Are you allowed to take a leased car to the track?

 

Assuming you can sell the car in a year or two at or very close to msrp (if not over) why in the world would you lease this??

 

Apologies, correcting these numbers based on the fixes to the re-purchase tax handling in the spreadsheet that was being calculated incorrectly. No guarantees there aren't other bugs too.

Note that the net cost scenario is no longer dependent on what the true resale value is, since it scales the loss up and down for both the leasing vs. the purchase financing scenario (as now taxes at sale are removed from both).

 

Assume you saved up and paid cash for the car- in one year that the op hopes to keep his car- he loses sales tax. That’s it. His cost to own is like 15k.

and if you trade the car in for something else- you get the sales tax back as well in some states.

i understand leasing daily drivers and beaters that will drop like a rock in value. But I don’t understand any financial benefit if leasing a gt3 unless you can’t afford the cash outlay.

 

My scenario assumed $150k actual value after 3 years. So in your "pay cash" proposal, he's out $181k - $150k = $31k when sold at the 3-year mark.

The equivalent for the lease would be putting down enough down payment in cash to cover all of the difference in residual value, leaving you only with the small payment of the borrowed residual value @ the lease APR (which you could also pay in a lump sum up front, but that doesn't change the fact you're paying it).

In that lease scenario, at 4.8% lease APR, it's roughly a wash ($30,870 cost at the end of the lease). But if you're stuck with a 6.48% lease APR, it'll cost you $4,550 extra in the lease scenario. Now that could be largely offset by investing the $90k+ of cash you didn't have to put into the purchase over the 3-year term, of course...

Feel free to play with the scenarios, or look for errors (only edit the numbers in cells that have shaded orange backgrounds): https://dl.dropbox.com/s/ps6jo0trgn2...ying%20v2.xls?

One good extension for completeness would be to assume a base asset account of $x that accrues interest at some assumed time value of money, such that the downpayment and monthly payments reduce that account in either scenario, and the "net cost" includes any lost value from that investment.

 

I’ll look at the file later as im on my iPhone but how is he out 150k if he sells the car and recoups the cash?

am I missing something? They only thing he will be out will be sales tax maybe and whatever the car drops in value in a year which should be minimal.

 

Mech, did you include tax on the lease payments? What about the large sales tax hit when you purchase the car at the end for the residual value sum?

 

Advantages of leasing really depend also on your state of residence as it relates to sales tax. Here in Ohio you pay sales tax on the whole purchase price of the car when leasing, which usually gets wrapped into cap cost so you end up paying interest on the sales tax, too.

If you live in a state where leasing means you only pay tax on the difference between purchase price and residual (at least that’s what I’m guessing another poster is implying), then maybe it’s a decent deal.

But it also like another poster said, any lease of high end GT car is likely a bad deal if you don’t buy the car at the end, because they lowball the residual value. That is, the vehicle’s market value at end of lease is likely far higher than the lease end residual value. So if you just give it back at the end, you’ll have paid for a lot of depreciation that didn’t really happen (plus interest on that “depreciation” too), and you’ll have handed a much more valuable asset back to the finance company than the price you could’ve just bought it for.

Probably the best case for leasing a car like this is Matt of Obsessed Garage who is doing a lease on his new (to him) $220K RS... I’d like him you can justify it as legitimately a business expense you can deduct the cost of the lease payments against income tax, which for most of us is much much higher than sales tax. Then buy it out at lease end and immediately trade it in toward another vehicle for the sales tax credit the trade in gets you (that last part again depends on your state of residence; here in ohio it only works toward purchase of new not used car, but in Florida and other states it works toward purchase of new or used car; I’m jealous about that)

 

Or the investment could have a negative return (which can happen , despite what people think), leaving you with a bigger loss. Unless you invest in 3 year treasuries at 1.6% in which case you have a massively negative carry trade.

 

Leasing tends to be a much better deal fundamentally on volume cars from any given manufacturer. For example, BMW is notorious for subsidizing the sale of its 3-series cars (not M3, sorry) and sometimes other cars that aren’t selling in the numbers they want to see by offering inflated residuals and lower-than-market money factors (interest rates) for specific models and trims via its captive finance company BMW Financial Services, which of course has the effect of making the lease payments much lower.

In that scenario it makes far more sense to lease than to buy the same model, because at the end of the lease, the residual buy out price is often far higher than true market value, so just turn it in and let BMW take the hit.

If you look at their schedule of residuals and MF for all their models and trims it’s obvious what they’re doing because the MF is a lot higher and the residual a lot lower for, say, an M3 or M5 than for a 328i sedan. And of course we know that in reality the true market residual value (as a percentage of its original MSRP) will be much higher on the M3 than on the 328i. Just look at what CPO 2-3 year old examples sell for from dealers.

I used to always lease when I had cars like those. Now that I’m into Audi S and RS modes and Porsche GT cars, I don’t lease, because it generally doesn’t make sense given the terms on offer to do so.

 

Interesting. What is the result if you sell the car after one year?

 

I didn't say he was out $150k. He paid $181k, and he recouped $150k @ the 3 year mark by selling, leaving him $31k in the hole.

I did attempt to include all that (assuming what I believe is correct) for California. Sales tax is included on the appropriate portion of the lease payment. And at the end of 3 years, if you buy out the lease and then immediately sell the car within a week, you avoid that sales tax and it's paid as use tax by the new owner.

In re-checking the sheet in this area, however, it looks like there was a bug in that tax accounting. Correcting that changed the magnitude of the results:

OP's scenario is now $6.8k more expensive to lease than purchase finance. Dropping the lease rate down to 4.8% APR makes it a wash.

Spreadsheet updated.


The assumption is you could do something better than sitting on the cash difference that would at least offset the numbers a bit.

I'm not sure what the lease-related assumptions would be after 1 year. Would you buy out the entire lease at the original contract terms? How would the residual value @ the 1 year mark be determined?

 

Correcting these numbers based on the fixes to the re-purchase tax handling in the spreadsheet. No guarantees there aren't other bugs too.

Note that the net cost scenario is no longer dependent on what the true resale value is, since it scales the loss up and down for both the leasing vs. the purchase financing scenario (as now taxes at sale are removed from both).

 

Here's some intuition:

For a purchase, you pay sales tax on 100% of the purchase price. Then you pay a small interest rate on whatever you financed.

For a lease that has a ~50% residual, you're going to pay sales tax on 50% of the car over the term of the lease anyway. On top of that, you are going to pay a much higher finance interest rate again on essentially the entire value of the car over an effectively longer period of time (this is why the monthly payments are less) such that the remainder on the "loan" is the residual value of the car @ the lease term.

To come out ahead with a lease, you need to pay less additional interest than you're saving by not paying sales tax on the other 50% of the car. That's a losing battle if the lease APR is 6.5% while the purchase APR is 2%.

More simple numbers: at 9% sales tax, you're saving effectively 4.5% interest over a year on the car's total value by only paying tax on half of it. There's already a 4.5% net interest rate between a 6.5% APR and a 2% APR, so you go into the red by the end of the lease (relative to initial purchase and later sell).

 

Based on the interest - money factor delta in Nick's example, financing is a better way to go assuming normal depreciation (on the finance) and it's all personal use (not chasing business deductions).

Porsche money factors suck (they're very high). It may be possible to go a bank for a better money factor but could be offset by lower residual. Porsche residuals are generally decent but, they're very low with GT3s (a bad thing w/leasing - you want the highest possible residual).

In my experience, BMW's money factors are more competitive with finance interest rates AND the residuals are solid.