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Not necessarily true. For many cars and many people, leasing is better than owning. You have a fixed low monthly cost that is easily budgeted for, while giving you the latest in safety equipment with a warranty so you don't have to work on it yourself (good for people who live in places where working on a car is frowned upon, such as many HOAs and apartment complexes). For people who change cars rather frequently, where even traditional financing or saving up to purchase outright is the same or more than a lease cost, and for people looking at EVs and PHEVs where the tech and car is obsolete in a couple years and the lease is heavily subsidized. I know a number of EVs that can be had for a zero down, $99/month cost, which is dirt cheap even compared to used cars you own outright.
While I own my own car outright, my wife's car is a lease, with a low fixed monthly cost, giving her the safest features, while affording me the luxury of not having to work to maintain it or fix it, due to the warranty and maintenance package. And when the lease is over, we just upgrade to the latest model, keeping her in the latest safety features and keeping the car in warranty. For my budget it's NO DIFFERENT than saving up every month to buy a car outright then saving up again to replace it when it wears out.
Completely agree and have a data point to offer on the EV lease. I just turned in my 2013 Ford CMAX Energi (plug-in hybrid). Great car, perfect for my daily commute. With free charging at work, I think I may have put in 50 gallons of gas over the 24 months I leased it. Mileage was over 200 mpg until I took it on a 600 mile trip and had to use the ICE for most of those miles.
Anyway, lease payment was $239/month (zero down) = $5736 for 2 years. Buyout on vehicle was ~$20.6k. The purchase price was $26,xxx (which included the $4K Federal tax credit which Ford Credit rebates back to the lessee). [MSRP was $33,750]. Well that same vehicle just sold at auction for $12.9K, almost $7k lower than the lease buyout. So Ford Credit took a huge hit on it. If I had bought the vehicle instead of leasing it, I would have had to eat that depreciation and it would have been more than twice as expensive as had I leased it.
Completely agree and have a data point to offer on the EV lease. I just turned in my 2013 Ford CMAX Energi (plug-in hybrid). Great car, perfect for my daily commute. With free charging at work, I think I may have put in 50 gallons of gas over the 24 months I leased it. Mileage was over 200 mpg until I took it on a 600 mile trip and had to use the ICE for most of those miles.
Anyway, lease payment was $239/month (zero down) = $5736 for 2 years. Buyout on vehicle was ~$20.6k. The purchase price was $26,xxx (which included the $4K Federal tax credit which Ford Credit rebates back to the lessee). [MSRP was $33,750]. Well that same vehicle just sold at auction for $12.9K, almost $7k lower than the lease buyout. So Ford Credit took a huge hit on it. If I had bought the vehicle instead of leasing it, I would have had to eat that depreciation and it would have been more than twice as expensive as had I leased it.
So you know that a dealer isn't going to take a loss, right? It's all in the paperwork.
Often times if you go into a dealership with the intention of leasing and you make that clear, the "purchase price" is going to be higher than what you could have negotiated to actually purchase the vehicle.
Not to mention, you are going to be hit with mileage restrictions as well as have to pony up for anything deemed more than normal wear and tear at turn in time. And you will pay full market price for the repairs. You are also stuck in a perpetual payment for as long as you lease and never have the opportunity to pocket any of that money you spend on a monthly lease.
Basically, you lease the car, pay the depreciation (look at the lease as being the depreciation) and then turn it back in and the dealer sells the vehicle less the depreciation (which you have just paid) so they aren't losing anything. They're still making money on the interest you pay. And they're making it twice since they lease it with interest and then sell it (typically finance with interest).
Had you bought the vehicle outright, you could have possibly negotiated the price down to around $23k. $23k at a 2.5% interest on a 60 month loan would bring your payment to $479.16 per month. In 5 years, you own the vehicle and would have paid around $28,750 for it. If you only drive 10-15k miles per year, you could potentially go payment free for another 5 or more years.
If you lease vehicles with the same $239 payments for 10 years, you will have spent $28,680 on lease payments and still not have a vehicle that is yours. Not to mention the probability of being able to stay within your mileage through the entire 10 years and not do anything that the dealer requires you to pay to fix is debatable and unlikely.
So you know that a dealer isn't going to take a loss, right? It's all in the paperwork.
Often times if you go into a dealership with the intention of leasing and you make that clear, the "purchase price" is going to be higher than what you could have negotiated to actually purchase the vehicle.
Not to mention, you are going to be hit with mileage restrictions as well as have to pony up for anything deemed more than normal wear and tear at turn in time. And you will pay full market price for the repairs. You are also stuck in a perpetual payment for as long as you lease and never have the opportunity to pocket any of that money you spend on a monthly lease.
Basically, you lease the car, pay the depreciation (look at the lease as being the depreciation) and then turn it back in and the dealer sells the vehicle less the depreciation (which you have just paid) so they aren't losing anything. They're still making money on the interest you pay. And they're making it twice since they lease it with interest and then sell it (typically finance with interest).
Had you bought the vehicle outright, you could have possibly negotiated the price down to around $23k. $23k at a 2.5% interest on a 60 month loan would bring your payment to $479.16 per month. In 5 years, you own the vehicle and would have paid around $28,750 for it. If you only drive 10-15k miles per year, you could potentially go payment free for another 5 or more years.
If you lease vehicles with the same $239 payments for 10 years, you will have spent $28,680 on lease payments and still not have a vehicle that is yours. Not to mention the probability of being able to stay within your mileage through the entire 10 years and not do anything that the dealer requires you to pay to fix is debatable and unlikely.
I don't think you quite understood what he was saying. He leased the car for X amount per month. X amount is the difference between the sales price and the residual amount. In cheapdad's case, the bank gambled that the car would be worth $20,000 or so at this point in time. The bank lost in this case, as he is saying that the actual value of the car is around $12,000. He didn't pay that much in depreciation - the bank will take a loss in selling the car at auction.
Also, I'm not sure where people get the idea, or why they perpetuate the fiction, that your negotiated sales price is affected by how you choose to purchase the vehicle. That's entirely on the purchaser and their negotiation skills. The sales price isn't going to magically go up because you opted to lease. If anything, it goes down because dealers see you as an easy sale in 34-36 months.
As to mileage and repairs, mileage is easy to keep track of and to know how much you need. If you go over, it's not like the world crashes down on you - if you go 1,000 miles over your allotment, the penalty is likely about $200. Big deal. Just figure out how much you drive and budget for it up front. Repairs are easy under a lease - there isn't any cost since the car should be under warranty at all times.
Finally, it never seems to occur to anyone pointing out the drawbacks of leasing that people who lease have zero desire to keep a car for more than 3 years, much less 10 or more.
I don't think you quite understood what he was saying. He leased the car for X amount per month. X amount is the difference between the sales price and the residual amount. In cheapdad's case, the bank gambled that the car would be worth $20,000 or so at this point in time. The bank lost in this case, as he is saying that the actual value of the car is around $12,000. He didn't pay that much in depreciation - the bank will take a loss in selling the car at auction.
Also, I'm not sure where people get the idea, or why they perpetuate the fiction, that your negotiated sales price is affected by how you choose to purchase the vehicle. That's entirely on the purchaser and their negotiation skills. The sales price isn't going to magically go up because you opted to lease. If anything, it goes down because dealers see you as an easy sale in 34-36 months.
As to mileage and repairs, mileage is easy to keep track of and to know how much you need. If you go over, it's not like the world crashes down on you - if you go 1,000 miles over your allotment, the penalty is likely about $200. Big deal. Just figure out how much you drive and budget for it up front. Repairs are easy under a lease - there isn't any cost since the car should be under warranty at all times.
Finally, it never seems to occur to anyone pointing out the drawbacks of leasing that people who lease have zero desire to keep a car for more than 3 years, much less 10 or more.
The sales price is absolutely dictated by how the vehicle is going to be purchased. I'm friends with the sales manager at our local Ford dealership and the sales manager at the Toyota dealership. Both will tell you very quickly that purchasing with cash will get you the cheapest out the door price. The transactions are quicker, tie up less of their time, and requires less paperwork and processing to complete.
Dealers finance the vehicles they buy from the manufacturer. Just as with consumers, dealers pay interest on the loans they take. Often times they pay an inflated invoice price and get the difference in the inflated price back quarterly as a holdback fee. That's why they show you their "invoice" pricing. Typically they can make $500-600 from the holdback fee per vehicle. (Ford offers 3% of the MSRP as a holdback fee to dealers). Let's say they actually paid $25k for a car. The holdback fee is 3% and is meant to cover the dealer carrying cost. They finance $25,750 from their lender. While they will get $750 in holdback fees from the manufacturer next quarter, they have to pay the interest on the full $25,750. If that vehicle sits on the lot for 2-3 months and they are paying up to $350 per month to hold the vehicle, they can quickly eat up the holdback profit and can go into the red fairly quickly.
The dealership has to pay interest on the entire amount to include the holdback, so it is in their best interest to move the inventory as quickly as possible to avoid interest and carrying/holding costs. If they can finance a vehicle to Buyer A for $26k or sell it outright in cash to Buyer B for $23k cash money, they'll take the cash deal every time.
Just because you have the desire to change vehicles every 3 years doesn't mean that it makes the most financial sense... which is the topic of this discussion.
But it also doesn't mean that it's financially disastrous, or that "financial sense" is the only consideration.
IMO, saving $$$ shouldn't be the be and all of life decisions.
But it also doesn't mean that it's financially disastrous, or that "financial sense" is the only consideration.
IMO, saving $$$ shouldn't be the be and all of life decisions.
It's not, and no one is saying that it is. But spending more than you make (often times the reason people finance vehicles is because they cannot afford to purchase it outright) isn't a smart life decision either. While it might not be financially disastrous to finance that $50k vehicle today because you have good credit and a few extra hundred per month just to get the latest bells and whistles, what do you do when you have a child who develops a serious medical condition that you have to pay for? Or when the HVAC goes out on your house? You've now tied your money up in a vehicle because of a wantand will have to finance yourself into more debt to be able to pay for the things you didn't plan for and you need, or go bankrupt because you're maxed out.
No one is saying don't do it... but instead to choose how you spend your money wisely. While saving money shouldn't be the end all of life decisions, debt can very quickly control your life.
Yea, all examples will change based on the persons income and life situations, that's why it's ALWAYS dumb to make a blanket statement as to what a person should or should not do. Also, I always tell any dealer of any kind I'm going to pay cash while negotiating, Then sometimes I do and sometimes I don't. And by the way, If you finance from outside the dealership they get paid in full anyway. People have also disputed what you say about dealers wanting cash who also worked, or know someone who does, for a dealer, so as usual, nothings cut and dry. And I know for a fact most Boat dealers who have in house financing would much prefer you finance. It all depends on how they run there business from the financial side.
Spousal Unit and I are talking about financing a sensible new mid-sized sedan right now. (The fun car is scheduled to happen in 3-4 years when primary mortgage on our house is paid off and the current Outback in looking at 125K+ miles on the odomoeter) Somewhere along the line, we've become brand loyal to a company that tends to hold value stupidly well (Subaru) and pricing is often less than $1500 between a 1-2 year old vehicle and a new one that's been sitting on a dealer lot a bit longer than they like. And once you get into the realm of a 4+ year old vehicle, you get shorter loan terms and higher monthly payments, and we're all about the cahsflow until spring 2018.
So on to the financing- have a preapproval for $25K for 6 years at 2.49% from our credit union. Was playing around with different down payments and monthly payments and it's about a $300/month payment for borrowing $20K. This goes up to $377/month if we borrow $25K. But because we live in an era of historically low interest rates, my total back of the envelope numbers say it costs roughly $5 per month to borrow $5K over 72 months. So for a little bit higher of a monthly payment, and an extra $5 a month we can leave the $5K either sitting where it is as cash reserves (13 monthly car payments if we needed to at some point if we saw a fall in household income) or invest it if we're feeling like that's the way to go. And we've only got another 27 months on the mortgage, at which time we'll effectively gain $950/month in cash flow.
We actually spent several months looking for the elusive $5-$7K used car around here that you could pay cash for, had a reputation for reliability, and had fewer miles on it than the Outback (currently at 106K) and since we just did the timing belt on the Adventure Wagon, we were also not wanting to get into a situation where someone was selling because they didn't want to do the 90K scheduled maintenance, leaving us to put another $1500-$2000 into the car in year one of our ownership. And kept striking out on that quest- lots of really high mileage stuff, some lower mileage cars that would flunk the 'could I drive this to Seattle if I had to?" expected reliability test, (we've got a dead Passat in the driveway with only 91K miles on it- never again!) and the cheaper but not dirt cheap used car just kind of lost the luster.
^^^^^ Great example, makes senses for you. also I don't remember who said it, But a dealer will take a loss on a car, they can't sit there for ever. another example of a blanket statement that isn't ALWAYS accurate.
The sales price is absolutely dictated by how the vehicle is going to be purchased. I'm friends with the sales manager at our local Ford dealership and the sales manager at the Toyota dealership. Both will tell you very quickly that purchasing with cash will get you the cheapest out the door price. The transactions are quicker, tie up less of their time, and requires less paperwork and processing to complete.
Negotiate the price before telling them how you're purchasing. That's what I've done. Doesn't matter if you buy with cash, finance traditionally or lease. get the price where you want it, then choose purchase method.
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