Should You Lease A Car If You Plan To Keep It 10 Years

Hey Cool Car Fans,

Last year someone asked this question on a website and I decided to answer it for them since so many people are anti-leasing today.  I think this is because most people do not take the time to understand how interest rates work on purchasing a vehicle.

Since I own a used car dealership, I primarily finance mostly used vehicles for people.  Most of my clients pay cash or they borrow against the equity in their cash value life insurance policies and pay back the insurance company using an unstructured loan.  This is by far the best way to purchase a vehicle because there isn’t any credit involved and you may payments on your own terms.  I explain this in detail at CoolCarsForLife.com if you’re interested in reading about that strategy.

You can check out my business model by visiting CoolCarGuy.com and what it is that I do.  I figured I would write an article about this topic though since so many people buy vehicles instead of lease vehicles.

13 YEARS LATER

Recently, I had a client track me down who purchased a used Acura MDX from me 13 years ago.  I was 37 years old when she purchased her last vehicle from me and she must have appreciated the experience to track me down again.  She was also impressed with the longevity of her Acura MDX that now had close to 180,000 miles on the odometer.  She was ready for a new one.  This is a woman who keeps her vehicles for a long time and she decided that she wanted a new one.

If she had purchased a new one the interest rate was pretty good, but it wasn’t amazing.  However, by leasing the vehicle her money factor was .00050, which is the equivalent of about a 1.2% effective interest rate.  She also didn’t want a huge payment on a vehicle that had an MSRP of $51,595 and leasing allowed her to only make payments on the depreciation of the vehicle.  By leasing it using what is commonly called a “closed-end lease” today, she was able to lock in the residual value and purchase the vehicle in the future for around $29,000.

THE RESIDUAL VALUE

Most leasing companies design their leases in such a way that if you go over the miles you purchase they are going to hit you with $.10, $.15, $.20 or $.25 a mile should you turn the vehicle back into the leasing company.  There are actually some leasing companies and manufacturers that will hammer you for the miles, even if you don’t turn the vehicle back in, which is crazy.  I’ve seen Mercedes-Benz do this and it’s a total “jerk”‘ move because you’re buying the vehicle and they don’t have any assumed risk or additional depreciation that it is costing them.

If it’s an “open-end commercial lease”, like on a truck for a construction company, then it makes sense to charge for the depreciation without a guaranteed residual value because they are structuring the lease that way upfront based on future unknowns.  The company might beat the crap out of the truck and it will be worth thousands less at the end of the lease, so the residual may not be locked in or it might be extremely low.   You want to make sure you read the lease agreement or know what you’re getting into when you lease a vehicle for sure and most people don’t.  When they get burned at the end they are ticked off because they thought that their Mercedes-Benz lease worked like their previous Toyota lease.

LEASING STANDARDS

Typically though, most leasing companies are going to structure their residual so that if you stay within the miles and you give the vehicle back they can sell it at auction and not lose money.  They are going to give you the option of buying the vehicle out without nailing  you for miles on top of the residual value, which is the right thing to do since you are sharing in the risk on the vehicle with them.  Some leasing companies, usually manufacturer’s like BMW for example, will put a really high residual on their car and that can give you a low payment, but they are banking on people going over their mileage, giving the car back and collecting money on tires, wear and tear and the mileage hit before sending it to auction or letting a franchise dealership buy it back.

The benefit though is that if you get the right lease and you lock-in the residual value then the miles are not really that important on the right vehicle.  An Acura MDX for example that you can buy for around $29,000 in three years with 12,000 miles a year is going to more than likely retail for more than that amount with 36,000 miles.  Which means that if you put on 45,000 miles you can still buy it out at the end of the lease and drive it another six to ten years and you should still be in great shape.  You have a lower payment for the first three years and a manageable payment if you choose to finance the remainder for the another three or five years.

I’ve leased Subaru’s, Honda’s and Toyota’s to people here in Colorado where they will look at the residual after three years and they realize they are in an “equity position” at the end of the lease term.  Often times they will call me and just ask me to help them buy their vehicle at the end of the lease.  The Toyota Tacoma or 4Runner is a great example of this kind of a strategy and many of the Subaru’s like the Crosstrek.  You get to the end of the lease and you realize that if you give it back to the leasing company Toyota or Subaru are going to sell it at auction for a few thousand less than what they are selling for online.  Why wouldn’t you just buy it out and sell it yourself or keep it?  These are what I refer to as an “equity lease” because you have equity in the vehicle at the end of the lease term.

GETTING THE VEHICLE YOU REALLY WANT

Instead of running around looking for the obscure off-lease, hard to find, overpriced used vehicle you could be driving a new vehicle and financing it over a longer term knowing that you’re going to keep it for 12 or 13 years like my client decided to do.  The first few years she is paying very little of the lease payment in interest and most of her payment is going toward depreciation.

Some of you may be thinking this is a really bad idea because you are financing the vehicle over a longer term.  The reality is the amount of interest she will pay is less for the first three years and she is going to keep the vehicle longer than someone who is buying a vehicle that already has three, four or even five years of driving on it.  This is the mistake and the reality that the financial wizards giving people bad advice don’t seem to understand.

If you buy a vehicle with 45,000 miles on it and you drive it for five years at 20,000 miles a year your vehicle now has 145,000 miles on it and it’s pretty much worthless.   If you finance or lease a new vehicle and you drive it for eight or ten years and it has 160,000 miles on it at 20,000 miles a year, it’s worth about the same as the genius who has 145,000 miles on their used vehicle.   The difference is your vehicle had a full warranty and no wear and tear on it to start.  In fact, you will probably get 9 or 10 years out of it as the original owner and are much more likely to maintain the vehicle to last.  The depreciation on a vehicle once it hits 145,000 miles compared to 180,000 miles is negligible.

The fact is that most people have to get out of their vehicles sooner than planned because they are paying too much in monthly payments to maintain them.  When a costly repair comes they have to unload them because they can’t afford the repair costs on their used car that they are still making payments on.
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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant who owns CoolCarGuy.com that is a licensed car dealership in Lone Tree, CO.  He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy

Why Do Car Dealerships Buy Vehicles At Dealer Auctions

Hey Cool Car Fans,

Someone recently asked me why so many used vehicles are purchased by dealers at auction.  I figured I would write a post explaining why auctions are used by dealerships to buy and sell cars.

WHY DEALER AUCTIONS

The first reason that dealers will end up being at a Dealer Auction is because they cannot choose what vehicles they take in on trade. This happens daily.  Someone wants to buy a Ford F150 that I might have on consignment and they have a Toyota Corolla to trade.  I may not want the Toyota Corolla in my dealership inventory taking up space and having to recondition it, advertise it, etc.  So, I send it up to the auction for another dealer to bid on it and put it in their inventory.  I just want to sell the Ford F150 that I have available, so I’m willing to roll the dice on the Toyota Corolla and send it up to the auction.

This is one of the reasons why most used car managers don’t really care about the trade value in the NADA or KBB book, but what the vehicle you’re trading is probably going to bring at auction.  Most people go in thinking that the dealership is trying to rip them off on their trade, but the reality is the used car manager doesn’t want to get stuck with a vehicle they don’t really want.  After you drive off, the used car manager has to decide whether to try to sell your nicely used vehicle with all of it’s issues or send it to auction.

THE BURN RATE OR THE TURN

Believe it or not, the car that you trade is not going up in value every month.  On the contrary, each month a third-party in the form of NADA and Kelly Blue Book are coming out with a book or website telling the world that your vehicle is worth less than it was the month before.  A dealer needs to unload vehicles that have been on their lot for 60 or 90 days to avoid loosing too much money in depreciation.  Most dealerships also have a floor plan with a curtailment, so they have to turn those vehicles or write a check to the floor plan company for part of the cost of the vehicle or the full amount.  Think about if you have fifty vehicles in inventory and the average curtailment is $1,500 and the dealer has to write a check for $75,000 to keep all of those vehicles on their floor plan.  That’s a big incentive to send it to the auction and unload the vehicle.

Dealers also have certain vehicles that sell better in their inventory.  If you owned a Lexus dealership and someone trades a Chevy Cruze the odds are pretty good you don’t want it in your inventory.  You send it up to the auction to free up capital that allows you to buy another Lexus or Toyota or some other used car that sells well on your lot.

The auction ends up being an efficient way to unload unwanted inventory or to pickup new inventory for the dealership.  It’s dealers purchasing vehicles from other dealers, so the emotion is out of the equation compared to buying from a consumer.  The consumer has an emotional tie to a vehicle where the used car manager doesn’t care – it’s just moving metal.

I use the dealer auctions quite often to find inventory for my clients for this very reason.
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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant who owns CoolCarGuy.com that is a licensed car dealership in Lone Tree, CO.  He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy

What To Know Before You Swap Out Someone’s Lease

Hey Cool Car Fans,

A few times a year I will get an email or a phone call from someone asking me if they should take over someone else’s lease.  There are websites that offer this service and I’ve done this for some of my clients as well, not through those websites, but directly through the leasing company.  I only would do this when it makes sense.

I figured I would write a quick article about the benefits and disasters that can occur in assuming a lease or using a lease buyout service.

WHEN TAKING OVER SOMEONE’S LEASE MAKES SENSE

First of all, it rarely ever makes sense to take over someone’s lease because you are assuming the remainder of their financial obligation.

However, if you have credit issues and the person’s lease that you’re assuming has stellar credit you could really hit pay dirt.  The problem is that you have to get the leasing company to authorize you to assume their lease, so they are going to require that you have good enough credit and the financial ability to pay back the lease.  There is where the problem lies for most people because if the person who has the original lease obligation has better credit and a better financial situation than the person applying to assume the lease, what is the incentive for the leasing company?

The other time it can make sense is if you want to buy the vehicle at the end of the lease term and the person trying to get out of the lease doesn’t have that many payments left on it.  For example, let’s say that you are interested in buying a 2017 Porsche Macan.  You could take over someone’s lease that they have for $996 a month for 18 months and if the residual to buy it out at the end is $31.141 that could play really well for you.  You’re grabbing a much more expensive vehicle for under $50,000.   I saw this exact opportunity by the way.  Again, you have to see if it makes sense or if you are better off just buying the vehicle as I will discuss next.

WHY TAKING OVER SOMEONE’S LEASE USUALLY DOESN’T MAKE SENSE

As I mentioned before, assuming a lease could make sense if you have credit challenges and you can get a better lease payment than you would get on your own.  However, what if you have better credit than the person who’s lease you are assuming?  They maybe at a 6% effective interest rate and you could be getting a lease on your own at a near 0% effective interest.  The lease is being sold based on a payment, but it in fact might be a really terrible lease that you are assuming.

The residual may also be terrible as well.  If your goal is to give the vehicle back at the end of the lease and you can stay within the remaining miles that could be a good option for you.  What if you go over the miles though and the lease is setup where you have to pay $.25 or $,30 a mile for each mile that you go over?  If you go over by 10,000 miles you could be writing a check at the end of the lease for $2,500 or $3,000 to give the vehicle back.   What if you want to buy it out at the end of the lease term, but the leasing company bet wrong and put too high of a residual for the marketplace?  Then you’re in a situation where the best option is to give it back, so you basically just rented the vehicle with a higher level of risk.

If you have good credit and they have  the vehicle you want with a great residual than instead of assuming the lease, you might be far better off buying out the person’s lease for their remaining payments and the residual value.  You could then finance the vehicle or lease it using a used vehicle lease based on the buyout value.  This could work far better if you have good credit, instead of leasing a vehicle based on someone else’s credit.

 

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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant who owns CoolCarGuy.com that is a licensed car dealership in Lone Tree, CO.  He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy

Mercedes Benz Billion Dollar Electric Vehicle Investment

Hey Cool Car Fans,

It started with Tesla getting millions of people fired up about electric vehicles over the last decade and now Volvo is planning to go all electric in the future with their cars.  Mercedes Benz has announced that they are going to be spending a $1 billion investment into their manufacturing hub in Alabama…

“The investment will go both to an expansion of the German luxury brand’s existing plant near Tuscaloosa and to build a new 1 million-square-foot battery factory.

While electric vehicle sales have been tepid overall, Mercedes has watched as Tesla jumped out has become a formidable player in the super-premium segment with its electric Model S sedan and Model X crossover. Now Tesla is threatening the lower, entry-level part of the luxury market with its lower-priced Model 3 sedan. 

The company is pursuing an “anything Tesla can do, we can do better” strategy,” – USAToday reported.

This is for the production of its all-electric EQ SUV.  Which is going to be the first all-electric SUV from Mercedes Benz and it’s going to be a big deal as more car companies are getting into the electric automobile market.

ARE ELECTRIC VEHICLES REALLY THE FUTURE

The consumer is driving the move toward electric vehicles with the success of Tesla in the marketplace and as people want a choice beyond the combustible engine.  What most people fail to realize is that the electric vehicle is the ultimate in planned obsolescence.  Car companies were accused of this tactic for years back in the 1970’s and 1980’s when vehicles would have parts that would break or wear out and have to be replaced.

A petroleum based engine is designed to run on gasoline or diesel fuel and it can be rebuilt.  When batteries wear out they are finished and have to be replaced and it can be extremely expensive.  Some people argue that this is no different than rebuilding an engine that can also be expensive.

THE COMPUTER AND CELL PHONE LESSONS

The problem is that the batteries that work today probably won’t drive the vehicles of tomorrow.  Car manufacturers are in the business of selling new vehicles and not updating used vehicles to the newest technology.  Nowhere is this more true than in the cell phone and computer market.  Is Apple offering an “upgrade” path for your original iPhone?  What about your 386SX computer from the 1980’s?  They are dead.  If you want to upgrade an old cell phone with the latest technology you have to buy a new cell phone.  It’s not any different with the future of the electric vehicle.  The cost to replace batteries are not going to be less, but they are going to be more.

You can see this with the Toyota Prius, but the difference is that your Prius can also run on gasoline, so it just becomes a heavy Corolla if you don’t replace the batteries.  This is a photo of a 2001 Toyota Prius with about 266,000 miles on it.  The cost for a replacement battery after 16 years is more than you would pay for the entire vehicle.  If you do some research you can pick up a used battery pack for about $1,600.  Proving the reality that EV batteries are not a sustainable long term technology nor will they be supported at a reasonable price.

The challenge for electric vehicles is not the new car market for consumers, but it’s actually the used car market.  Most people are afraid of buying electric vehicles that are five years old and having to replace the batteries in the future.  The lifespan of batteries in electric vehicles today is about ten years, like in a Toyota Prius.  It’s pretty difficult to convince someone to pay top dollar for a used electric vehicle when they are concerned about the battery life and the cost to replace the batteries.  In 2015, Autoblog.com had an article titled “Tesla Roadster battery pack replacement will cost $29,000”.  That’s crazy expensive for another 10 years of battery life in an older vehicle.  You don’t hear too much talk about this though from the media and Wall Street darling do you?

Which brings me back to the fact that Mercedes Benz is  making a billion dollar investment into electric vehicles.  Why wouldn’t they?  The consumer is failing to realize that they are helping to sell the car manufacturers on turning their vehicles into a very expensive appliance, like their cell phones and computers.

In the meantime, for all of those petroleum haters out there, this is a 1970 Nova SS Tribute that I spotted on the Manheim Dealer Auction for around $25,000 plus shipping and dealer profit.  You could get this super cool vehicle that is still worth almost as much as those expensive Tesla batteries after 47 years of driving.  And for only about $10.00 in gasoline drive it down the road without having to update anything.  Best of all, this vehicle should be worth about the same or more in another 47 years where that electric vehicle is destined for the crusher.  Which is why classic petroleum based vehicles are the ultimate in recycling!

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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant who owns CoolCarGuy.com that is a licensed car dealership in Lone Tree, CO.  He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy

Why Do Luxury Cars Cost More Money

Hey Cool Car Fans,

As The Cool Car Guy, I assist people in buying, selling, trading and leasing vehicles on a regular basis.  I work with people from all walks of life, but as you might expect a good portion of my clients drive luxury and high-end vehicles.  I also have clients who drive the no frills “bean can” as well or people who are on a limited budget.  I often am asked by people why they should spend the additional money for an Audi, BMW, Mercedes Benz, etc. than on some of the less expensive vehicles on the market.  Many people think that these vehicles are all created equal, but nothing could be further from the truth.

I decided I should take the time to write an article on why luxury vehicles are more expensive than other brands on the market. Many people assume that it’s all about just selling a vehicle for what the market will bear.  Which is a nice way of saying that they think that all vehicles are the same and therefore they are ripping people off with a brand name.  It’s true that the manufacturer needs to turn a profit, but when you buy a more expensive vehicle you are also getting a product that costs much more to produce.  The components are more expensive to build the vehicle.

I actually run into this even with other people in the car business who don’t like Porsche, Audi or BMW or Mercedes Benz because they are expensive to repair.  It cracks me up because some of these people are Used Car Managers and people who actually sell cars for a living.  It’s as if they have no clue about what it under the hood and like a typical teenager think that just because both cars have a USB port they are the same technology.  They don’t seem to understand that there is a difference in the quality of components being used in the vehicles.  Let me illustrate this fact with just a few components to show the difference in pricing.

LETS LOOK AT THE BRAKES TO START

Brembo brakes are usually found on a vehicle like a Porsche 911 Turbo or a high-end Audi.  You can grab a set of these over at Tire Rack at a discounted price of $1,916 for a kit at the time that I posted this and this particular one fits on a1983 Porsche 911SC Targa.  Those do not include installation time at $150 to $200 an hour at a dealership or even at some of the specialty shops.

Contrast that with a set of rotors for a 2015 Hyundai Elantra GT that you can grab for $122.83 and these are much better than what the manufacturer would put on.  These brakes are not even close to the same in performance or quality which is why they are more 15 to 16 times less money!

ENGINES AND TRANSMISSIONS

Here’s the engine for a 2011 BMW 335xi, which I happen to own and drive as my daily driver here in Colorado.  It’s a 6 cylinder twin turbo engine that produces 300hp.   If you needed to replace this engine it would cost over at CarMonkeys.com close to $11,000 for a used one and that’s a deal.

Contrast that with a 2011 Toyota Camry 3.5l V6 that was their top of the line motor for that year that produced 268hp and it would be about $4,500 for that used engine at CarMonkeys.com.  That’s less than half the price even though they both have six cylinder engines.  Why?  They’re not even close when it comes to performance, components and technology that has gone into the two engines.  It’s not as drastic in price difference compared to the brakes, but it’s 2.5 times the price on the used market for the same six cylinder engine.  Obviously, they are not the same.

As you start to go throughout the vehicles and add up the cost of components like brakes, tires (run flats on the BMW or Mercedes Benz for example), the transmissions, shocks, struts, all-wheel drive systems, sound dampening, the quality of interior, you discover that everything costs more on the luxury vehicle.  You can keep going with this sort of exercise in other aspects of the cars.

If it were truly a case of the manufacturers gaining huge profit off these cars and they were not that expensive to produce than companies like Hyundai would be much more competitive with their new Genesis vehicle.  Instead they have only been able to beat the price of a Lexus by a very small margin in their pricing.  They are focusing on offering a longer warranty as a key buying point.  After all, the cost to surround a person with airbags and have the same quality components to compete with their target market of a Lexus and Acura isn’t any less.

The bottom line is that you get what you pay for when it comes to buying a vehicle.

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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant who owns CoolCarGuy.com that is a licensed car dealership in Lone Tree, CO.  He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy

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