Lease Vs. Buy

[midwesterner]

I see the annual Lexus ads for leasing and special financing, and am reminded of the various arguments. The question of lease or purchase comes up in this forum from time to time.

Leasing always seemed a last choice to me, as I felt I wanted to own the car. As I've grown older, it seems to me there are three options: Finance; pay cash; lease.

Cash is usually seen as the cheapest option, but even that has a price: you are giving up both the interest you are presumably earning on the cash, and there is the opportunity cost foregone (you used the money to buy X rather than Y).

Money advice people always argue against financing cars, especially at high rates. But if you can get subsidized rates (Lexus is offering rates of .9% - 1,9% on certain models), and are making more money from invested cash, this might be a good deal. For example, with inflation running at about 1.6%, financing at these subsidized rates might make sense.

Leasing has its merits, and as one financial guru is quoted, buy things that appreciate; lease things that depreciate. Industry experts argue that you benefit from (1) more car for the money, (2) you are paying only for the use, and (3) you always have a new car under warranty. I leased a car for a daughter in college, and that worked out pretty well. I also got some experience with construction equipment leasing during during my corporate career -- basically same arguments as automotive. There is a money factor (interest rate) in leasing, but there's a money factor in each choice.

So I was open to the pitch when Lexus offered subvented leases, similar to those now advertised, a couple of years ago. I had no trade, and I got a very good deal on the car -- which is the starting point for lease negotiations -- and a significant tax credit. I decided to try it and am happy with the result. I got a lower lease rate because our driving is split among three cars and I can stay under 10K miles annually. I haven't felt any angst over not "owning" the car. Legally, Toyota Corp and I are joint owners.

If Lexus offers me an early out on the lease, which I understand is a not unusual practice, I can apply the higher residual value, as I understand, to the next lease. The dealer finance mgr told me he thought this was the best deal going. I'll have to do the math when the time comes, but the idea has some appeal. If I choose to simply turn in the car and go somewhere else, I've driven a new GS350 AWD for three years at about the price of a mid-range used car.

Otherwise, I can simply write a check for the guaranteed residual at the end of the lease. That might not be the least expensive means of acquiring an automobile, but it's not a bad choice.

Leasing required modest cash up front, and didn't require the savings.draw-down that would have been required by cash purchase. Lease payments come out of cash flow. So far, this is working out pretty well.

What do I recommend? Not sure there's any one answer, but depending on your needs, and whether business use might make leasing attractive, leasing might be a good option. My sense is that in leasing, shorter is better (e.g. 27 - 36 months); that only subvented leases should be considered, and leasing should be considered only with cars that hold high residual value (otherwise you are paying for high depreciation).

Not sure what I will do when the lease is up, but will report on the pluses and minuses as things work out. Next step will be to see if I get an early-out offer about mid-2015.

Hope this helps somebody trying to make a decision. No doubt somebody on the forum has more experience / expertise on this than me, and can maybe add to my discussion.

[VBdenny]

I look at a car lease this way.

Once the car is paid for

You no longer own it

[LEX-SV]

I look at ownership as preferable and a more important consideration mainly when buying assets that appreciate. I favor car ownership slightly over leasing, mainly because of the flexiblity it gives me.

Owning (versus leasing) a production car is not special part of my portofolio. I own my Lexus outright, mainly because I enjoy it, not because it's a great financial asset. Yes, it depreciates at slower rate than a low mileage BMW/Mercedes/Porsche of same model year, but it still has depreciated significantly.

My wife as a self-employed business person has both leased and purchased cars, either way her tax accountant (a licensed pro) can deal effectively with it for significant tax benefits. A couple of those European lease cars were mediocre to poor at best and were gladly turned in at end of lease (to be wholesaled off by dealership since they were defective and high mileage), no additional benefit would have come from ownership of those dogs only more hassle. Another thing I noticed about leasing was the lax inspection criteria for turn-in, other than mileage limitations which are clearly spelled out in contract.

I'm not married to owning or leasing, driving premium cars is expensive both ways. But for those that can both afford them and appreciate them, great. Work the best deal that meets your unique needs is how I see it...

[midwesterner]

Agree. I probably should have noted that the financial benefits of leasing probably vary from state to state. I guess the main reason I did it was that I wasn't sure how much I'd like the car, and leasing seemed a good way to find out -- along with an exceptional offer from the dealer. My general strategy is to pay cash and keep the car for a long period. I am not sure I would lease it again, but not sure I wouldn't. One thing for sure, if it hadn't been for the tax credit, I wouldn't have done it. In IL, you pay the tax when you lease, and pay again when you buy out the car. Not a good deal at all.

[LEX-SV]

In CA tax on lease is only for years and amortizated portion incurred, and is included in monthly payment. Additional sales tax paid later If car is bought off lease is based on residual buyout price, therefore no double payment. Or in other words the total tax basis (in CA) will not exceed the total capitalized cost shown on the original lease contract.