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Old 12-09-06, 07:33 PM   #1
rollinboy
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Default Another Lease vs. Buy Thread

Guys I wanted to make a new thread about this subject since it seems to have become hidden in the December to Remember thread. I think this could have some potential benefit for some people and deserves some attention. I am looking for any current or former salesman, accountants, or anyone who may have stayed at a Holiday Inn Express last night.

Assumptions: You plan to keep the car for only 3 years (pretty normal for the type of people that would drive a Lexus) Including me.

Scenario 1: As I stated in the first post I think by the January timeframe I should expect to get a loaded 06 350 for about $34K. Also I plan to put down about half either way. A decent loan rate of 5.9%.

Scenario 2: Buy New. With a new 07 after taxes we are looking at about $41,000 give or take a few hundred dollars. Still putting down half or so, $21,000. Same 5.9% interest on the rest.

Scenario 3: Lease a New 07 for the same $38,000 I have already negotiated. The standard depreciation value is 42% if I remember correctly, leaving a residual value of 58% or $22,040. The Lease payment is calculated by Lexus.com and I assume it takes into account the Money Factor. Since you are not incurring the large down payment you might as well invest that same $21,000 into a High Yield CD at say..5.9% I like even numbers

Scenario 4: Buy it out right. I know this is not an option for some people. If not maybe you should reconsider buying a Lexus. After all the finance rates should be enticements not deal makers. But we all over extend ourselves every now and then Im guilty too

I think I am even being a little low on the resale price but I think it's a good benchmark. From what I have learned talking with salesmen, the best way to handle a lease when it comes to a Lexus is to sell at the end. That is why they are so aggressive with leases, they know they will be able to sell it for more than what the payoff amount will be. It would even be possible to sell it an make a little profit if you kept it in good condition. And boom there's your next down payment.
Just as a point of reference a 2004 (3 year old) IS300 KBB's at $28,000 fully loaded and is no nowhere near the car the IS350 is. If you use that figure you could potentially make 6K off the car by selling it at the end of the lease rather than turning it in. Highly unlikely.

So the math works out as follows:

As you can see the final line is updated out of Pocket. This represents the total amount you will end up losing by driving the car.
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Old 12-09-06, 07:46 PM   #2
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that is a nice visual.........
That pretty sums it up. Good find!
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Old 12-09-06, 08:09 PM   #3
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Couple of observations:

1. Obviously the cost to buy outright is the same as getting a loan for three years since you've assumed the investment rate is the same as the loan (5.9%). This is as good an assumption as any, I suppose, but how good has your personal investment experience been over the last three years? Mine's been a LOT better than 5.9% after taxes. The choice of this number will swing the numbers.

2. Lease is showing the cheapest cost at the end of three years. And this would be the best choice if you only want to drive the car for three years (for whatever reason). But as I've brought up previously in other threads by outright owning the car you SAVE the lease cost of $564 per month for every month going forward past the 36 month lease. That is where OWNING the car really becomes cheaper because the major depreciation is over and you own the car unencumbered, and repair costs at this point should be minimal. But if you just can't stand driving a 3 year old car a lease makes sense from a pure economic point of view. My only caveat would be to remember that after the 3 year lease you are back to square one as you jump into another lease on another car and you start another cycle. This is where leasing bums me out ..... you are always renting a vehicle at $500+ per month. This really becomes expensive in the long term (lease upon lease upon lease), but this doesn't seem to bother many folks. Personally I like the period after a car is paid off and I can drive it without any type of car payment for another 3 or 4 years. Obviously you have to like the car to do this, which is why making the right decision on the type of car and its options is important.

3. Is owning a vehicle important to you? Some people just like the idea of owning their ride vs. renting it. Any preference?

Good luck.
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Old 12-09-06, 09:24 PM   #4
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#4: Buy it with cash. I agree that if you can't pay cash for a car, then you are looking at a car that's out of your range. There are exceptions of course. Such as you're starting your career and need a reliable car. But do you really need a $30k+ reliable car? All of my old cars were bought after college; starting with a Sentra, RSX, and now my IS.
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Old 12-09-06, 09:25 PM   #5
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buy buy buy buy!!!
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Old 12-09-06, 09:36 PM   #6
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Quote:
Originally Posted by Evitzee View Post
3. Is owning a vehicle important to you? Some people just like the idea of owning their ride vs. renting it.
you only own it once you receive the title, until then, the bank owns it.
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Old 12-10-06, 07:43 AM   #7
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Good replies,

Obviously the absolute best case situation would be a 0% finance charge for as long as possible. barring that I think it is smarter to relize your faults and try to take as much advantage of them as possible. I am in a unique situation, maybe similar to some salesmen, realtors. I generete a large portion of my income in a 3-4 month out of the year timframe. Unlike some it is, however, guaranteed and predictable. Bascially the way I look at it, and please don't mistake this for trying to brag since I know I am still very low on the totem pole but hey I'm only 25, According to my numbers of total out of pocket. It stands to reason that I will make enough money in 1 of those 3-4 months to pay that amount for the enitre 3 years. Do you all really see a problem with spending 1 months salary every 3 years to always have a brand new car?

Quote:
Originally Posted by Evitzee View Post
Couple of observations:

1. Obviously the cost to buy outright is the same as getting a loan for three years since you've assumed the investment rate is the same as the loan (5.9%). This is as good an assumption as any, I suppose, but how good has your personal investment experience been over the last three years? Mine's been a LOT better than 5.9% after taxes. The choice of this number will swing the numbers.

2. Lease is showing the cheapest cost at the end of three years. And this would be the best choice if you only want to drive the car for three years (for whatever reason). But as I've brought up previously in other threads by outright owning the car you SAVE the lease cost of $564 per month for every month going forward past the 36 month lease. That is where OWNING the car really becomes cheaper because the major depreciation is over and you own the car unencumbered, and repair costs at this point should be minimal. But if you just can't stand driving a 3 year old car a lease makes sense from a pure economic point of view. My only caveat would be to remember that after the 3 year lease you are back to square one as you jump into another lease on another car and you start another cycle. This is where leasing bums me out ..... you are always renting a vehicle at $500+ per month. This really becomes expensive in the long term (lease upon lease upon lease), but this doesn't seem to bother many folks. Personally I like the period after a car is paid off and I can drive it without any type of car payment for another 3 or 4 years. Obviously you have to like the car to do this, which is why making the right decision on the type of car and its options is important.

3. Is owning a vehicle important to you? Some people just like the idea of owning their ride vs. renting it. Any preference?

Good luck.
I completely agree about the 5.9% being on the low side. I really tried to downplay the whole leasing situation. There is a very good possibility that one could make alot better return than the 5.9% I stated. In that case I think it would further pull leasing out front.

**Again everybody these assumptions are based on you coming to terms with that fact that you plan to drive the car for only 3 years** please don't bother to comment with anything along the lines of. "well if you drive it for 4,5,6,37 years then you would make out much better in the end" I need new cars, I need cool stuff, it's a must for me. Everybody has their vice. At least I'm not throwing $30,000 per year up my nose
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Old 12-10-06, 08:54 AM   #8
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Since you state that you must have the latest and greatest (you didn't make that clear previously) leasing makes the most sense. You don't seem to have any great desire to actually own the vehicle, and since you only want to drive it for 3 years before getting the latest vehicle why buy it? Just cut a good lease, drive the vehicle for 3 years, and flip the keys back to the dealer before sliding into the next lease. I don't see any upside in your case for owning it.
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Old 12-10-06, 09:04 AM   #9
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Quote:
Originally Posted by Evitzee View Post
Since you state that you must have the latest and greatest (you didn't make that clear previously) leasing makes the most sense. You don't seem to have any great desire to actually own the vehicle, and since you only want to drive it for 3 years before getting the latest vehicle why buy it? Just cut a good lease, drive the vehicle for 3 years, and flip the keys back to the dealer before sliding into the next lease. I don't see any upside in your case for owning it.

Perfect, thanks! That's the motivation I need to hear . Sorry for leaving out the whole, I need a car every 3 years part. I thought the Assumptions part took care of that. I have trouble sometimes writing everything I am thinking. And as for after the lease is done people need to know that it can be much more advantagous to sell the car at the end of the lease rather than turning it in. I have yet to see one single lease that estimates depreciation correctly. In almost all cases they are off at least a good 10%. there for you stand to gain an additional 2-3K by selling instead of turning it in.
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Old 12-10-06, 09:26 AM   #10
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Whether you lease or buy, just be mindful of the long term effects.

i.e. for every $25k spent on a car, that is $250k lost in retirement savings. For $50k, it is $500k lost in retirement savings.

If you are young and flipping cars every few years, you could easily be out over $1 million in retirement savings.

Personally I see no point flipping a car every 2-3 years since the models don't change but every 7 and allow a year or two for the bugs to get worked out.
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Old 12-10-06, 09:58 AM   #11
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Good point.
How did you get your numbers for retirement loses?

Also remember that buying a $40K car does not constitute me actually spending $40K. In actuality according to my numbers it would infact take me 3 cars which is 9 years to actually spend that $40K ok well $45K. which works out the same as those people that buy a new IS and keep it for 9 years, only I get a new car every 3. Newest technology, newest safety, newest gas mileage.

Also, there is nothing saying I have to get another IS. My first car at 18 was a 2001 IS300. I kept that for about 3 years. I leased it and sold it at the end of my plan. Made about $3,000 off the difference. Put that down on a 2003 Avalanche. Leased it, but pretty much lost my profit margin because the Chevy doesn't hold value like a Lexus. Maybe in 3 years there will be another redesign in another make. Than back to the IS for 2012.

By the way I am currently contributing fairly to my retirement. Right now about 25% goes to either to a comnpany matched 401K or an IRA. I also own 2 houses, one of which I rent out. I really don't know, however, how concious I am about my retirement situation. I guess my plan as of now is to live life as full as possible while I am young, no children, and can enjoy it the most. I would like to pay off the house I am living in($340K, of which I still owe $250K to date). Maybe this plan will be tragic flaw?
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Old 12-10-06, 10:37 AM   #12
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Financial advisers have told me that $1 will be worth an average of 10 times its value over 30 years. Some investments do a lot better, some a little less.

So if you take $50k times 10 you have $500k.
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Old 01-31-07, 09:52 PM   #13
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Maybe it is just me but there is a big piece to this puzzle everyone leaves out when comparing lease vs buy.

(using lexus.com for these calculations)

Let us say a buy (loan) results in a monthly payment of $679 (36 month term, $42k purchase price, $20k down payment, 7% interest rate) And, at the end of your 36-month loan your car has a resale value of $22,000. So, essentially you have a "cash value" of $22,000 in your pocket (if you sold your car, of course... which, for this argument I am assuming you would).

On the same car, if you put down $5,000 a lease would have a monthly payment of $570 (36 month term, $42k purchase price, $5k down payment, $1,680 in other fees due at signing, 12,000 miles / year)

Up front, you have $13,320 still in the bank when leasing as compared to buying ($20k - $5k - $1,680). Let us say you invest and get a 7% annual return over the next 36 months. When it comes time for you to turn your car in, your $13,320 will have grown to $16,422.

However - and here is the part that people always seem to forget - what about also reinvesting the money you are saving on the monthly payment. In all fairness, to compare apples with apples, you have to be willing to put away the same amount each month. So, adding $109 / month to that $13,320 gives you $20,774.

Now, here is where I fail to see why putting a big down payment on a lease is bad. Let us say you put $10k down instead of $5k on that loan. Your monthly payment will then be $415 with $8,560 to invest up front. Add to that the $264 difference in monthly payments and your bank account will have $21,095 at the end of 36 months.

Is my math wrong??
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Old 01-31-07, 10:10 PM   #14
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i didnt put a huge down payment on my car just incase there is an accident and i total the car(knock on wood). then i dont think i would be seeing that money ever again.
others might not put a huge down payment because they dont want to go broke for a couple months. its always nice to have some extra cash at the end of the month just incase something occurs. forgive me if i am making no sense.
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Old 01-31-07, 11:30 PM   #15
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Default My kinda thread...

I am a Financial Services Manager at a Lexus dealership. Lately, I have had a lot of LS460 clients come in with the intentions of paying cash for their 70-80K car. The first thing I ask them is how long they plan on keeping their LS. As stated before, the typical (not a poor boy like me) Lexus customer will keep their Lexus for 36 months. Then I begin to ask them if they have considered leasing options so that they can leave their downpayment money where it is. In the above mentioned case, there is $21000 available to put down on a purchase, so what is the best case scenario for this?

A Lexus One-Pay Lease.

Here's why it works:

1. You make all of the monthly payments upfront, so there are no statements to hassle with. This is not a big deal if you use the auto-withdrawl feature though.

2. In our state, you are only taxed on the monthly payment and not the full cap. cost (negotiated price) of the lease. This works for the standard lease as well.

3. If you take care of your leased car and stay within the allowed mileage, USUALLY within 2.5 to 3 years, the dealer will be able to roll you into a new lease for the same, if not cheaper payment.

4. ...the best part of a one pay lease for customers is that Lexus Financial Services only allows the dealers to mark up a lease .00040 on a One-Pay. Not only that, but since all of the payments are made upfront, the money factor is reduced by .00100, which all dealers do...it would be stupid for them not to.

Most finance managers dislike the one-pay lease. It doesn't give them the high paying reserves that most leases allow (.00120 over the buy factor)

Just my 2 pennies...
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Old 01-31-07, 11:30 PM
 
 
 
 
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