Thoughts on Car Leasing

DGS49

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When you lease a car, the car is actually purchased by the leasing company (which might be a bank or even a corporate affiliate of the manufacturer), which usually holds the title to the vehicle, then it is rented to you for a the period of the lease. There are three basic variables in the transaction: the Acquisition Cost (what the leasing company pays for the car), the interest rate, and the Residual Value (the amount the leasing company believes it will get for the car, at wholesale, when you turn it in). Another term you should be familiar with is “Capital Cost Reduction,” which in the leasing world is a DOWN PAYMENT. It is your up-front money to lower the initial loan amount, pay up-front money to the dealer, and reduce your monthly payment. Usually, the up-front money is a combination of the first monthly payment, a CCR, and some relatively small fees. Sales/use taxes are not advertised, and are up to you to pay.

So as a member of the public, the “best” lease transaction combines a (a) low acquisition cost, (b) a low interest rate, and (c) a vehicle which depreciates as little as possible over the term of the lease, thus yielding a “high” residual value. Often the lowest acquisition cost comes when a manufacturer is discontinuing a model, or replacing it with something that is substantially re-designed. They want to clear out the old inventory to make way for the new. When comparing one lease with another, one might take into consideration a basic calculation that reveals “how good” a lease quote is. For purposes of illustration I will always use a 36 month lease, assuming 10,000 miles per year. The calculation goes like this: Start with the MSRP of the vehicle. Multiply the monthly payment by the number of months in the lease, then add the up-front money that is required to get that payment. This yields the aggregate total that you will have to pay during the term of the lease. There are other irritating little fees that you will be hit with, both when picking up the car and dropping it off, but unless you are really being screwed these should not total more than a thousand dollars in total. OK, once you have calculated the aggregate total of payments, divide that sum by the MSRP and it will give you a percentage. Usually, it’s about 50% of MSRP. That is, the lease will cost you half as much over three years as if you bought it outright; the tradeoff being, you have nothing but fond memories of your money at the end of three years. If the aggregate lease payments are less than 50% of MSRP, you have a pretty good deal; if it’s a lot less than that, it’s time to pounce on that vehicle. It makes more sense to lease than to buy at that point.

Well, it turns out that the “stars are aligned” these days on a lease of a Toyota Tacoma. The manufacturer is keen to move some iron and clear out inventories, bank interest rates are extremely low, and the Tacoma has one of the best resale values (least depreciation) of any vehicle sold in the U.S.

And don’t you know, Toyota is sponsoring Tacoma leases with the enticing “deal” of $2,999 down (which includes a Capital Cost Reduction of $2,080) and 36 payments of $269 per month, yielding an aggregate amount of $12,683 for the three-year lease, which is less than 35% of the $36,558 sticker price of the featured vehicle! The featured vehicle is basic, but still nicely equipped. It is an “SR5,” V-6, AWD, but it’s nothing fancy. Ugly steel wheels, cloth interior, and all that.

So here’s where it gets interesting. Essentially nobody wants the Tacoma that is featured in the ad. I would venture to say that very few dealers would even stock a vehicle like that. Well, knowing what we do about leasing, if we add items to the MSRP the Acquisition Cost will increase, but the Residual Value should increase proportionately with the increase in Acquisition Cost. In other words, if I lease a Tacoma with all the gee-gaws and a $42 thousand MSRP, the Residual Value should be proportionately higher than that of the stripped down Tacoma in the ad. So following the same calculation, if I were to lease a Tacoma Limited (MSRP $42,960), the aggregate total of the down payment and the monthly payments should be right around 35% of the Sticker Price - $14, 653. If you put the same $2,999 down, you come up with a higher monthly payment of $324 – an increase of a little more than 10% - in proportion with the increase in the MSRP.

But Toyota’s website does the calculation for you. If you lease the Tacoma Limited for the same 36 months, with the same $2,999 down payment, they come up with $433 per month ($3,083 due at signing). With THIS payment, the total of payments comes out to 43.5% of MSRP. Still a good deal, but nowhere near as good as the ad deal.

So what does that mean? It means that Toyota is initially offering to lease you a car that you don’t want, at a cost that leaves them and the dealer with almost no profit, in order to entice you to come in and lease a more expensive vehicle that is much more profitable FOR THEM. Bait & Switch?

But what if you don’t go all the way up to the Tacoma Limited? What if you pick through the options list and come up with a truck that is, say, $1,500 more than the “featured” Tacoma? The monthly payment quote will go up DRAMATICALLY. Because the dealer will assume that you don’t know anything about leases (the sales staff is as ignorant as you are) and will transform a transaction at cost (the ad) to a transaction that is wildly profitable for them. Last year I visited a VW dealer with a copy of a Tiguan lease ad FROM THAT DEALER. By the time I got the salesman to give be a hard number on an actual vehicle (which was the same as in the ad), the quote was a hundred dollars a month more than their own ad!

Bottom line: Be careful when talking about leases with a dealer. They are all thieves.
 
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Polishprince

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I never considered a lease myself, have always bought my cars 2nd hand, already broken it. I think its the way my family has always done it. My uncle was the only one in my family that insisted on a new car. He liked the large full sized Buicks and drove his cars for years. He took a lease once. He was 97 and decided that he was going to quit driving at age 100, so he got a 3 year lease. Made sense for a very limited circumstance.
 

petro

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I drive an average of 30,000 miles per year. My commutes can be 5 miles or 75 depending on jobsite and I carry tools.
A lease would never work.
 

petro

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I never considered a lease myself, have always bought my cars 2nd hand, already broken it. I think its the way my family has always done it. My uncle was the only one in my family that insisted on a new car. He liked the large full sized Buicks and drove his cars for years. He took a lease once. He was 97 and decided that he was going to quit driving at age 100, so he got a 3 year lease. Made sense for a very limited circumstance.
Last two Jeeps I bought were one owners lease returns with about 50K miles.
About as good as buying new without the immediate loss in depreciation.
 

Persistence Of Memory

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The only thing you need to realize in leasing is that you lose the value of the car at the end of 3 years. If it has a value of 15,000. You take a 15k paper loss. But you get a new car with lower pmnts if leasing again.

Payments are lower. You are essentially driving a new car all the time. Minimal maintenance and headaches. If the car is a production lemon, you're not stuck forever. However most leases have you cough up 2 grand upfront.

If you know a lot about cars and maintenance, buying a car and running it for 15 yrs will save you a lot of cashola.

Buying, maintaining, and running a car for 15-20 yrs will save you a boatload of cash. Sure you have to sink a grand or so every year in a car. But you are not paying 5000 bucks a year, yr after yr.
 
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DGS49

DGS49

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A lease makes sense if (a) you can live with the mileage limitation, (b) are going to trade your car in three or four years anyway, and (c) you find a great deal on a car that you like. Leasing a car because you cannot afford the car you want is extremely foolish.

For ME, that Toyota (in the ad) would be attractive. What I would do is lease the exact vehicle in the ad, then add a few things on my own out of pocket (nicer wheels, a tonneau cover). Then decide whether I want to remove them when it's time to turn the car in.
 

evenflow1969

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A lease makes sense if (a) you can live with the mileage limitation, (b) are going to trade your car in three or four years anyway, and (c) you find a great deal on a car that you like. Leasing a car because you cannot afford the car you want is extremely foolish.

For ME, that Toyota (in the ad) would be attractive. What I would do is lease the exact vehicle in the ad, then add a few things on my own out of pocket (nicer wheels, a tonneau cover). Then decide whether I want to remove them when it's time to turn the car in.
Here is a perspective from some one whos uncle owned a dealership. I have looked at this from every perspective there is. The only time a lease is better than a purchase is when you can right of the payment as in this has been leased by a buisness. From the car sales mans perspective thanks for leasing because I just made some money and get tired of mini's on new cars. When I was on the lot for my uncle on week ends unless you were looking for a lease or a used car I would not waste my time with you. Gotta make money on the week end. I would work for a mini during the week but not on week ends. This was years ago but we did calculate the cheepest way to drive a noce car. I am going to show my age here but back then the Buick lesabre was the highest residual car on the market. The cheapest way to drive a car was to but a two year old lesebre drive it for two years and trade.
 

Marion Morrison

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When you lease a car, the car is actually purchased by the leasing company (which might be a bank or even a corporate affiliate of the manufacturer), which usually holds the title to the vehicle, then it is rented to you for a the period of the lease. There are three basic variables in the transaction: the Acquisition Cost (what the leasing company pays for the car), the interest rate, and the Residual Value (the amount the leasing company believes it will get for the car, at wholesale, when you turn it in). Another term you should be familiar with is “Capital Cost Reduction,” which in the leasing world is a DOWN PAYMENT. It is your up-front money to lower the initial loan amount, pay up-front money to the dealer, and reduce your monthly payment. Usually, the up-front money is a combination of the first monthly payment, a CCR, and some relatively small fees. Sales/use taxes are not advertised, and are up to you to pay.

So as a member of the public, the “best” lease transaction combines a (a) low acquisition cost, (b) a low interest rate, and (c) a vehicle which depreciates as little as possible over the term of the lease, thus yielding a “high” residual value. Often the lowest acquisition cost comes when a manufacturer is discontinuing a model, or replacing it with something that is substantially re-designed. They want to clear out the old inventory to make way for the new. When comparing one lease with another, one might take into consideration a basic calculation that reveals “how good” a lease quote is. For purposes of illustration I will always use a 36 month lease, assuming 10,000 miles per year. The calculation goes like this: Start with the MSRP of the vehicle. Multiply the monthly payment by the number of months in the lease, then add the up-front money that is required to get that payment. This yields the aggregate total that you will have to pay during the term of the lease. There are other irritating little fees that you will be hit with, both when picking up the car and dropping it off, but unless you are really being screwed these should not total more than a thousand dollars in total. OK, once you have calculated the aggregate total of payments, divide that sum by the MSRP and it will give you a percentage. Usually, it’s about 50% of MSRP. That is, the lease will cost you half as much over three years as if you bought it outright; the tradeoff being, you have nothing but fond memories of your money at the end of three years. If the aggregate lease payments are less than 50% of MSRP, you have a pretty good deal; if it’s a lot less than that, it’s time to pounce on that vehicle. It makes more sense to lease than to buy at that point.

Well, it turns out that the “stars are aligned” these days on a lease of a Toyota Tacoma. The manufacturer is keen to move some iron and clear out inventories, bank interest rates are extremely low, and the Tacoma has one of the best resale values (least depreciation) of any vehicle sold in the U.S.

And don’t you know, Toyota is sponsoring Tacoma leases with the enticing “deal” of $2,999 down (which includes a Capital Cost Reduction of $2,080) and 36 payments of $269 per month, yielding an aggregate amount of $12,683 for the three-year lease, which is less than 35% of the $36,558 sticker price of the featured vehicle! The featured vehicle is basic, but still nicely equipped. It is an “SR5,” V-6, AWD, but it’s nothing fancy. Ugly steel wheels, cloth interior, and all that.

So here’s where it gets interesting. Essentially nobody wants the Tacoma that is featured in the ad. I would venture to say that very few dealers would even stock a vehicle like that. Well, knowing what we do about leasing, if we add items to the MSRP the Acquisition Cost will increase, but the Residual Value should increase proportionately with the increase in Acquisition Cost. In other words, if I lease a Tacoma with all the gee-gaws and a $42 thousand MSRP, the Residual Value should be proportionately higher than that of the stripped down Tacoma in the ad. So following the same calculation, if I were to lease a Tacoma Limited (MSRP $42,960), the aggregate total of the down payment and the monthly payments should be right around 35% of the Sticker Price - $14, 653. If you put the same $2,999 down, you come up with a higher monthly payment of $324 – an increase of a little more than 10% - in proportion with the increase in the MSRP.

But Toyota’s website does the calculation for you. If you lease the Tacoma Limited for the same 36 months, with the same $2,999 down payment, they come up with $433 per month ($3,083 due at signing). With THIS payment, the total of payments comes out to 43.5% of MSRP. Still a good deal, but nowhere near as good as the ad deal.

So what does that mean? It means that Toyota is initially offering to lease you a car that you don’t want, at a cost that leaves them and the dealer with almost no profit, in order to entice you to come in and lease a more expensive vehicle that is much more profitable FOR THEM. Bait & Switch?

But what if you don’t go all the way up to the Tacoma Limited? What if you pick through the options list and come up with a truck that is, say, $1,500 more than the “featured” Tacoma? The monthly payment quote will go up DRAMATICALLY. Because the dealer will assume that you don’t know anything about leases (the sales staff is as ignorant as you are) and will transform a transaction at cost (the ad) to a transaction that is wildly profitable for them. Last year I visited a VW dealer with a copy of a Tiguan lease ad FROM THAT DEALER. By the time I got the salesman to give be a hard number on an actual vehicle (which was the same as in the ad), the quote was a hundred dollars a month more than their own ad!

Bottom line: Be careful when talking about leases with a dealer. They are all thieves.
Thank you for that! *informative*

I've always been the "cash and carry" type.
I buy what I can afford, or maybe less than I can and save money for parts.
 

Persistence Of Memory

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A lease makes sense if (a) you can live with the mileage limitation, (b) are going to trade your car in three or four years anyway, and (c) you find a great deal on a car that you like. Leasing a car because you cannot afford the car you want is extremely foolish.

For ME, that Toyota (in the ad) would be attractive. What I would do is lease the exact vehicle in the ad, then add a few things on my own out of pocket (nicer wheels, a tonneau cover). Then decide whether I want to remove them when it's time to turn the car in.
Here is a perspective from some one whos uncle owned a dealership. I have looked at this from every perspective there is. The only time a lease is better than a purchase is when you can right of the payment as in this has been leased by a buisness. From the car sales mans perspective thanks for leasing because I just made some money and get tired of mini's on new cars. When I was on the lot for my uncle on week ends unless you were looking for a lease or a used car I would not waste my time with you. Gotta make money on the week end. I would work for a mini during the week but not on week ends. This was years ago but we did calculate the cheepest way to drive a noce car. I am going to show my age here but back then the Buick lesabre was the highest residual car on the market. The cheapest way to drive a car was to but a two year old lesebre drive it for two years and trade.
I love experience on a topic. What do you think about my previous post? Please elaborate on any points. Please criticize me if wrong.

I have this all figgered out. I drive a 1978 Toronado with a 403.
 

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