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02/08/2005: "Leasing: The Follow-Up"

  A very good friend of mine has followed Not From Toronto since its inception. He's provided lots of feedback, and has been a great sounding board for my ideas. My recent article Leasing vs. Buying: What You Need To Know seems to have really caught his attention, and he brought up some questions about leasing that still remained for him. I would like to answer those questions now hopefully to the enlightenment of all.

Q1: "If it's never better to buy than to lease, why is leasing so complicated and has so much fine print? What's being hidden in that fine print?"

Since when does something have to be simple to be better? What would you rather have: survival of the strongest, or our complex system of laws, government, and social medicine? Simpler isn't always better.

Leasing boils down to a company owning a vehicle and letting you use it for a monthly fee. That's not as simple as that same person owning the car and using it for themselves, and thus the fine print has to be more substantial. The fact that leasing has more fine print than financing does I'll have to take your word for, as I've never purchased a new vehicle before.

If you're talking about the fine print in typical print ads, just take a look and see. Typically it spells out what model and trim level the ad is for, the down payment, the lease and/or finance rate, applicable rebates or incentives, the lease or finance term, vehicle price, calculated monthly payment, and even might include a lease or finance rate example.

Q2: "The outlay after lease term can easily be higher than the difference in your chart. All you have to do is pick a dealership who feels their cars depreciates slower than market value for your claim to be shown false. Ford is an excellent example of this. Many dealerships would naturally go this route."

This chart is only one example. There will be examples that are different both ways. I simply used this to show why, generally, leasing is better.

Dealers do not set financing terms, which includes residual value of the vehicle at the end of the lease. Dealerships do not carry the lease (except in some wholesale [fleet] lease agreements, but those are not leases you or I will ever see as individuals on the retail level), and thus have power over exactly nothing except the sale price of the vehicle. In Ford's case, they have their own financial wing, and carry their own leases (as does GM, DaimlerChrysler, and other makes more and more frequently) and can set whatever terms they want.

In this case, we're talking about a GM vehicle, and financing or leasing through GM Finance. With power over the leasing or financing terms, they can skew the numbers to make one or the other more favourable, depending on what they want to do.

In the case of playing with the residual value of a vehicle to make the lease cheaper, there are reasons why a manufacturer would not want to do that. Ford has been on the receiving end of the resulting problem for a number of years. Sure, you can play with then residual for a Taurus/Sable, and that will mean you'll lease a lot of them. Good for your factories, right? Yes. But at the end, you'll be stuck with virtually every Taurus/Sable you've leased. The difference in market value and the buy-out will be so bad (ie., the residual will be many thousand dollars higher than market value) that the only logical choice will be to walk away from the lease at lease-end. Why buy it out, when you could get the same car - or much, much better - for thousands less right off the dealer's used car lot?


Q3: "If you buy a vehicle that's used, most of the depreciation has been knocked off, and the monthly payments would slightly to dramatically favour the financed used vehicle. I would rather finance used than lease new, because at least I'd still have wheels at the end of it."

I never said that buying used is bad. In fact, it's a great way to go, in my opinion. The scope of my article was simply to show that if you're getting a NEW car, you should lease.

I fully agree that buying a used car is the best way to go. However, the fact of the matter is that leasing a new car is the cheapest way to get into a late-model vehicle. Unless you purchase a significantly older used vehicle, your loan payments are still going to be greater than lease payments on a new car. That's the entire reason I'm driving my Elantra, and not a '99 Odyssey.

Q4: "'Money experts' who are much smarter at this than either you or I are *still* debating whether leasing is better or not. Most seem to say that financing is. Have you spent any time seeing why they feel that way? If you have, were you reminding yourself that they are smarter at money management than us average people?"

What is the goal these "money experts" are aiming for? Cash flow? Tax shelters? Asset maximization? I'm no accountant, but there are many goals for money management. In my case, I'm looking at what costs less per month in the short term, and what costs less to purchase the vehicle in the longer term. If that's your aim, leasing is the only way to go. However, if you're looking to get a tax break on a vehicle for business use, or maybe looking to offset some capital gains, perhaps buying is the way to go. I don't know, and don't care - it's beyond the scope of this article, and beyond what the majority of people will likely care about. Ask your accountant.

If you want to pay less for a new vehicle, lease. It's that simple. Always do the math, but chances are leasing will be significantly cheaper, especially on a monthly basis. More about this a bit later.

Q5: "Your course is going to teach you a set of facts that will help you enthusiastically sell cars the way it makes the most profit for your dealership, not the best savings for the customer. Why would a dealership prefer to lease vehicles over financing them, even when there's way more paperwork involved, if the end result is to save the customer money? That does not make good business sense."

First off, you're wrong about the course. It does not teach us any facts that will help us sell cars. All the course does it teach us how to best relate to our customers, listen to what they need, and show us how best to present our vehicle. In any case, what does that have to do with leasing?

Believe it or not, the dealership doesn't care one way or the other whether you lease or finance, because they get paid exactly the same way in either case. If you finance the Pontiac G6 in the example from the previous article, you give the dealership their $26487 and you take the car. When you lease, the leasing company (in this case, GM's financial division) gives the dealership the same amount of money, and then you take the car. In either case, someone is buying the car from the dealer, and the dealership makes profit based on that sales price.

Leasing or financing only affects the dealership when you consider that someone who leases a vehicle will very likely be returning that vehicle in 48 months and looking for another - a repeat customer. You don't get that with financing, so dealers like to lease just for the repeat business.

Q6: "I can't give you a set of numbers that show you how financing looks better, because I'm not a numbers guy..."

How about I give you a case there financing *looks* better in the end? Take a look at the following scenario that I found in December 2004:

In this case, Hyundai is offering 0% financing for a 60 month finance term, versus a 1.9% lease rate for 60 months. (A 48 month lease is available of course, but the 60 month lease rate is better.) Skip right on down to the very bottom of that table, and you'll see a surprise: financing will actually lower the total cost of this vehicle as compared to leasing. So there you go, one case where financing looks more attractive. Look a bit closer, however, and leasing is still the way to go.

First and foremost, look at the difference in the payments between the 0% finance and the lease. There is still nearly an $80 difference in favour of the lease, to the tune of over $4500 over the course of the lease. Paying less per month for the same vehicle is always a good thing, right? I think so.

Second, you'll always have options at the end of a lease. You can turn the car in and never worry about it, you can purchase it and enjoy it further, or you can sell it yourself and enjoy any profit that may be in the vehicle. I may need a small, economical hatchback now, but who knows what I'll need in 5 years?

The one factor that should not be overlooked is the gap insurance that a lease provides. If, heaven forbid, you should ever wreck that new vehicle of yours, only a lease will automatically cover the difference between what your insurance will pay and what is still owing on the vehicle. In the case of a very inexpensive vehicle like the Accent, it may not be that big a deal. For some, however, any unexpected payout is a major inconvenience. If the vehicle is significantly more expensive - a new Toyota Sienna minivan, a new pickup truck, or even a shiny new Cadillac for example - the remaining gap that you would need to fill if you finance could be quite high. Gap insurance covers this, and gap insurance is not available on finance agreements.

Hopefully this has cleared up a few more questions about leasing. I'm open to further discussion, and would be happy to answer any questions, or work out all the numbers for a vehicle you're looking at if you wish.