Everything you need to know about buying vs leasing, and how to negotiate the best deal on both

Oh my car guru, my car guru, should I buy or lease my car guru?

Hey folks, Lenny Lawson, the car guru right here, I want to answer that question for you

today.

And, you know, a lot of you are thinking, I would never lease a car, I ain't renting

no car.

Well, leasing is not renting.

Leasing, you know, you rent from Enterprise, or Avis, or Hertz, or Budget, somebody like

that.

That's not leasing.

Leasing you have more rights and it's, you're committing basically to a longer period of

time.

But I have a great example here.

I have a customer that I am working with through one of my salespeople that we're basically

wanting to buy Mustang, a Mustang convertible GT in my showroom.

It's a really, really nice car.

The CMSRP is right at $67,000.

And they wanted to finance it for a pretty short period of time, 36 months.

I know this payment sounds really high.

It is.

And that's what got my wheels turning.

But anyway, at 36 months their payment was going to be $1,839 a month.

That is a huge monthly payment.

Of course, that includes $4,598 in sales tax because when you buy a vehicle and you don't

have a trade in and these people don't, you've got to pay sales tax on the full amount in

the state of Tennessee.

Now, I don't know where you live.

It might be different.

But and your tax rate may be lower.

Ours is about 7.5%.

But yeah, $1,839 a month times 36 months is $66,204.

So that's what they will have paid out of pocket for this vehicle for 36 months.

So I suggested that they might want to look at a lease payment.

And they're typical.

It's basically a typical response.

Well, tell me how that works.

I've heard of leasing.

A lot of people have told me not to do it.

I've heard, she even said, I've heard that it's a gimmick.

And I said, well, it's no gimmick.

It's just a financial tool that we can use that businesses use to lease equipment,

to lease vehicles, to lease tractor trailer rigs and trailers.

I mean, leasing is a big deal.

It's not some gimmick.

It is designed for multiple types of users, people who want to, like if you're running

a business, for example, and you want to be able to write off each lease payment,

you can do that as opposed to buying a vehicle and financing it.

You can only depreciate so much per month because it has to be depreciated over a five

year period.

So leasing sometimes works better for businesses, but it's not just for businesses.

And I'll give you an example.

So their payment was $1839 for a purchase.

For lease, it was $855.

That got their attention.

They would save $984 a month.

Yeah, but what's the catch?

Well, at the end of 36 months of paying $1839, they would own the vehicle.

At the end of 36 months of leasing it, they would not own the vehicle.

They would have to pay an additional $36,611 plus tax to own it.

Well, that's awful.

Well, maybe not.

Because over a period of 36 months, they would have paid in $35,424 less than if they bought it.

So could you use an extra $35,000 in your budget over three years?

That also got their attention.

So if they want to keep the car at the end of 36 months, then they can buy it for $36,611.

If you add tax to that, that's $39,356.

If you add that to what they've already paid for the lease, that's $70,136.

Now, you compare that to what they would have invested in it over 36 months,

and they would have invested $3,932 more if they leased it and then bought it and financed that.

So it's more, it costs more to lease it.

Yeah, it does long term if you decide to buy the vehicle at the end and then refinance that balance,

but not the way most people do it.

See, most people would not want an $1,839 monthly payment, would they?

They'd want something a lot less, so what do they do?

They finance it for a longer term.

So she said, well, how could we get the purchase payment down?

I said, well, that's obvious.

I didn't say that because that would have been insulting.

I said, we just finance it for a longer term.

Let's say 60 months.

She said, well, let me see what it'd be for 60 months.

So I calculated that.

The 60 month payment was $1,201.

Again, the lease payment was $855.

So she's still saving, what is it, $346 a month.

So over a three year period, savings is almost $13,000.

So that's why people lease folks.

It's a cash flow thing.

Now, if you like to buy a vehicle and keep it forever till the wheels fall off, as they say,

again, I'm not sure who they are, but yeah, you don't want to lease.

It's not a good option for you.

But if you trade like every two to four years, leasing is definitely worth considering.

But when the typical average salesperson even suggests that, most people recoil as if this is something bad.

It's not.

It's not bad.

It's just a financial instrument.

It's something that can be used to improve cash flow.

Okay, I'll take my first break.

I'll be back in just one minute.

Okay, I am back.

You know, there's so many variables involved in financing cars or financing anything.

I mean, you have to look at the sales price, of course.

And if you're leasing, you have to make sure that the price that they gave you for the purchase of the car has to be the same as the lease capitalized cost.

Yeah, that's what it's called.

The beginning number on a lease instead of being called the sale price because you're not really selling it is called the capitalized cost.

Now, this is where a lot of car buyers get burnt is because they haven't listened to the car guru who clearly states that the capitalized cost is negotiable, just like the sale price is.

So let's say that you've worked all day to get a great sale price, you're happy with the price, and then all of a sudden somebody brings up a lease option or you do.

You need to make sure that they use the same number because if they don't, then they're being deceptive.

So let's assume that they're not deceptive and they use the same number.

Then you also have to look at what the money factor or interest rate is on the lease.

What's the money factor?

Well, the money factor is like a, it'll be like 0.00246 or 0.00135.

When you see that number, you'll know that they're using a money factor on the lease.

And basically it's the interest charge.

Now, Ford quotes an actual percentage rate, although it's not an APR.

It's still a percentage that the lease is based on and they'll quote it like 2, 4, 6, whatever.

It's a whole number, it's not a fraction.

Now to determine what the interest rate is when they give you a money factor,

just take the money factor and multiply it by 24 and that will tell you what the interest rate is.

Pretty simple.

So if it's 0.001234, just take that, multiply it by 24 and that'll be your interest rate.

Okay?

So that's another factor.

Another factor is the term.

And then the final factor in a lease is the residual value.

That's what the vehicle will be worth at the end of the lease.

So if you're doing a 36 month lease, then it will be quoted as a percentage of MSRP.

So let's say that the MSRP on the thing is $50,000 and they say that the residual value,

what they're anticipating, that thing being worth at the end of 36 months is 65%.

Then all you have to do is take 0.65 multiplied by the MSRP and that's what you can buy the vehicle for

at the end of the lease.

And if you subtract that residual number from that capitalized cost number that you negotiated

or the selling price, I'll use those terms interchangeably but it's really called the capitalized cost.

Subtract the residual value from the capitalized cost and that's the amount of depreciation

that the car is going to eat up.

You take that number and divide it by the term and that's most of your monthly payment.

It's depreciation.

If you have a really low interest rate or a really low money factor, you know, that's really not going to be that much money

in terms of all of that being said.

What really matters is the dollar figure at the end.

What is the lease payment times the term?

What is the purchase payment times that term?

You compare those two numbers and then if you think you might want to buy that thing at the end of the lease,

you have to know what that residual value is going to be.

Because that residual value is not what you can buy the car for.

You have to add sales tax to that.

And then if you can't afford to pay that out of your pocket, the full amount which most people won't be able to,

you're going to have to finance that.

So you have to figure what that's going to cost.

What's the interest rate going to be on that?

What kind of a term?

What kind of monthly payment can you afford?

And that's why I normally recommend to folks if you really believe that you're going to buy that thing at the end of the lease,

then don't lease it to begin with.

Just go ahead and purchase it.

Finance it for 60 or 72 months.

Try not to go 84 months.

But just go ahead and buy it.

But if you think that you're going to be trading cars every three to four years anyway,

and you don't want to have to worry about trade-in value or having to go through that whole process again,

it's so much easier when you just turn it in.

Hand them the keys.

Now they're going to inspect the car or the SUV or whatever you leased.

They're going to want to make sure that you have maintained it, which you're supposed to do anyway.

If there's a bunch of door dings all over it, they would assume that you would have had those fixed.

If you're buying a convertible and there's a big old tear in the convertible top, guess what?

You're going to be charged for that unless you buy the vehicle out.

And then the final factor is if you go way over on miles, see most leases are based on 15,000 miles a year.

So on a three-year lease, 45,000 miles.

Now you can get a low-mileage lease and it'll save you money.

It'll save you money every month.

But if you go over on miles, then you're going to have to pay for it.

You're going to have to pay up to, you know, 15, 18 cents a mile for every mile that you go over.

But here's the truth behind that, okay?

If you buy a car and you put in, put excess miles on that car, you're going to have to pay for those miles too.

Because somebody that looks at your car trying to determine what it's worth, they're going to deduct for excess mileage.

And that may amount to 25 cents a mile.

A lot of people say, well, I'm not going to lease because I may go over on miles and I don't want to have to pay for my extra miles.

Well, if you buy it, you're still going to have to pay for extra miles because it's going to be taking off the value of the vehicle.

I mean, if you put 100,000 miles on a car, an average mileage of 15,000 miles a year would have been 60,000 miles.

I mean, there's going to be a major deduction in the value.

If you divide that by the number of miles involved, you'll see how many cents per mile that is and it's going to be, it's going to be shocking.

So leasing is really not for people who don't take care of their vehicles.

If you take care of your vehicles, if the tires need replacing, you replace them.

If you fix dents and dings, if you get a star and a windshield, you get the windshield replaced, then you're a really good lease candidate.

And then if you like to trade right before the warranty runs out and, you know, you like to get a new car every three years and you want to take advantage of the latest technology,

you might be a leasing candidate.

But there's a lot of people say, no, no, I want to buy the car. I want to own it.

Well, I mean, in reality, it may be titled in your name, but technically you don't own it yet.

The bank does.

Just missed a couple of payments.

See what happens.

The rifle owner will show up in your front yard or in your driveway with a rollback and they will collect what you thought you owned.

So, and then they'll take it to the auction, sell it and whatever the deficiency is, then they'll sue you for it.

That's not real appetizing.

Is it?

So this is something worth considering for a lot of people.

You know, you'll find that a lot of BMWs, Porsches, Mercedes, most of them are leased because those people don't want to suffer the amount of depreciation that they're going to have to face,

especially on a BMW or an Audi or a Mercedes.

Now, Porsches depends on, you know, if it's a 911, they don't depreciate much.

But if it's anything else like a Macan or a Cayenne, those things drop like rocks and those people, they don't want to have to worry about it after 36 months.

They want to come right in and get them a new one.

And so they lease.

So really, there's only one way to properly analyze this and that's to look at a side-by-side comparison.

The problem at most dealerships is the salespeople don't know squat about leasing.

You end up having to talk to a manager and if they don't do a lot of leasing, then, you know, they act like they're lost at sea.

So it's better to go to a dealership that knows and understands leasing so that they can tell you what your options are.

But just like buying a car, we talk about the four targets that you have to hit, especially when you're trading something in.

You have to negotiate the sales price separately from everything else.

You negotiate the trade-in separately.

You negotiate the terms of the loan and you negotiate the aftermarket items, warranties, gap insurance, that kind of stuff.

So there's four things, four negotiations.

I'm sorry, but there are four negotiations unless you don't have a trade-in that would make it three that you have to pay attention to and negotiate.

Too many people lay down when they get into the finance office and those crooked finance men, not all of them, but some of them, just roll right over you

by charging you too much interest, too much for an extended warranty, too much for gap insurance, too much for a protection package.

And you really don't know what you're buying.

You just want to get out of there with your new car because a lot of people, you know, they feel like they're done once they've signed the buyer's order or their sales contract.

No, you're not done.

There's another negotiation getting ready to happen when you go into the finance office.

So that's the way it is on a purchase.

On a lease, it's very similar.

There aren't as many targets.

If you've got a trade-in, you can trade in a vehicle on a lease.

Well, you really can't.

The dealership is going to buy your trade-in and they're going to take, like, if you have a deficiency, if you owe more on that trade than it's worth, something has to happen to that negative equity.

Either it has to be rolled into the lease, which it can be.

Or you have to pay it out of pocket.

Let's say you don't have a trade.

What are you looking for?

You're looking for that capitalized cost.

That's the selling price.

That's the starting point.

And you have to make sure that you're still getting a good deal.

Okay, the second thing you're looking at is the money factor or the interest rate.

Ask them what it is.

Don't let them just quote you, pay them and say, what's the money factor?

And they'll tell you, you get your calculator out, multiply it by 24.

That's the interest rate.

And then ask them, are you marking up the money factor?

They'll look at you like, how'd you know that?

I listened to the my car guru guy.

Okay, yes, we were marking up the money factor.

Please take that out.

Okay, and then finally, what is the residual value?

You can't do anything about that, folks.

That's a set number, but you need to know what it is before you go in,

because you've got to look at that residual value just in case you think about buying that thing.

And just do the math.

It's not a complicated, well, it is.

Dog on it, it is a little complicated.

Any car purchase is.

I mean, if you take it seriously, it's not complicated if you just walk into a store and say,

I want 450 a month, you know, that's real easy.

They'll just find a car that they can sell for, they'll find a $300 a month car that they can sell for 450.

And you won't know the difference.

And then they'll do the paperwork and you'll go home and you'll be happy.

You got a new car.

You have no clue what you paid for it.

So that's pretty easy.

Takes a little bit more work to get a great deal.

Hopefully you listen to me or get you a copy of the my car guru guidebook.

And it explains all this stuff, including the lease.

So how do you get that 423-552-2020 text me your email address and I'll send you a PDF version of it.

Or you can call the operator here at my dealership, Gateway Ford and Gateway Nissan.

423-639-5151 and tell them you want me to print you out a copy and mail it to you.

Give them your address, name, address, so forth, and then I'll print it out and mail it to you.

It's real easy.

So I'll be back in just one minute.

So I don't know what these people are going to do, but they've got something to think about now.

They have found a way to get the vehicle that they really want a very nice GT Mustang convertible and save $984 a month.

Would you be happy about that?

I would.

They didn't even know it was an option until Lenny Lawson brought it up.

And maybe they're one of those people that know we really want to own it.

And maybe they're not.

Maybe they're folks who, since it is a third vehicle, it is.

It's not their main vehicle.

They may just look at it for what it is.

You know, this is something that's going to be sitting in the garage most of the time.

We've got two other vehicles.

Why would we invest an additional $984 a month in this thing if we're not going to drive it that often?

And let's say we get over it, you know, just like people get over owning a boat or camping, they get over the Mustang thing.

And in three years, they just go back to, well, come back to my dealership, hand us the keys and walk away.

And there's really no further obligation unless they damage due to the tires are worn out or they've gone excess miles.

They may have to pay us a little extra money, you know, for excess miles.

But, you know, if they purchased the thing and we're trading it in, they'd pay for those extra miles as well.

There is no way to escape those realities.

And if you want to learn more and more about these kind of realities, especially when it comes to your car life, listen to my car guru.

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That's pretty cool.

I think that is amazing, quite frankly.

I've got a whole bunch of listeners in South Africa.

I mean, that just blew me away.

And I'm glad, you know, that I can help them because they have car lives too.

And apparently there's a lot of the same shenanigans going on in Cape Town that might help them when they go out to buy our lease of car.

So if you need me, again, 423-552-2020, send me a text.

I'll help you out any way I can.

Well, thanks for listening and I'll see you next time.

Everything you need to know about buying vs leasing, and how to negotiate the best deal on both

About this episode

Ford Mustang

MSRP

financing

monthly payment

sales tax

lease

own the vehicle

additional payment

capitalized cost

money factor

residual value

depreciation

interest rate

mileage limit

resale value

excess mileage

BMW

Audi

Porsche 911

Porsche Macan

Porsche Cayenne

trade-in

protection package

negative equity

Ford Gt Mustang

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