From: sankar@Xenon.Stanford.EDU (Sriram Sankar)
Subject: Re: Info wanted on leasing vs buying
Originator: sankar@Xenon.Stanford.EDU
Organization: Computer Science Department, Stanford University.
Date: Thu, 5 Nov 1992 22:44:06 GMT


Let me try and compare leasing vs. buying.  In either case, you negotiate a price on the car
with the dealer.  Suppose this price is $X.  What usually happens is that the dealer trys to
avoid negotiating such a price, but talks in terms of so many dollars per month and so many
dollars down etc. so that you are usually quite confused about what the price of the car is
actually.  In either case (leasing or buying) the dealer gets their $X, and then its upto the
leasing company/bank to start dealing with you.  Note: I'm talking about the common case that
I'm aware of - I know there are exceptions to this, but I won't get into them.

OK, now let's see what happens if you wish to buy/lease this $X car (I'm assuming the $X
includes costs such as prep and freight).


BUYING:

You pay the dealer $Y = $X + sales tax on $X + registration which is also a function of $X.
(If you wish to take a loan read on)
You take a loan for $Y minus any down payment.  The standard parameters of the loan are the
term and the interest rate.  I'm sure all of you understand this.  Depending on the bank that
gives you the loan, you may be required to take insurance of certain amounts.  I've taken
a car loan once when the bank placed no requirements on insurance - i.e., I could have taken
the legal minimum and that would have been fine.


LEASING:

The leasing company pays the dealer $Z = $X + registration.  Note that no sales tax is
involved.  The lease parameters are the term, the residual value, and the money factor.
The residual value is fixed based on the car - i.e., this cannot be negotiated.  The
term may be negotiated.  In any case, plugging these parameters into a formula results
in a monthly payment.  I do not know what this formula is.  The monthly payment is really
a car rental fee, and to this tagged on a use tax.  So although you save sales tax,
you pay the use tax.  At the end of the lease, you pay the residual amount and officially
this is when you buy the car.  So you have to pay the sales tax on the residual amount.

Now you have the option of returning the car at the end of the lease.  In which case, if
the car is in reasonable condition and does not have more than a certain number of miles
on it (usually 15K per year), no money transaction is involved at the end of the lease.
Otherwise, you will be charged for the extra mileage and any other unreasonable conditions
of the car (such as body dents).

Usually, the leasing company will set the residual amount as small as possible since they
get a tax-break on the depreciation on the car during the lease period.  Remember that they
are renting the car to you and the car is capital equipment that belongs to their company.
The more the tax-break, the more the savings that can be passed on to you by the leasing
company.  I believe that even the buyer could get some tax-breaks, but I believe that this
is not possible any more.  The point I'm making here is that in the case of a lease, it
usually makes no sense to return the car, it will always save you more money to purchase
the car, or sell it off to someone else.


SOME ACTUAL COMPARISONS:

I recently leased myself a Saab and made a detailed analysis on the actual numbers.  Saab
was offering a 4 year loan with 25% down and 2.1% interest.  They were also offering a
4 year lease with a money factor of 1.9%.  For the price I paid, here are some interesting
statistics.  Suppose x is the amount of interest I'm able to make on my money (maybe through
the bank), and suppose I have enough money to buy the car outright (:-)).

if 0 < x < 2.1 then its best to buy the car outright

if 2.1 < x < 4.0 then its best to take the loan

if x > 4.0 its best to take the lease

Suppose the loan option did not exist, then if x > 3.0, it would be best to take the lease,
i.e., the money factor of 1.9% translates to a interest rate of 3.0%.

At a high-level, the only real difference between a loan and a lease is that in the loan you
pay the down-payment up front, in the lease you pay it at the end.

In my case, the use-tax + sales-tax on the depreciated amount was a bit less than the
sales-tax on the new car price.

In most people's cases (as was in mine), I would not have been able to buy the car outright,
so one may argue that the above comparison (involving x) is not very meaningful.  But this
comparison still makes some sense for it tells you whether to lease or take a loan depending
on how much your money makes in the bank.  In the case of the loan, there is a big initial
payment and slightly larger monthly payments, suppose one could save all that in the bank and
earn interest on that - would the final balance be more than or less than the amount needed
to pay the residual amount + sales-tax.  In my case, the point where the lease started making
more sense was 4%.

Sriram.