BUYING vs LEASE

This is one of the questions that many people try to ignore it when it is about time to buy a car. You should not ignore it, and I will explain to you why.
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JD Powers and Associates said back in '95 that at the end of 2000 year more than 80% of the population will lease the cars.

The first time when the lease came in the market back in 1979 nobody knew too much about leasing, not even the financial institutions, the dealerships or the customers. So the banks stated at that time that with a lot lower down payment and a lot lower monthly payments you (us) should be able to drive a lot more expensive car. Kind of interesting! Let refresh that. I put down less money on a $45000 car and pay less monthly payments for 24, 36 or 48 months lease. That sound wonderful, but what's the catch?

First, let's break it down. Lets suppose we are looking at a 96 Acura 3.5 RL the new flagship of Acuras. The non-premium RL runs close to $43,000 a very nice car that competes with Lexus LS 400 and Mercedes E class.

Back in August and September 1996, an ad in the newspapers said that you can lease an Acura 3.5 RL non-premium for $499 a month with $2,500 down, first payment $520, security deposit $550, acquisition fees $450, tag title and tax. So, all these numbers added together could be closed to $4300 down and $499 + tax for 39 months lease with a residual value close to $22,600 and 12000 miles per year.

Hold down! You will say! What is all that crap you just mention...the security deposit, the acquisition fees and residual value...and, $4300 down and 12000 miles per year and it looks to me that I will never own the car! No way Hose...Because:

I'm driving more than 12000 miles a year.
I am going to put down $4300 down and I will never own the car!
And you want me to pay for the mileage at the end of the lease!
And I don't want to get in something I don't understand!
No way again... I better put $4300 down and finance the car for 60 months and the car will be in my name. Am I right or not!

Yes, you are totally WRONG! And I will explain it to you why.

>Now lets suppose that you and me will get the same car.

A 1996 Acura 3.5 RL non-premium listed at $43,000.

No trade involved.
You will buy the car; I will lease it.
We will put the same down payment, in our case $4,300 down.
You will finance the car for 60 months at 8.5%; I will lease it for 39 months at 4.1%.

Note: On lease the banks deal with a money factor (e.g. 0.000170) and not with the interest rates like we are used in straight purchase, but if you translate the money factor on interest rates you will see the big difference in the percentage.

So let's try to do some calculations on your side (straight purchase):

Bottom Line to be financed after tag, title and taxes and $4300 down payment will be $40,000.
Now $40,000 over 5 years (60 mos.) at 8.5% = $820.66 monthly payments. HMMM!!

So let me rephrase that: You will put $4300 down and you will pay $820.66 per month for the next 5 years, just because your intention is to own the car?

Now lets do some calculation on my side (on a lease):Same car, same price, same down payment and the payments will be only $499 plus Tax a month!

It has to be a catch somewhere you will say. Is not that simple! Because everybody will start leasing the cars instead purchasing! And why they don't do it.

Because my dear friend, like I told you, back in '85-'86 when the people start leasing the cars they didn't understand the leasing completely or it was not explained to them in a proper way.

Now lets go step by step to see the difference between purchase and lease:

As an example lets supposed we already bought the cars and we are ready to trade them in after 2 years, for a different car maker (you may want a new Lexus and I may want a new Mercedes)

We used the same down payment $4,300.
For the same car You were paying $820.66/month, I was paying 499 + tax.
I was paying $296.71 per month less than you; driving the same car! So far, for 24 months I saved $7,121.04 and you spent it.
Can you do anything else with $7,121?

Ohm! I assure you do, YES. I was paying off two of my credit cards or I used it towards my mortgage to pay off on my HOUSE faster, the only asset in this life that will worth some money in the future.

Now, let's talk about taxes! When you purchased your car you have to pay 5% or 6% taxes (depending on your county) plus another 9% (today 7%) for luxury tax.

Note: On any car over $34,000 (today over $36,000) you have to pay additional luxury taxes. Now lets see how much did you paid on taxes and how much did I paid also. Your case: $43,000 x 5% = $2,150 plus additional 9%($792.05) Total paid taxes=$2942.05.

My case: $499 x 5%=$24.95 So far, each month for 2 years I was paying $24.95 x 24 months = $598.80 plus additional 9%($540.00) Total Paid taxes=$1138.80. Oh! Again I was saving another $1,803.25!

Let me put all these staff down to see the difference a lot better:

I save $7,121 + $1,803.25 = $8,942.25 in two years! And I was driving the same $43,000 car like YOU did it. All right, all right! So what's the catch!

Question: But in long run I will pay more for the same car on a lease if my intention is to keep the car and refinance that residual value at the end of the lease?

NO! And I will show you in the next lines.

Do you remember that for the same car (Acura 3.5 RL) your payments were $820.66 for 60 months at 8.5% and my payments were $523.95 for 39 months lease at 4.1% with a residual value of $22,600.

Now again lets do same calculations:
Your case: $820.66 x 60 months = $54,163.56
My case: $523.95 x 39 months = $20,434.05 and I will refinanced the $22,600 at an interest of 8.5% for 36 months = $25,683.48. Let's add the $20,434.05 + $25,683.48 and we will get a total of $46,117.53.
So, you will pay $54,163.56 and I will pay $46,117.53 for the same car. Can you see the difference of $8,046.03? Can you do anything else with that kind of money? I bet you do!

You don't have to listen to me, but how about J.D. Powers and Associates when they specify that in the future more than 80% of the population will lease the cars. And why they will do that? Because the people didn't take time to understand the lease. They didn't want to overcome something new that will brake the old tradition of purchasing the cars. Today when the lease is explained in a proper way, the people agree and see that they have a lot more benefits over old way of purchasing the cars.

Have you heard something like this "...I better go financed the car and it will be mine!..." But when the car will be yours, after 1 year, 2 years, 3 1/2 years, 4 years and 2 months, and so on.... The car will be yours at the end of the term when you will receive the title. I'm right or not! Can you say that the car will be yours after 2 years of financing! No, because the bank has the title and not you. You rent the car! Yes, "read my lips", YOU RENT THE CAR! As long as you have a lien holder on your car, you can not say that the car is yours. If you don't make your car payments for 2 or 3 months the bank has the right to repo the car from you! ! Did you know that! Yes, you knew it, but you ignore it. So, you are going to finance your car for 5 years, and in the next 2 years you are ready to trade in for another car! ! But in mean time, you have been paying $270 more per month - like in our example on an Acura 3.5 RL - just because you want to do what our grandpa was doing 50 years ago - purchase the car! Again J.D. Powers and associates said that today, people keep their cars no more than 2 or 3 years. Why? Because the market and technology is changing so fast today that sometime it is hard to keep with it. And we are a part of that change and we have to change.

Let me ask you something else. Why you don't wear the some clothes every day? Even if you wash and perfume them in every day! Because you need a change, you need something else that it will make you feel better. Because you have to reward yourself for all the hard work you do every day. Am I right or not! I bet you that I am. Would you like to get the car you want it so much? Yes, then when? When you will be retired! Than wait another 30 years and realize that the car you want is not even made anymore.

Everything looks just fine 'till now, but how about the mileage?

Leasing is another way of financing a car. The banks stated on contract that if you will leased a car you will be allowed to drive between 12,000 and 15,000 miles a year. And if you want, you can buy additional miles when you sign the contract.

Hold down again! On straight purchase I don't have to buy additional miles and I can drive as many miles as I want per year, with no restrictions. What's the explanation!

I think that in our lifetime we had the chance to trade in more than one car for a newer car. Now let me put down this scenario.

You actually have a '93 Toyota Camry with 67,000 miles. The car was wonderful, but it is about time for a change; you may need a bigger car, your income has increased over the years so lets trade the Toyota for an Acura. By the booklets you should have no more than 45,000 mile (15,000 miles/yr. So what are you going to do? Are you going to pay for the mileage? Nobody did that and nobody will ask you. Why! Because no working person is driving today 12,000 or 15,000 miles per year, everybody is driving between 20,000 and 30,000 miles a year, if not more then that!

Note: Now to be more briefly, when you trade a car to any dealership, the used car manager inspects the car for body damages, mechanical problems, interior-exterior conditions VIN of the car and mileage. Now the used car manager will test drive the car and when he is coming back he will open his "Black Book" to see the wholesale value of the car. Now lets supposed that the car he just inspected was our 93 Toyota Camry. The wholesale value of the car by the book will be $13,800. Because the car has high mileage, he will deduct $800. So the final offer for our trade was only $13,000. He will not ask you if you have leased or purchased the car. The book is the book! No matter if you are leasing a car or not when it is about time to trade in the car, the penalty for the mileage is deducted from the value of the car (listed in the Black Book or N.A.D.A)

So, the same scenario will apply when you will trade in your 96 ACURA after 2, 3 or 4 years from lease. You don't have to pay for the additional miles. And I will mention one more time; you do not have to trade the car back to the same dealership or same kind of carmaker. You can trade in the car anywhere in USA to any other domestic or import carmakers. Now, please read these lines carefully so you will understand their meaning. The only time you will pay for the extra mileage is when you turn the car back to the same car maker and you will tell them "...here is the key and the car..., I'm not trading-in, I'm not buying another car and I'm not refinancing the car. I just want to return the car back!". That's will be the only time when the dealership will ask you to pay for extra miles, if you have any.

Question: What if I want to trade in the car before the end of the lease? I will suffer any penalties.

No, you will not suffer any penalties, unless you will not decide to trade in the car before 1 year since you sign the contract. So let me be clear in here. If you decide to trade in the car after 8 months since you lease it, it will cost you one payment, and that's the only penalty. In rest you can trade the car after 1 year and 2 months, 2 years and 4 months, or anytime you want, and you will not be penalized.

How about the insurance? It will run higher on lease than purchase!

That's true, but I will explain to you the advantage. Now lets supposed that you will have a bad accident and your car is financed on straight purchase. The insurance company will pay you no more than 80% of the value of the car. And if you don't like the way they repair your car and you want to walk away from it, you have to pay the financial institution the other 20%. It doesn't sound too good! Will you or me have that kind of money! NO.

Now on a lease for the same accident the insurance company will pay you 80% and the Leasing Company the other 20%. So if you want to walk away from the car you are free to do it with no cost or any other obligations. Isn't that better!

Good luck with your next investment!

A good advice: On a lease you are dealing with a CAP COST that is the same thing as SELLING PRICE! The CAP COST is negotiable!

The best time to buy a car is on :

- same day of holidays
- at the end of the year
- over the year always in Sundays (or Saturdays if the dealership is closed on Sundays) at closing time.
- in July or August when is the year end for dealerships (that's the time when the next year models start arriving)

All of the above are only for general information. Examples are reflecting the year of 1996. Anyway you should use your own judgement and any useful information for your next investment.