On 2011-06-30 08:46 , Michael Benveniste wrote:
On 6/29/2011 8:53 PM, Alan Browne wrote:

Prove it. Give me an actual case that shows end value better in a lease
vs. an outright purchase for a car at a given price. Don't forget all
the T&C's and the end states.

I'm not sure what you mean by "end value," but I can give you an
example where the lease had better value at the beginning and the
end of the lease term.

I didn't say end value, but end "state". To compare you have to bring
both cases to a close if not equal end state.

In 1990, I took such a lease deal on a Nissan Maxima SE. The terms
were such that if I exercised my right to buy at a fixed price at the
end of the 48-month lease, my effective interest rate worked out to
just over 5%. At that time, the yield curve for 3-5 year U.S.
treasuries was over 8%.

The car price was around $22,000 and had been negotiated before working
out financing. The extra registration fees were $115, and I had to pay
a refundable up-front fee to Nissan of around $300. Interest on the
treasury was subject to Federal Tax, so effectively the lease + end
purchase was just a little bit better.

However, that doesn't count the value of the put option that's inherent
in such an arrangement. As it turned out, I was involved in a major
accident with the that car. The other driver was 100% at fault, but
there was about $6000 of damage to the Maxima including frame repair.
While it was repaired (and I believe it was repaired well,) that made
it worth less than the residual value. So at the end of the lease, I
exercised my option, returned the car to Nissan, and ended up buying
a new Mazda.

In the end you bailed on the car because it was damaged goods and you
had a perception of lower value. That was accidental serendipity.

As usual with finance, it works out to an exercise in numbers and
risk. While a business calculator makes doing present value
calculations a breeze, pricing the implied option still requires some
work and skill. And realistically, the 1+ hour I spent running numbers
and negotiating with the business manager is time I'll never get back.
If you're not willing to invest that effort, I suggest you don't even
consider a lease for a personal vehicle.

I'd bet the vast majority of people who lease personal vehicles do it
because they do not have much (or any) cash to put down but are willing
to pay a fixed amount every month. They do not make a financial
analysis of any deep kind.

If one leases a car for 3 years for $400 per month and returns it, he
has paid $14.4K and has nothing. And if he decides to buy it he pays a
premium over the used value at that point.

If I pay $600 a month for 5 years I've paid $36K. Then I drive the car
for another 5 years (yes a little more maintenance, but not much). That
comes to $300 a month on average - and that $300 is worth less every
month that goes by in any case. Then I sell it for $4000 bringing the
average down to about $270 / mo.

Leasing cars is a rubes game.

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