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