Leasing a Car

[rpadula]

I was browsing the craigslist auto for sale ads last night and noticed several "take over my lease" posts. A quick investigation led to sites like SwapALease and LeaseTrader.

I just figured I'd look for a good used car, but I was wondering if taking over a lease might be advantageous. Anyone know how to figure it out?

 

[kkoran]

A lease might make sense if you can write the entire cost off as a business expense. Otherwise, I think leaseing is just a way for people to drive a car they can't really afford.

 

[flyersfan31]

Unless they are going to underwrite some of the cost, you're just doing them a solid and renting a car. I wouldn't do it.

 

[AdamZ]

Unless they are going to underwrite some of the cost, you're just doing them a solid and renting a car. I wouldn't do it.

Actually you take over the lease but at a much reduced rate. The orginal lessee buys it down to get out of it.

 

[rpadula]

Actually you take over the lease but at a much reduced rate. The orginal lessee buys it down to get out of it.

Adam, could you please explain that?

I know that you can pay a "down payment" at the start of a lease (really it's a pre-payment) to get a lower monthly rate. For example, see this listing's seller comments. The guy exiting the lease loses that and so that's good for whoever assumes it.

And then there are ads like this, offering a $1,000 incentive (to me?) lowering the effective monthly payment.

Very few of them seem to show the final buyout price. I was wondering how to figure out if there are any combinations of taking over a short lease, say one having less than 12 months remaining, and buying it at the end and getting a good deal on a newer car vs. buying an older one (likely with significantly more miles on it).

 

[JeffDG]

The way I look at a lease is that the company is estimating the future value of the vehicle, and then you pay:

Principal: On the difference between purchase price and future value
Interest: On the whole amount

So, essentially, you're paying interest on money that you never intend to pay principal on.

Then there's the fees and penalties at the end...

I estimate the value to the consumer as the inverse of how often a dealer will suggest an option...how often will a deal suggest paying cash up front on a vehicle? As opposed to the frequency of them suggesting a lease...which do you think is in the dealer's best interest?

 

[Trapper John]

Unless they are going to underwrite some of the cost, you're just doing them a solid and renting a car. I wouldn't do it.

Yep, and you're renting with a mileage penalty. A bunch of people that lease take low mileage deals (thinking they won't pile on the miles), because they are chasing the low payment.


Trapper John

 

[Ted]

Yep, and you're renting with a mileage penalty. A bunch of people that lease take low mileage deals (thinking they won't pile on the miles), because they are chasing the low payment.

And it does work for some people. If you have fairly predictable patterns and you know how many miles you drive per year and can deduct it as a business expense, then it's fine. The problem is that you're making a gamble, because if you drive the car any less than you say you will you've overpaid, and if you drive it any more than you say you will you get hit with a big penalty.

Overall, I don't like leasing. I might, however, do it if I could deduct it as a business expense. I can't, so it's not worth even trying.

 

[jesse]

And it does work for some people. If you have fairly predictable patterns and you know how many miles you drive per year and can deduct it as a business expense, then it's fine. The problem is that you're making a gamble, because if you drive the car any less than you say you will you've overpaid, and if you drive it any more than you say you will you get hit with a big penalty.

Overall, I don't like leasing. I might, however, do it if I could deduct it as a business expense. I can't, so it's not worth even trying.

I suppose leasing and deducting might work if you're convinced that you need to drive a super late model car. Otherwise though, you're still going to be financially better off buying something a few years older. The deducting doesn't make it free.

It is sort of funny how I look at buying a new car as being rather stupid no matter how much money you have - and then I go and spend ridiculous amounts of money flying airplanes and think that's OK.

As far as buying out someone else's lease to pick up a sweet deal on a car....I think the amount of crap that could go wrong with that plan creates way more risk then necessary for the money you're likely to save.

 

[flyersfan31]

As far as buying out someone else's lease to pick up a sweet deal on a car....I think the amount of crap that could go wrong with that plan creates way more risk then necessary for the money you're likely to save.

That's about where I come out on it too.

 

[Ted]

I suppose leasing and deducting might work if you're convinced that you need to drive a super late model car. Otherwise though, you're still going to be financially better off buying something a few years older. The deducting doesn't make it free.

It is sort of funny how I look at buying a new car as being rather stupid no matter how much money you have - and then I go and spend ridiculous amounts of money flying airplanes and think that's OK.

We all have priorities. Some people want to drive new cars. Some people want to fly airplanes. You and I are in the latter category.

If you're one of the people out there who is already going to drive a new car and replace it every 3 years, then there are ways to make leasing a logical idea. That said, I'll keep my 10 year old, 129,000 mile truck, and drive it until the engine throws at least one rod, probably 2 or 3 before I stop driving it.

 

[Dr. O]

Shucks yes, just one rod a bangin ain't enough to give up on it/// Put some sawdust in the crank case and it quiets right down...

denny-o

 

[Dr. O]

More seriously... I am in business and the lease can be "written off" (whatever that means)... My accountant never found leases to save us money and we purchase our vehicles - usually slightly used and let some other sucker have taken that big loss when the tires first crossed the curb at the dealers lot...

denny-o

 

[wabower]

Analysts measure all rolling stock deals on a "money-in/money-out" basis, since all depreciation claimed must be recaptured at ordinary rates and the deferral period is too short to provide sigificant value.

You're basically measuring a stream of lease payments vs. an assumed stream of purchase-money mortgage payments to see which provides the lowest NPV cost. Any business calculator will do the math.

IMO, it's hard to find a decent deal on the lease assumption websites. The primary reason is that the guy who wants (or needs) to get out of the lease normally can't afford to provide the lump-sum discount necessary to make it a good deal.

More seriously... I am in business and the lease can be "written off" (whatever that means)... My accountant never found leases to save us money and we purchase our vehicles - usually slightly used and let some other sucker have taken that big loss when the tires first crossed the curb at the dealers lot...

denny-o

 

[AdamZ]

Adam, could you please explain that?

I know that you can pay a "down payment" at the start of a lease (really it's a pre-payment) to get a lower monthly rate. For example, see this listing's seller comments. The guy exiting the lease loses that and so that's good for whoever assumes it.

And then there are ads like this, offering a $1,000 incentive (to me?) lowering the effective monthly payment.

Very few of them seem to show the final buyout price. I was wondering how to figure out if there are any combinations of taking over a short lease, say one having less than 12 months remaining, and buying it at the end and getting a good deal on a newer car vs. buying an older one (likely with significantly more miles on it).

Rich, sorry for the delayed respose. Basically the folks advertising on the various sites want to get out of the lease for one reason or another, financial reasons are the top reason. So as others have said, yes you are bailing someone out of a financial obligation BUT they want to get out of the lease and are very often willing to negotiate and pay all the transfer related fees, pay you an "incentive" to get you to take over the lease such as the one you posted. ie. The car has 10 months left on the lease and the payment is $400 per month. If the guy gives you a $1000 incentive then your lease cost drop to $300 per month plus they have already paid all the up front fees buy downs etc. You have the car inspected and if you like it you work out a deal and get it.

It is not just taking over anothers financial obligation. you are not taking over the lease out of the goodness of your heart. Think about it if you are going to lease an Accura for $400 per month and you have to pay $3700 upfront fees and buy downs, you now get that lease without paying the $3700 even if you don't get the incentive. if its not a good deal you just don't do it. Its that simple.

As for the buy out well thats written into the term of the lease just assume its the residual value some financing companys will negotiate down the buy out some won't because they have insurance for any deficency that they get hit with after auction.

 

[Dave Siciliano]

Leasing can make sense for some folks. Normally, a higher mileage business user that wants a new, dependable car.

Analyzing a lease is looking at a stream of cash flows and residual value as both Wayne and Adam have stated above. You'd have to analyse the contract, look at residual value and what the car could be purchased for if you wanted to keep it. That's a lot of work if you chase several cars before making a purchase.

We purchase our vehicles at auctions coming off leases. We've found it's best to pay cash and slightly out bid dealers for nice cars. They have to purchase them cheap enough to pretty 'em up, put them on the lot, market them--and, make money after paying a salesman, overhead, etc. If we bid a couple hundred dollars more than they can pay (dealers), we get a nice car that may need a bit of cleanup but much cheaper than we would pay at a dealer.

If I could suggest something, that would be it if you want a car that's two or three years old. You may not be able to inspect the car other than at the auction; so, if a fella had a habit if riding the clutch at stop lights on slight hills, that might not show up. BUT, we have purchased four vehicles this was and done excellently on each. We've purchased two still under new car warranty programs.

Best,

Dave

 

[Ghery]

Or you do as my original CFI did (he who had an MBA). Buy the best car you can for about $2000. If it lasts a year you are money ahead. I keep cars until they are no longer economical to run (and I may drop a new engine in my Wrangler when the time comes, but that's a long way off). Figure a minimum of 10 years. My Wrangler is 11 years old now, but use 10, the arithmatic is simple. I have to buy that new vehicle for less than $20,000 to keep my annual cost (purchase) under his cost. And he drove Cadillacs. I don't (and won't - my great grandfather, who drove nothing but Buicks, once observed that "People who buy Cadillacs can't manage their money."). There might have been something to his method.

 

[weilke]

As a strategy to maintain 'decent' vehicles at minimal cost is to buy them 2 years old with less than 30k on the ticker and selling them once they hit about 120k. That way, you hit the 'linear' part of most 'uitility' cars depreciation curve and you get rid of them before the components start falling off one by one.

I don't care much for the $2000 kind of cars.

 

[jsbougher]

That's about where I come out on it too.

Agreed. It looks like there are quite a few leases available now with 6-9 months and 15,000+ miles left on the lease. We put a lot of miles on our cars for work and looked at picking up short term leases with plenty of miles left. Upside is the company could provide a reliable car, under warranty and employees can drive the heck out of it for a reasonable monthly amount that can be expensed. The downside is that it is simply too much work to search, qualify, negotiate, get plates, book insurance ... for a short term agreement like this to make sense.

 

[astanley]

Leasing can make sense for some folks. Normally, a higher mileage business user that wants a new, dependable car.

Analyzing a lease is looking at a stream of cash flows and residual value as both Wayne and Adam have stated above. You'd have to analyse the contract, look at residual value and what the car could be purchased for if you wanted to keep it. That's a lot of work if you chase several cars before making a purchase.

We purchase our vehicles at auctions coming off leases. We've found it's best to pay cash and slightly out bid dealers for nice cars. They have to purchase them cheap enough to pretty 'em up, put them on the lot, market them--and, make money after paying a salesman, overhead, etc. If we bid a couple hundred dollars more than they can pay (dealers), we get a nice car that may need a bit of cleanup but much cheaper than we would pay at a dealer.

If I could suggest something, that would be it if you want a car that's two or three years old. You may not be able to inspect the car other than at the auction; so, if a fella had a habit if riding the clutch at stop lights on slight hills, that might not show up. BUT, we have purchased four vehicles this was and done excellently on each. We've purchased two still under new car warranty programs.

Best,

Dave

Wayne, Adam, and Dave's post are some of the most succinct on the process of valuing a lease versus finance versus buy -- it's about the relative value of cash flows, what you desire out of the product, and how you believe you can maximize returns based on 1) and 2). Some people disparage leasing as "renting the car" -- but a car is a disposable item (unless, in item 2, you are planning to hold your new Dodge Charger for the next 50 years, when it is an antique), so all money is essentially for services, not for a long term asset.

I generally do not like leases, but that is because I generally do not like new cars. I like used cars, with 20-30k on them, that have taken the majority of the depreciation cliff found in new cars, and are on a steady slope to 0 value. But, YMMV.

Dave's concept is an outstanding idea, and a great way to beat a firm like CarMax at their own game (which they are surprisingly good at).

Cheers,

-Andrew