Wednesday, January 4, 2012

Lease that fancy car from yourself NOT from the dealer

My car lease is due pretty soon. I need only good quality transportation from point A to B and I am not likely to buy a Lexus, BMW or Mercedes because of the poor economics. But I also realized that leasing is nearly an artform.

The lease that the dealer offers you may be unsuitable. In fact try to compare leases by using 'residual value' and interest rates. Also figure out how interest is to be charged - over the new price of the car for the entire lease period or is there a reduction of principal and associated lower interest payments akin to a mortgage?

The idea behind the lease is that you 'pay for what you use' and that your capital layout is zero. In reality the lease terms offered by your dealer maybe so poor and/or the return that you get from the invested saved capital layout is so minimal that the whole thing is a money losing proposition.

I came accross this solution - be your own leasing agent! Very simple - you set the residual value of the car, you can determine this using the black book, or easier just to do a stab at it. Say you plan a four year lease. You could set the remaining car value (residual value) after 4 years of depreciation at 45% of the purchase price.

This is what you have to know when dealing with a dealer lease, your depreciation is set by the dealer and it is often not consistent with other dealers - consequently a low residual value results in much higher payments than compared to the expectation that a car will hold its value (high residual payment). In addition, when you trade in the car at lease end, you're supposed to get the trade in value (just like any other car). If you leave the car on the lease lot and walk away you may loose out on the difference between residual value and the actual trade in value. That difference can be in the thousands. I kid you not!

So you estimate the residual value after four years to be 45% of the car's purchase price. If you bought a $50,000 car that would mean you used up 1-45% = 55% of the cars original pruchase price or $27,500 over four years.

With a traditional lease, you pay the interest rate set by the car dealer - mine wanted 4.8% or 4 x 50,000 x 4.8% = $9,600. However, if by lease end you had paid off the car to its residual value of $22,500 you'd owe a lot less and amortarized you probably would only have to pay $6,960 in interest over the lease term. Even worse, if you used a LOC to finance the lease yourself, your interest rate would probably be 3.25% and you'd pay only $4,712.5 over the term of the lease - Ouch that is nearly $5000 less than the dealer's lease!

I figure that leasing the car from myself wil save me over $7,000 and... you can buy your lease out whenever you please, just pay off the LOC.

This is what you could do. Pay for the car cash and finance it through a secured line of credit on your house or on another property you own. Next estimate the value of the car that you use up over the lease term. In the above example that would be $27,500 divided by 48 months. To determine your monthly payment ad interest of around $4712.5/48 = more or less $100 (with a LOC the bank will calculate the interest every month for you to the penny). So that would be $572.92 (car usage) plus $100 (interest) or $672.92 as your monthly payment if you 'leased from yourself'.  Your car dealer would charge you a lot more for a $50,000 lease. The only negative is that you would have to pay GST (plus PST if not in Alberta) over the entire car purchase price rather than over the leased portion of the car. But that is minor compared to your total savings.

I hope that this is helpful. I am planning to do it this way myself. Just think of all the options I can add to my new car using the savings: heated leather seats, navigation system, bluetooth, sigh...

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