Why Lease a Car |
CAR LEASING...SMARTER THAN YOU THINK!
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Before I had a clear
understanding of leasing, I purchased my cars the old fashion way. I
either paid cash or financed. But, like everyone else, I ended up
losing thousands of dollars each time. No matter what price I
negotiated, I always ended up losing most of my investment. In time
I got disgusted with the losses I was taking at trade in time. I
owed it to myself to check out car leasing.
Quickly, I saw how the
leasing concept would eliminate my losses.
When I leased my first car, I understood the
term depreciation - a drop in value caused by wear and tear (usage).
In fact, all cars eventually depreciate down to a zero value.
I regard leasing as the finest form of service because it benefits all drivers.
The car lease concept is simple.
The leasing company capitalizes the vehicle so I avoid paying a down
payment. My monthly payments include the amortization of the car's
expected depreciation any amortized amounts and a small service
charge. The monthly car payments are justified because I have the
use of the car and the use of the leasing company's capital for a
specified period of time. I especially love the residual aspect of
the car lease concept!
Why should I tie up my money in the future
value of a car I won't be keeping?
I choose to only pay for the
portion of the car's value that I use up while driving it. I prefer
to lease, have the protection of a new car warranty and enjoy the
best years of the cars life.
I wisely leave the trouble years to a
used car buyer.
Frequently, my clients ask me for a financial
comparison of lease vs. buy. In showing them my analysis, I never
add the residual used car value to the sum of the lease payments.
Why don't I?
Because, if the used car will not be worth the
option-to-buy price, I won't be buying it. Since I do not know what
the car will be worth at the end of the lease, it would be
ridiculous for me to weigh the residual cost at the inception of the
car lease.
How then do I compare lease vs. buy?
I compare the monthly payments on a lease with $0 down to conventional financing with 20% down. When analyzing a traditional car loan, I equate the amount financed to two loans in one. One of the loans covers the amount of expected depreciation. The other covers what the vehicle will be worth when my loan is paid off. In other words, I see the traditional car loan as a consolidation of these two amounts. Unfortunately, the consolidation leads to extremely high car payments - about twice the amount of a lease payment. My belief is leasing provides a cheaper price. I pay $0 down and my car payments are cut in half. I am paying on about half the value because the car lease price is based on the amount of depreciation anticipated during my period of usage. With car leasing I can easily upgrade to a more expensive car, conserve my cash and still afford the payments. I conclude that a car lease is a function of proper money management and a purchase is not. Frankly, I rate the value of my cash appreciating in the bank over owning a depreciating car parked in my driveway.
Follow this scenario carefully: You are planning to buy a new car and then replace it in three years. You negotiate a $35,000 purchase price. You then ask the salesperson what the new vehicle will be worth in three years. He estimates $17,500. Since you won't be using this portion of the car's worth, you want it deducted from the original $35,000 purchase price. In consideration of only paying $17,500 instead of $35,000, you promise to surrender the car to the dealer in three years. You further promise to return it in good condition and without excessive mileage. The salesperson replies that what you are proposing is called a lease! You don't care what the transaction is called. You are simply a shrewd buyer and expect the purchase price to be based on the portion you will use - $17,500 in this case. With this cleverness, you are beginning to think like a knowledgeable lease customer.
I have never prejudged leasing as ending up with nothing. To the contrary, I know leasing helps me to gain an asset more valuable than a pink slip. I will gain cash! My decision against buying is an easy one when I put the emotional aspect of owning aside and concentrate on the economic consequences. A study of used car values will reveal that buying and then not keeping a vehicle beyond seven years is usually an economic disaster. I see a purchase as one part depreciation and one part the worry about future value. I see car leasing as one part depreciation and no worry about the future value. Whether I buy or lease, the depreciation part will always be the same. However, under a lease I never have to pay for or worry about future value as I would under a purchase. This advantage helps to conserve my cash and saving cash is the primary benefit of car leasing. I am unconcerned about not having a pink slip to use for a down payment on my next car. Instead of owning a used car, I own cash! I will have more cash saved in the bank given the lease's $0 down and lower monthly payment aspect than the money I could expect to get from the sale of a used car. Understanding this fact is the secret to appreciation of car leasing.
By Steve Hovey - Certified Public Accountant
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