# Leasing a car instead of buying new



## james4beach (Nov 15, 2012)

I'm asking this question on behalf of my parents. They want to get a new car (something in the MSRP 20k-24k range). They want something new, as in, nearly zero odometer. They want low effort, and they're not handy with cars... they won't do buying & selling in the secondary or private markets.

They have sufficient cash to pay for a car outright, but are curious whether leasing works out cheaper - considering the fact that they only want to drive the car so long as its newish (not letting it age much) and if they bought a new car, they would only sell it back to the dealer... my dad is convinced that's the only rapid, low effort way to sell a car.

Thoughts? I'm totally unfamiliar with the calculations for leasing, so I find that I'm not even able to properly compare buying to leasing. Seems to be many caveats. I would appreciate any tips on how to compare and calculate these alternatives. Basically the options seem to be, leasing vs. buying and then selling back to the dealer in a couple years.


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## youngdad3 (Jun 29, 2013)

You can easily compare leasing vs financing cost by adding all monthly payments + buy back amount + buying fee at the dealer for the lease and putting it against the sum of monthly payments if you finance. In fact the salesmen should provide a sheet detailing everything. You should still do the math yourself though because salesmen are notorious for playing with numbers and forgetting about the fineprints.

In my case, car at 46k$ MSRP the lease ends up costing 1500$ more than financing if I buy it back after 48months, even though the advertised lease rate was 1.9% instead of 2.9% for financing. I leased anyway, for the primary reason that I've got an "exit window" after 4yrs if I've got too many problems with the car, but so far I like it so I might buy it when the lease ends. 28 months to go..


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## blin10 (Jun 27, 2011)

leasing advantages over buying new:

-you get into accident, it does not decrease value of the car since you just return it at the end
-car has too many problems? can simply walk away
-always under warranty (bought cars under warranty as well but usually for first 2-4 years depending on manufacturer)
-you can invest that money (if you bought it) and collect interest 
-you don't pay tax on the whole thing right away, you only pay tax on residual % of the car (and you pay that monthly vs lump sum when buying)

in my opinion buying new only makes sense if you're planning to drive it for long long time (7+ years)


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## Rusty O'Toole (Feb 1, 2012)

Today it seems there are many low interest rate deals or cash back deals on buying cars. So it would make sense to negotiate the best price you can, and finance the car. Keeping your own money in higher paying investments.

Leasing generally costs more than buying but has tax advantages for business.


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## james4beach (Nov 15, 2012)

Thanks for the responses. I definitely have more questions.

Question was asked about km - this would be low usage, under 10,000 km a year. They tend to get quite a bit of minor damage (scratches and small dents on bumpers). I realize the car has to be perfectly fixed up before returning to the dealer.

My dad also seems very keen on the idea of paying a larger down payment in order to reduce the monthly cost. I'm trying to wrap my head around this one. When you pay a larger down payment isn't that going towards equity in the car? And since when leasing a car you don't get to keep equity, do you get reimbursed for that extra payment into equity ... or is that just throwing away money?

In other words, from a total cost perspective (not caring about monthly payments) is the goal here to pay as close to $0 down as possible? Or is it harmless to pay a larger capital/downpayment, because that money comes back to you?


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## fraser (May 15, 2010)

I think that it is all down to cost, tax position, and personal preference. We have leased and we have purchased. 

I leased one vehicle. It was advantageous at the time because I used it for business purposes. The numbers worked because of the tax writeoff-but just barely. I also found that when asked, salespeople always seem to be reluctant to disclose the inherent interest rate on the lease.

We did not find it advantageous to lease a personal vehicle. The opposite was true for us. But, we keep our vehicles longer than most people and we are not particularly 'car proud'.

If we were buying today we would look for a Honda, Toyota, Mazda end of year deal with 0 percent financing. And we would not buy the add ons...rust proofing, extended warranty etc. This is where the dealer can really make margin on a deal.


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## james4beach (Nov 15, 2012)

Thanks, fraser.

Could someone comment on the downpayment or "capital cost reduction"? According to what I'm reading here, one should not put in a large downpayment. Even though it reduces monthly payments, it means you tie up capital in the car and could expose you to losses
http://www.carsdirect.com/auto-loans/should-i-put-any-money-down-when-i-lease



> While a down payment is usually a good idea for purchasing a vehicle--you should avoid leasing contracts that require a down payment.
> 
> When leasing the vehicle, the down payment is usually called a Cap Cost Reduction. Many times, customers will put down a fairly substantial amount of money in order to lower their monthly payments. While making the down payment will certainly reduce your monthly payments somewhat, you should consider this: you could get into a serious accident in the first few months of the lease, and the car may be totaled. If something like this happens, your down payment is completely lost. Even if you have high-quality collision insurance and gap insurance, none of your down payment will ever be refunded.


Here is a second article that describes the logic of avoiding downpayments whenever possible.
http://www.autonews.com/article/20130404/BLOG06/130409933


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## Oldroe (Sep 18, 2009)

You not only keep your monthly payment down. You don't self insure your car.

Spent my whole life in the auto industry. If the car company's are pushing you in that direction it benefits the car company's.

If you look at newspaper adds (THUR) you will see cash price in very small print. Can they pay cash or get line of credit.


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## james4beach (Nov 15, 2012)

Oldroe said:


> You not only keep your monthly payment down. You don't self insure your car.


Sorry I didn't totally understand. For a lease, are you saying it's beneficial (for me) to have high downpayment or low downpayment?


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## andrewf (Mar 1, 2010)

Doesn't it depend on the implied interest rate? If you have cash and the implied rate is high, you might as well have a large downpayment and near-zero lease payments. Alternately, if the rate is quite low, then you should have minimal downpayment and maximal lease payments.

Sounds like your parents need to take some remedial math courses to learn about time value of money.


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## james4beach (Nov 15, 2012)

I wasn't concerned about the time value of money (I'll check that too - obviously they may result in different totals), but I'm more concerned about the issue raised in the linked articles.

It sounds like if the car gets totaled, any amount you sink into the capital is lost. "you could get into a serious accident in the first few months of the lease, and the car may be totaled. *If something like this happens, your down payment is completely lost*. Even if you have high-quality collision insurance and gap insurance, none of your down payment will ever be refunded."

Just wondering if this message, that I found in those two articles I linked, is true... both articles say it's best to pay no downpayment or as close to zero as possible. It doesn't have to do with the payment amortization and time value, but rather we're talking about paying to gain equity in something you neither own nor are insured for.

That first article also says that instead of making a downpayment, keep that cash in a bank account and use that towards the higher monthly payment. Since it's not your car, why hand over any extra money you don't have to?


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## Ponderling (Mar 1, 2013)

I know the trend stated so far has been for a new car, but this in the frugality posting area, so....

Consider lightly used? With regular oil changes, and the occasional brake job, battery and muffler, most cars these days will go to 200k easily. 
Buy used with maybe 60-80K on it, and then if they drive it 10K a year they have at least a decade of vehilce to own. 
Most modest cars in this range or used go for 12-20K. Look to the Haldimand Motors web site, and you will see about 500 cars priced there to try these numbers out. 

If the issue is about your parents deteriorianting diving skill, then owning a car means fixing the dings on your schedule. With a lease, fix them before the lease is up, or pay the consequences


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## marina628 (Dec 14, 2010)

we use to lease cars until about 3 years ago ,we found a great deal on a demo and bought it instead of leasing.Back in 2002 my husband was driving to work in his 6 day own lease when a lady rear ended him and did over $16,000 in damage.It was a Ford Focus Wagon and i think it was only worth $24,000.Leases usually make sense for business owners or if you have a car allowance.


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## james4beach (Nov 15, 2012)

marina628 said:


> Back in 2002 my husband was driving to work in his 6 day own lease when a lady rear ended him and did over $16,000 in damage.It was a Ford Focus Wagon and i think it was only worth $24,000.Leases usually make sense for business owners or if you have a car allowance.


Sorry to hear about the accident. Could you tell me more about the resulting financial situation from that? How did it play out after the accident & insurance claim. Did he just end up walking away without any kind of monetary loss?


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## PrairieGal (Apr 2, 2011)

We leased a truck once, primarily because we were poor, the payments were lower and we didn't need a down payment. When the lease was up we were over on the kilometers, had some minor body damage and needed a new windshield. All that added up to quite a bit of money so we decided to buy it out, which we had to finance. It seemed like we were paying for that truck forever. Never again. To me leasing feels like you are just renting someone else's vehicle, and you never own it (which is basically true). 

There is a reason that the dealerships try to push you into leasing.


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## marina628 (Dec 14, 2010)

james4beach said:


> Sorry to hear about the accident. Could you tell me more about the resulting financial situation from that? How did it play out after the accident & insurance claim. Did he just end up walking away without any kind of monetary loss?


no financial loss we got a new car exactly same just had to wait about 3-4 weeks fo rit.Insurance took care of everything.


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## Ihatetaxes (May 5, 2010)

I have leased and I have owned. For years in commissioned sales my accountant recommended leasing as a better write off when most of my driving was business related. I used to have a huge territory covering most of Ontario and would often drive well over 1,000 km/week for work.

Now I lease because I like getting a new vehicle every three years, my company pays me a non taxable mileage allowance and my annual vehicle expenses are a small percentage of my income. Some luxury brands have very high residual values so my current vehicle which retails for over $85k plus tax costs me only a few hundred a month more to lease than a $45k domestic car. 

For most I do think buying is a better choice.


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## blin10 (Jun 27, 2011)

andrewf said:


> Doesn't it depend on the implied interest rate? If you have cash and the implied rate is high, you might as well have a large downpayment and near-zero lease payments. Alternately, if the rate is quite low, then you should have minimal downpayment and maximal lease payments.
> 
> *Sounds like your parents need to take some remedial math courses to learn about time value of money.*


sounds like you don't know what you talking about... never put any money down on a lease, if there's a write off you loose your down payment... what you can do, is put many security deposits (some allow up to 9) they will lower your lease rate, and if there's a write off you get it back since it's not down payment...


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## Ihatetaxes (May 5, 2010)

blin10 said:


> sounds like you don't know what you talking about... never put any money down on a lease, if there's a write off you loose your down payment... what you can do, is put many security deposits (some allow up to 9) they will lower your lease rate, and if there's a write off you get it back since it's not down payment...


I don't put down payments. Last lease I had a paid for vehicle worth $45k as a trade but instead of using it for a down payment I got them to write me a cheque for the $45k (and I still saved the taxes on the lease since the trade taxes had already been paid). Worked out nicely.


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## andrewf (Mar 1, 2010)

blin10 said:


> sounds like you don't know what you talking about... never put any money down on a lease, if there's a write off you loose your down payment... what you can do, is put many security deposits (some allow up to 9) they will lower your lease rate, and if there's a write off you get it back since it's not down payment...


You're right. I would never lease a car.


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## james4beach (Nov 15, 2012)

Thanks for these great responses, really appreciate the help!


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## fraser (May 15, 2010)

The last time we looked at new cars, the salesperson tried desperately to defocus us on price and focus us on monthly payment. He was not successful. 

We like to get the price negotiated, then we deal with the the value of the trade in, and finally the financing issues of interest rates and implied interest rates on any loans or leases on offer. Most of the salespeople we have dealt with do not especially like this approach.


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## sprocket1200 (Aug 21, 2009)

Ihatetaxes said:


> I have leased and I have owned. For years in commissioned sales my accountant recommended leasing as a better write off when most of my driving was business related. I used to have a huge territory covering most of Ontario and would often drive well over 1,000 km/week for work.
> 
> Now I lease because I like getting a new vehicle every three years, my company pays me a non taxable mileage allowance and my annual vehicle expenses are a small percentage of my income. Some luxury brands have very high residual values so my current vehicle which retails for over $85k plus tax costs me only a few hundred a month more to lease than a $45k domestic car.
> 
> For most I do think buying is a better choice.


Agree. Buying is better unless you can write it off.

If you can write it off, then max out the allowance of cra by prebuying Kms. This lowers the buyout, partially financed by tax breaks, then buy it cheap and cca it to death. Or sell it and make a profit.


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## Y3LLoWF3LLoW (Sep 30, 2013)

Or spare yourself the headache with getting a hyundai.

My buddy got the elantra I think, 17k out the door, 7 year warranty, near 0% financing.

Its really hard to beat the price and warranty. They could get a nice honda for 12k but theres always the chance something major breaks down and you'll be paying for it anyways. If they're prone to bumps and scratches then leasing is definitely not the way to go.

if theyre not car proud people then thats what I would suggest.

OR! my parents bought a pontiac vibe for like 5k. Since its essentially the same car as the toyota matrix, essential parts and maintenance is really cheap. The price is just lower since pontiac is dead.


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## alingva (Aug 17, 2013)

http://moneyinside.ca/calculators.shtml has car lease calculator. I would suggest to release from some one (look in google for a site to release), you would save money on insurance (first 2 years insurance on a new car is very expensive)


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