Purchase or lease? Pros and cons.

ChasingCoral

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When you buy a car and finance it, you are spreading 100% of the purchase price over a set number of months.

When you lease you are spreading a portion of the depreciation, usually between 40% and 45%, over a set number of months.

Most of the time the difference between the interest rates when you buy vs. when you lease are not significant.

Bottom line: the monthly payments over the same period of time, the lease must be substantially less than the monthly payment when you finance.

If the residual is 60% over a 3 year lease, (you are paying 40% of the purchase price of the car) to get similar monthly payments when you finance the finance term would have to be 2 1/2 times as long or 7 1/2 years.

An absolute rule of leasing that may apply: If your budget only allows a monthly finance payment of $500 a month, never lease a more expensive car where the payments are also $500 a month. Always lease the same car and pocket and save the difference between the finance monthly payment and the monthly lease payment.

Two other rules of leasing: leasing 101:

  • Never, I repeat never put any money down to reduce the monthly lease payment. Everything including sales tax and acquisition fee should be rolled into the lease.
  • Never lease beyond the manufacturer's warranty period-
Yes. We've heard your two rules over and over.
Your rules just don't have the same weight as Gibbs' rules. ;)





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macchiaz-o

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Yes. We've heard your two rules over and over.
Your rules just don't have the same weight as Gibbs' rules. ;)
Rule #3.1: Don't believe what you're told. Double check.

Rule #7: Always be specific when you lie.

Rule #36: If you feel like you are being played, you probably are.

Rule #51: Sometimes you're wrong.
 

FredT

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  • Never, I repeat never put any money down to reduce the monthly lease payment. Everything including sales tax and acquisition fee should be rolled into the lease.
Why? Doesn't that increase your finance costs?
 

ChasingCoral

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A question on leasing: When financing, the customer can generally pay off the loan early with no penalty (I understand this will depend on the terms of the loan). Can you pay off and purchase a leased car early, especially under Ford Options since it is really a balloon financing program?
 

hybrid2bev

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A question on leasing: When financing, the customer can generally pay off the loan early with no penalty (I understand this will depend on the terms of the loan). Can you pay off and purchase a leased car early, especially under Ford Options since it is really a balloon financing program?
You can buy a RCL out early and Ford Options (retail installment contract with a balloon note) too. No pre-payment penalties (validate that on your contract document in the Truth In Lending section).
 

kdryden99

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A question on leasing: When financing, the customer can generally pay off the loan early with no penalty (I understand this will depend on the terms of the loan). Can you pay off and purchase a leased car early, especially under Ford Options since it is really a balloon financing program?
Ok so options works like a finance so in reality you should be able to pay it off early. As for the lease normally you have to wait until end of lease to purchase it but it really depends on each manufacturer. They make up the terms so you would have to check the contract.
 

JellyBelly

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I have never leased - keep cars long time /drive more than lease limits - but MME is the first one I would consider leasing only because BEV technology is evolving rapidly and possibility of significant depreciation exists in 3 to 5 years. Having said that Options may be a good middle ground.
 

ChasingCoral

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You can buy a RCL out early and Ford Options (retail installment contract with a balloon note) too. No pre-payment penalties (validate that on your contract document in the Truth In Lending section).
Perfect, thanks!
 

DBC

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I have never leased - keep cars long time /drive more than lease limits - but MME is the first one I would consider leasing only because BEV technology is evolving rapidly and possibility of significant depreciation exists in 3 to 5 years. Having said that Options may be a good middle ground.
People stress over the lease vs buy decision but in a regular open end lease the difference between leasing and buying is just the acquisition fee. The tax credit makes this psychologically more complex but doesn't make a financial difference.

The reason I say psychologically more complex is that if the tax credit is added to the residual you are guaranteed that the buy out price will be above FMV, and a lot of people are uncomfortable paying above FMV in a buy out. The reason it doesn't make a financial difference is, had you purchased the car, you would have paid more and owned a car with a FMV below the residual.

For example, assume a vehicle is worth $10K in year one and $5K in year 3 and $0K in year ten. Your choice is to pay $10K up front or $3K for the first three years with the option to buy for $7K at the end of year 3. If you exercise the option and pay $7K for a vehicle with a FMV of $5K and then hold it until year 10 you are in the exact same position as when you just paid $10K in year 1. But it won't feel the same. I've seen more than one person love a vehicle but walk because the residual exceeded FMV.

If you can use the the tax credit then Ford Options works great, assuming that the limited information we have is accurate. Compared to the lease, you get a $2500 incentive, a lower interest rate, and a buy out price that may be below FMV. Compared to purchase you get the incentive but a slightly higher interest rate. However you get the option at three years to walk if you don't like the car or to buy it at what I'd assume is a good price if you do. Doesn't seem to have a lot of downside.

You can also come up with plans that fit our particular needs. You and I might like an option to use Option for one year -- kinda like a test drive -- and then either use Options for the remaining two years or purchase at the low interest rate over three years. But we don't make the finance products. We have to pick from what's offered.
 

DBC

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Why? Doesn't that increase your finance costs?
Of course it does. Just may not be a lot of dollars, and the closer you are to 0% the less difference it makes.

But the best decision depends on the rate and your situation. If I had a CD or Treasury bond paying 7% and the lease rate was 2% then I wouldn't cash in the security to put more down. On the other hand if my alternative fixed investment was paying .01% and the lease rate was 2% then I might. Just depends on whether there was something else I wanted to use the money for -- like a remodel. This is the depends part.

But if you are putting a lot down just make sure you have GAP insurance or something like it.

Also don't get fixated on the monthly. That is always a bad idea. I once had someone proudly tell me that they had reduced their monthly payment on a 36 month lease by $100 simply by putting an additional $4000 down. What can you say?

Also note that you can cover the downside of extending a "lease" beyond the warranty period with an extended warranty plan, so "never extend the lease longer than the warranty period" is another rule easily ignored without real consequence. However I don't see any advantage in extending the lease for the Mach-E, and if you don't like the vehicle that fourth year will go by very slowly. LOL
 

ChasingCoral

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Also don't get fixated on the monthly. That is always a bad idea. I once had someone proudly tell me that they had reduced their monthly payment on a 36 month lease by $100 simply by putting an additional $4000 down. What can you say?
You can say they make a quick $400 on that deal!
 

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