Never, never,never,never,never, finance a toy. Especially a depreciating one such as most automobile. It will only end up costing you much more in the long run. Unless you can find a 1950s era Ferrari or Alfa Formula One car for a $100,000.00 or so.
Sure, it will cost you more in the long run. But, what if a person is only planning to keep it for 3 years and put 15,000 miles per year? Is it better to lease at approx. $1200/month for 3 years rather than buy the car outright in the beginning and then sell it after 3 years at retail?
Let's see if I can figure this out correctly. At the end of three years, the lease payments total up to $43200.
How much would you be able to sell a 3yr. old M5 in very good condition with 45,000 miles? With current prices, a very good condition M5 that is accumulating 15,000 miles per year is worth low to mid 60's-- say, $65,000. So, if the total price for the fully loaded car was around $72k, each year the car depreciates by approx. $7,000. At the end of 3 years, the car, if sold to a private party, is worth $51,000. Therefore, if you had purchased the car outright at the beginning and then sold it yourself, you would be losing $21k as opposed to $43k if you had leased the car.
By leasing you pay twice as much. But, many people don't have $72k in extra cash, so they are forced to lease if they want to own an expensive car. Actually, even average people who buy a $15,000-20,000 car would not be able to purchase the car in one lump sum, so even they are forced to make monthly payments, right?
But what about these low APR leases we keep hearing about? Do they tip the scales in favor of leasing versus buying?
Would somebody comment on my calculations and answer my questions, please? I don't have any real-world experience when it comes to financing "depreciating toys."
I'm purchasing a 2002 Beast (on order) and decided to finance it with a home equity loan. Advantage - interest is ,in most cases, deductible on Fed. income tax. Disadvantage - you could lose your house I'm doing because #1, I have a high equity to loan ratio, and #2, I could pay it off if I was forced to.
Maverick, my son-in-law just bought a '98 Z3 and chose the alternative financing ( low APR lease) I think you're talking about. As I understand it, You pay a low APR for a 3 year (lease) period. At the end, you have the option of paying off the balance as a balloon paymt, or re-financing. They figure the balloon paymt will be approximately what the vehicle with average yrly milage and in good shape is worth at the end of 3 yrs. Advantage - you can afford a more expensive vehicle today than yuor budget would allow. Disadvantage - you may be overwhelmed with high payments after refinancing in 3 yrs if interest rates skyrocket, and, if you're forced to give up the car in repo, you can be sure it won't be worth anything near the balloon note you owe at wholesale auction, and you're stuck with the difference. Does this help?
I have represented several large auto leasing companies in my law practice, so I think I know the ins and outs of the auto leasinmg business more than the average person. The one error in your analysis is that you didn't take into account the loss of use (interest) of the cash used to buy the car, versus the cost of financing the vehicle with a lease.
The primary advantage of a lease is that you don't have to ante up a large cash payment to get into a car. Because of the higher risk involved for the leasing company, the profit margin (APR) is usually higher. Promotional leasing rates help equalize the difference, but then usually corresponding cash discounts/rebates and lower lending rates are also available.
Leasing has the following disadvantages:
(a) Some leases limit you as to the number of miles you are allotted over the lease term.
(b) You are stuck with the vehicle, even if you are unhappy with it, for the lease term; while you may be able to negotiate to "roll over" the lease to a different vehicle, you could lose a lot of $$$ in doing so.
(c) Any modifications/improvements belong to the leasing company, although I suppose it is possible, at the end of the lease term, to remove all the goodies before returning it.
(d) You are required under the lease to obtain and maintain full insurance, including full comprehensive and collission; for many people, especially those owning multiple cars, it would make sense to self insure for comp and collision, which could save you big bucks in the long run.
Leasing doesn't make sense if you are buying a second/third car as a toy, or if you intend to keep it for a long time. It would make sense if:
(a) You can't or don't want to come up with much up front money; and
(b) You only intend to keep the car for the lease term, or intend to trade the leased car in at the end of the lease term for another leased vehicle; that way, you never have to come up with a substantial lump sum, and need only budget a more or less constant monthly car payment for the rest of your life, like budgeting for rent for an apartment.
Sorry for the ugly conjugation mistake : preterit of steal is stole and not stoled : oouh -> shame on me... In fact, I'm so honest that I don't even know how to spell it
That is a good occasion to refresh the thread and let the votes coming
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'01 Carbon Black M5
'01 Titanium Silver Z8
The view was expressed above that one should not finance a non-income producing, depreciating asset.
I think that the depreciating nature of the asset should not be factored into the financing decision. Whether you pay cash or you borrow, if you own the asset you will bear the same depreciation expense (i.e., the loss of market value).
The decision whether to pay cash for the M5 versus borrowing the price should be based on a comparison of the cost of borrowing funds versus lost investment potential. If I can invest my cash and reasonably expect to make a higher return on the investment than the cost of the interest on the loan, I should borrow the funds.
Assume that I have $80K in cash, I can finance the M5 at 6.25%, and I can my invest my cash at an 8.0% average annual return, why would I not be better off to borrow some or all of the $80K?
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Jim 2001 ///M5 Royal Red / Caramel
Originally posted by JFB The decision whether to pay cash for the M5 versus borrowing the price should be based on a comparison of the cost of borrowing funds versus lost investment potential. If I can invest my cash and reasonably expect to make a higher return on the investment than the cost of the interest on the loan, I should borrow the funds.
Assume that I have $80K in cash, I can finance the M5 at 6.25%, and I can my invest my cash at an 8.0% average annual return, why would I not be better off to borrow some or all of the $80K?
You brilliantly demonstrated one of the well known concept in Finance ie the cost of capital ! There is a certain level where a company (or an individual in that case) should better borrow funds than finance an investment with equity (or cash). If my shareholders want 15% ROE and I can borrow at 6%, I will prefer to increase my gearing ratio to the point at which the lenders (the bankers generally) would increase the interest rate, because of my high indebtedness, to a level above the ROE. Then at this stage I will be inspired to finance on my own funds to optimize my cost of capital. For an individual, the ROE could be seen as the opportunity cost to invest in other assets (ie shares, mutual funds, real estate etc).
Anyway, a Beast worth little sacrifices which are beyond pure financial theory
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'01 Carbon Black M5
'01 Titanium Silver Z8
Poll : How did you finance the beast ?
I'm doing because #1, I have a high equity to loan ratio, and #2, I could pay it off if I was forced to. 
/ Caramel
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