Affording a Car - Articles - Zimbio

When you should lease a car instead of buy

Mon, 24 Jul 2007 12:29:17 GMT

posted by loyalis

I don’t think that there are a whole lot of absolutes in life. Death and taxes are definately a few of them. However, it seems that modern day American culture has dictated that owning your vehicle instead of leasing it is another one of these absolutes. Very rarely do people ever say ‘Leasing a car instead of buying a car is a good deal’. In fact, it’s usually very much the opposite.

Instead of stating that leasing a car is good and buying a car is bad, let’s look a little bit deeper at when leasing a car can be a good deal (no, seriously). I believe that the stigma associated with leases comes from the way they are improperly sold/used.

An automobile is the second largest priced item that many people will ever own (next to the house). However, cars are not an asset in the financial sense. They require increasing cash into them as they age as well as decreasing in value. They are wonderful fun, sexy, fast toys but they are not an asset. Sorry guys.

Many people naturally want to use the same financial tool they used on their house on their car as well : leverage.

You put money down, make payments and then at the end of a certain time, you own the car. However, when you do this you are effectively assuming all of the maintenance risk and none of the price/inflation risk of your vehicle. This may not be the best move because the maintenance costs of vehicles rise much, much faster than the purchase price of vehicles.

At the end of the day, you have a vehicle that is paid off, increasing your cash flow (if you make it that far.) But now your cashflow is being consumed in maintenance costs (not completely, but the cost of ownership increases)

Leasing can be a good deal if:

You don’t ‘overbuy’ and lease a nicer car than you could afford otherwise. One of the largest advantages of leasing is the reduced payment. You completely throw this away if you go for the BMW instead of the Chevy because the Chevy payments are equal to the BMW lease.

You live in an urban area. Leased cars have mileage restrictions on them, usually 12,000-15,000 a year. It is much cheaper to rent a car to go out of town then to drive a leased car that’s close to the mileage limit.

You don’t like auto maintenance. Over the term of a leased vehicle, it is way less likely that you will have serious maintenance issues compared to the full life of a vehicle.

You find yourself buying a new car every 3-4 years anyway. If you are going to trade in your car every 3 years, leasing is probably worth taking a serious look at.

My Thoughts:

The advantages to car buying are realized over long term ownership. If you like driving late model cars, or move around a lot, or you just find yourself buying a car every 3 years or so, leasing may be an option.
You don’t have anything at the end of the day. One of the biggest outcries about leasing is that you have to give the car back at the end of the day. A car is not an asset.
- When the lease is up, you are giving up control of the vehicle. So? Last time I checked, most of the cars I pass on the road each day were built in the last decade. Whether it is the junkyard or the dealership, the car goes away at some point.
Every situation is very different when looking at a lease. As I stated above, if you do any amount of driving for work or play in your personal vehicle forget about a lease. Cut your monthly fixed expenses somewhere else. However, if your car is just to run quick errands and you drive less than 30 miles or so a day, leases get more attractive.
Leases are not bad. They are Amoral. Leases are a tool like a brick, shovel, hammer, etc. People lease houses all of the time. Office Space too.

Many people choose leases to buy a bigger or better car, instead of the same car for less money in the correct situation.

/grump

Automotive, Buy, Calculators, car, Credit, Debt, Lease, Life, Personal Finance, Young Money

Auto Leasing Shows Steady Growth

Fri, 5 May 2007 03:07:31 GMT

posted by Editor
By Brendan Moore

05.04.2007

Vehicle leasing is continuing to rise steadily in the U.S. as a means of consumer auto finance despite the misgivings of some of the large auto finance providers. Leasing now accounts for a little under 23% of all new-vehicle deliveries, up from approximately 16% just four years ago. Of course, leasing penetration is still nowhere close to the all-time high of over 30% reached in 1999.

Vehicle lessors suffered huge losses in the years subsequent to 1999 as a result of inflated residual values, and that pushed a lot of lessors out of the leasing business, as well as forcing residuals up much higher. The combination of higher residuals and a smaller number of lessors chilled what was a red-hot consumer auto leasing market for years after this big shake-out. Memories of that crash in the business are what is making some of the current lessors a little nervous. It wasn’t that long ago, so the pain is still pretty fresh. Now, not all auto finance companies are nervous about the steady march upward in leasing; indeed, some are actively seeking to increase their leasing business. These lessors feel that the drivers of the irrational residuals on lease vehicles that existed before the last leasing debacle are no longer present in today’s leasing market. And if they’re a captive (GMAC, NMAC, DaimlerChrysler Financial, etc.) leasing company, they also like the fact that a consumer that leases a car is back for another new car in about 32 or 33 months, while the consumer that finances a new vehicle through an installment auto loan doesn’t show back up on the lot for almost 60 months. That is a huge difference, and you better believe the captives have taken note of that disparity.

Regardless of how the lessors feel about the risks of increased leasing, consumers are embracing leasing as a way to get the vehicle they want despite the recent rises in interest rates and new-car prices. As we commented on in an article titled Maybe You Should Lease Your Next Car last year (sill available in November 2006 Archives), there are many, many consumers that really should take a look at leasing their next new vehicle as opposed to financing that vehicle through a long-term installment loan, as many consumers are doing now (see Long-Term Auto Loans Continue to Rise in last month’s archives). It is simply a better deal for them financially. It is apparent that an increasing number of savvy consumers are figuring this out on their own, and I would expect further increases in leasing over the next few years. My forecast is that leasing will account for around 30% of new-car financing again by 2010.

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Maybe You Should Lease Your Next Car

Thu, 5 Jan 2007 20:02:30 GMT

posted by Editor
Maybe You Should Lease Your Next Car

November 20, 2006

In a previous life, I worked for quite a few years as a senior manager at a couple of large auto finance companies. At one of the companies, we offered both open-end (commercial) and closed-end (consumer) leases on cars and trucks, and at the other, we offered consumer vehicle loans and consumer vehicle leases, with the portfolio split pretty evenly between the two finance products. We weren’t as large as the biggest auto finance units, but we were pretty big for the time, with almost a million units in the portfolio.

It was readily apparent to me during those stints that there were many people who would have been better off leasing their vehicle and were instead getting car loans. The reason for this hesitation on the part of consumers is no mystery; there were some serious abuses of consumers through vehicle leasing in the early 90’s because the disclosure requirements on lease contracts then were laughably weak. Many auto dealers and their F&I managers were just crushing people with lease terms that the consumer wasn’t - continued on http://www.autosavant.net

Buying a new car - or should you lease?

Mon, 16 Oct 2007 15:41:00 GMT

posted by colinardill
Everyone loves the idea of a shiny new car – the smell of the interior, the gleaming engine, and the state-of-the-art sound system. But is it better to own that new car, or lease it?

It really comes down to two issues, says Jim Rogers, chair of Rogers Group Financial in Vancouver. “How long are you going to own the car before replacing it?” he says. “And will you be able to expense the car through the nature of your work?”

Basically, if you’re going to keep the car for five years or longer before replacing it, you’re better off buying it, explains Rogers, especially if you don’t have a job that would allow you to write off some of the expense.

Today’s cars are made to last at least five or six years without requiring much in the way of expensive repairs, Rogers points out, and these days the look of a model doesn’t even really change that much from year to year. So unless your job requires you to have a late-model vehicle, it’s more cost-effective to own your car and keep it for five or six years.

On the other hand, if you tend to only keep a new car for three years before replacing it, and you can expense it, there may be a case for leasing. “But you should still sit down and do the math,” says Rogers.

Calculating the costs
There are many variables to add up when you’re weighing the pros and cons of leasing versus buying.

Here are some factors to consider:
- Whether you’re leasing or buying, what is the proposed interest rate?
- If you’re leasing, what are the terms, conditions and buyout privileges?
- What will the residual value of your car be after the lease ends?
- How much will your car be worth in three years if you want to sell it?
- How will you be financing your purchase – for example, will you use your home equity line of credit?
- Have you factored in any hidden costs and considered the tax consequences?

According to Consumer Connection, a publication of the Office of Consumer Affairs at Industry Canada, here are some of the pros and cons of leasing and buying a car:

Advantages of Leasing
- a lower monthly payment than you’d otherwise have on a loan for the same car
- you’re taxed on just the monthly payment rather than on the full price of the vehicle
- your vehicle is under warranty for all or nearly all of the ownership period
- your money isn’t tied up in a vehicle
- your vehicle is almost always fairly new

Advantages of Buying (or Financing)
- the carrying cost is lower than if you keep your vehicle on lease for a long period of time
- unrestricted kilometres
- more freedom in terms of servicing and any modifications to the vehicles
- you build up “equity” in the vehicle that you would not with a lease
- your taxes are lower on a loan than if you buy the vehicle at the end of the lease

In the end, it comes down to how often you’re going to replace your car, whether or not you can deduct any of the related costs, and what interest rate you can get. The important thing is to work out the numbers carefully before you make a decision. You may find it useful to try one of the many online calculators. Industry Canada offers helpful tips for the buy/lease dilemma, along with a calculator, on its website: www.strategis.ic.gc.ca/epic/internet/inoca-bc.nsf/en/ca01851e.html.

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Welcome to our blog about Affording a Car

Tue, 13 Dec 2006 18:08:06 GMT

posted by Tony
This is our group blog, which is unique because any Zimbio member can post an entry to it. Some members blog about recent news and trends related to the portal topic, others recount relevant personal stories. You can also comment on and rate existing blog entries, to voice your opinion and to help the community identify which members and entries on the portal are must-reads. Got an interesting idea or story to share with other members of this portal? Well, then put on your journalist's cap and add your own blog entry!