Buying a car: Cash vs Leasing

[Giannis]

I had a talk yesterday night with some guys at the bar. We talked about cars and more specifically about the ways to purchase them. One of those was interested in buying a Mercedes and he was between cash and leasing, more keen on leasing.

So, if you were in the market for a car, how would you choose to buy it, using leasing services or by paying with cash/monthly instalments, and why? Also what do you think that are the pros and cons of each "method"?

 

[Sayyaaf]

interesting subject Giannis. I had this dilemma when I purchased my car. I had the cash but couldn't decide to purchase the car cash or lease it. Well, then I figured out, how long am gonna keep this car ? I thought 2 years would be the maximum unless things changed, since I know am going to replace it with either the new 7er or X6 or a Maserati. Since then, i decided to lease it and replace it once one of these car would become my first choice.
So, it really depends whether u are planning to keep the car or not.

 

[ree]

I would personally buy a car with cash - but there is an exception: If you really plan to use your car as "business-vehicle", it could be more efficient to lease the car. Nevertheless it is a highly controversial discussion and also most of the private purchaser are going to lease their cars - but then it isn't your car and you really have to read the small print - you should ever consider, that you need enough money to pay the monthly rates.

 

[Matt530i]

Right now I'm leasing and when my lease is up in February, I think I'll lease again. Here's what I think people need to know.

1. The cheapest way to purchase a car is to pay 100% cash AND maintain it properly AND drive it until it dies (should be 10+ years for a German car).

2. If you can't pay 100% or you don't want to drive it until it dies, then you need to consider the following:
-how long will you drive the car?
-how much will you drive the car?
-what can you sell it for when you buy your next car?

The longer you drive the car, the more likely you are to be better off purchasing the car. 6 - 10 years probably makes purchasing the best option. Plus, you can't lease for more than 6 years from most/all manufacturers.

Look at the kms included when you lease the car. If you drive significantly more than that (say 5,000 km more per year) you'll be in for a nasty surprise at the end of the lease unless you buy it at lease end.

If you're going to only drive the car for 2 - 5 years, then look at the residual offerred under the lease. When I leased my current 5er, the residual was 60% of the MSRP and I paid about 95% of MSRP.

That means I'll only pay for 35% of the car. Right now in the used car market where I live, I can only sell my car for around $4,000 less than the residual. Had I bought the car, I would have ended up paying for $4,000 extra in depreciation.

 

[Giannis]

I have a tendency to keep my cars up until they die (see Clio) so i guess cash is the solution for me.

On the other hand i'm not very familiar with the term "lease" since it's not widely used here...

 

[Matt530i]

A lease works as follows:

You enter into an agreement with the owner of the car (the leasing company, usually related to the manufacturer) to drive the car for a set period of time (24 - 60 months).

The agreement specifies how many kilometers you can drive each year, what you do/do not have to maintain etc. There are penalties if you exceed the total allowed kms or if you bring it back it damaged condition.

The reason it's cheaper is that you only pay for the depreciation of the car over the period you drive it. In a closed in lease, the leasing company guesses how much it will depreciate and that's what you pay. In an open ended lease, the leasing company adjusts their initial guess for the true market value and you either get some money back or have to pay more at the end.

At the end of the lease, you can either buy it for the price the leasing company guessed it would be worth, or walk about with no further obligation.

In terms of mechanics, it's like an interest-only loan on the residual value (the value of the car at the end of the lease), plus a normal loan for the portion of the depreciation that you pay for and finance.