a lease vs. conventional ownership
In some cases the incentives from Lexus Financial were so compelling on the lease that the combination of payments added to residual (in the ultimate optional buy-out) came out to a smaller total amount than combining payments on a conventional loan.
Even in the face of such a clear “lease is superior” presentation on an Excel spreadsheet, I still remember a number of occasions where a destined to “buy” client would thank me and then conclude… OK I think I will “buy it”. Of course it makes no difference to me as a seller, but at least I did my best to present the option.
©2018 Eric Hanson