re: Thinking about leasing a vehicle

Leasing 101:

The very first thing you have to come to terms with regarding automobile ownership is that you will lose money. The wannabe hedge fund managers will check in and tell you "never invest in a depreciating asset" or "leasing is throwing money away!". If you truly are such an automobile monk then buy a used toyota and maintain it. You will likely not need another vehicle for 8-10 years at least....on the other hand if you enjoy automobile ownership for intangible reasons (like many people do!) then "you have to pay to play".

Even if you have decided that you are willing to pay a premium for driving a newer and fancier vehicle, you still want to minimize your cost to do so. With this in mind you have 3 options: pay cash, finance, or lease. Paying cash and financing are straightforward and generally well understood, so that leaves us with leasing:

Leasing is NOT "renting" the vehicle. Leasing is financing a portion of the vehicle's cost over a set term. The amount you finance is called the capitalized cost. This number is determined by something called the residual value. The residual is what the vehicle will be worth at the end of the lease. This is the single most important number in leasing and will have the largest impact on whether or not the lease makes more sense than financing or paying cash (excluding any tax write off considerations). The residual value is calculated as a percentage of the MSRP and is set by the leasing institution...it is not negotiable. As you can imagine, the residual is impacted by the lease term and mileage, although the relationship isn't necessarily linear. Most manufacturers have a "sweet spot" with regards to term and mileage. Another thing to realize is that some manufacturers artificially inflate the residual on their leases in order to move vehicles. BMW is a good example, it is not uncommon for a BMW to lease with a 65% residual value...imagine trying to sell a 3 year old BMW with 36000 miles for 65% of the original sticker. Not happening. You might have heard people say a vehicle "leases well" or "doesn't lease well"...this is what they're talking about.

Circling back capitalized cost...Cap cost is the difference between the selling price and the residual. Note, you still negotiate sale price exactly as if you were purchasing cash or financing. Your lease payment is simply the financing of the cap cost (plus any dealer fees, lease acquisition fees, etc.) over the term of the lease, plus "money factor". Money factor is just interest, but for whatever reason in leasing they give it a different name. It will be expressed as a very small number, e.g. .002. To translate money factor to a standard interest rate, multiply by 2400...so .002 mf would be 4.8% interest rate.

At the end of the lease, you will have paid only for the up front agreed depreciation. You can turn in the keys and owe nothing more, assuming there are no other charges for excessive wear and tear. Imagine knowing the trade in value of a vehicle three years down the road, on the day that you buy it. This is essentially what leasing gives you. You also have the option to purchase the vehicle (either with cash or financing) for the residual value.

When leasing makes more sense than purchasing:

- When you tend to get a new car every 3 or 4 years.
- When you can reliably predict the mileage you will put on the vehicle. There are penalties for going over
- When you can write off part of the lease as a business expense
- In summary, assuming 1 and 2 above are true, when the cost of the lease over a given period is less than the cost of financing then trading in or selling the same vehicle over the same term. You really need to spreadsheet this as it can vary quite a bit between different makes and models. Over a 3 year period leasing is usuallly cheaper, but not always.

Other considerations:

- Wear and tear. Dealerships will take an assessment of the vehicle at turn in and charge you for anything they consider excessive. If you are rough on vehicles this alone may preclude you from leasing.

- Mileage. As stated previously, if you go over your mileage allowance, there will be a charge built in. Usually around 15-20 cents per miles.

- Tires. There will be a specified tread depth required at turn in. Usually this means you will be required to purchase a set of tires just prior to turning the vehicle in, or pay the dealership to replace them. This is especially pertinent on something like a Porsche which will likely have tires that cost $250-$300 each!

- Modifications. If you are the type that likes to modify your vehicle, leasing may not be your thing. You can modify the vehicle a little with simple things like wheels, exhaust, window tint, or similar small things, BUT when you turn it in the dealership will expect it to be back in stock condition and may charge you (sometimes a lot) to return the vehicle to stock. Some manufacturers (VW/Audi for example) have checksums on their known ECU programs, so if the car has been performance tuned, it is immediately detected and flagged, potentially voiding the warranty. This will incur a penalty on lease turn in as they can no longer CPO the vehicle....Modifications are a really grey area ....in general don't plan on modifying a leased vehicle beyond very small things.

- In general, you want to put as little money out of pocket as possible when leasing. You derive nearly zero benefit (tax deduction considerations aside) from any down payment, or "capitalized cost reduction" as it is called when leasing. Do the math for yourself...If you factor in a $1000 cap cost reduction, the cost of the sum of your lease payments will be reduced by that $1000 plus whatever interest they're charging you on the $1k...this is a terrible deal. Keep the cash in your pocket, or even better in an IRA of some kind.

That about covers it. As I said you really need to make a spreadsheet to compare leasing vs financing for any vehicle you are considering purchasing. It isn't hard to do and really lets you grasp the true cost of vehicle ownership over a given time period.