There are myriad camps/perspectives on the whole financing vs leasing debate.
But what usually happens is that people twist their logic to fit the thesis they’re trying to prove. For example, ST_00 above says that financing is smarter. And basically implies not financing is a dumb move.
His biased take relies on the calculation where financing the vehicle will “only” cost $22k for the first 3 years. Basically $53k minus $31k. But he ignores the interest expense of the financing option (BMW loan financing interest rates will be around 6% APR). He also ignores the opportunity cost of capital where a loan-borrower needs to make both principal and interest payments on a loan. This is usually why financing payments are higher than similarly structured lease payments, although the higher payment becomes “equity” in the vehicle over time.
Last, He also neglects to place any value on the lease-optionality where you could easily exit the vehicle if it is underperforming or problematic during the warranty period.
At first blush, closed ended leases are complex for normal car buyers. But if you decompose the rent factor, depreciation, and option to capture value in the residual, they are great ways for someone to enjoy a new vehicle. THEN at the end of the lease that person could choose to capture the vehicle and keep driving it, or roll into a new lease with lease-loyalty benefits.
Personally, I think if you leased a vehicle then saved the monthly payment differential vs a financed/loan… then the lease is a great product to use for the first 36 months. Every person has slightly different motives to gain access to a vehicle. Once they weigh the pro’s and con’s, they can decide. It doesn’t make sense to conclude one way (loan vs lease) is “better” than the other in all instances for a given car.
I’ve written about this here… but of course my perspective is just one of many on this topic. Bottom line, I don’t think it’s as simple as “financing is better.”
You and @delta737h should trade notes. He’s put together a white paper on this. And he’s definitely smartly qualified to put something like this together.
The prof is good but he causes a lot of these poor newbies heads to explode while reading his technical posts…lol! I’m an engineer who used to present a lot to non engineers so decent at dumbing things down!
I have included corporate rebate of $1500 here. $1000 is for new lease without loyalty. Is this a good deal. Revised by dealer from the last post.
Thanks.
Updating deal details here, as the other post is closed and moved.
Can you please suggest on this deal:
BMW X3
MSRP: 55,780
Discount: 4,720 (8.3%)
Rebate: 2500 ($1000 new lease + $1500 corp rebate)
36 months
10K miles
MF: 0.00210
RV: 56% (31,236)
Due at Signing: 3000
Monthly: $700.95 (includes PA tax 9%)
It’s a solid enough deal considering it’s presumably local and you’re not paying any add-ons or broker fees, get the discount to an even 9% and I’d sign it if this is what you want.
Well yeah, but the key is to combine powers to make something awesome.
Like imagine a baseline where we all accept a “low monthly effective” cost is the metric we’ll use to compare leasing vs buying. I know even this premise is still up for debate since it’s not a NPV or EVA model, but whatever.
Let’s take the prof’s mega-head-exploding-math. And combine it with your engineering baller-ness. Then mix in in real-world financial instrument/pricing stuff from @HersheySweet or @themachine.
So imagine someone punches in their bad-ass lease structure into the LH calculator. LH calculator spits out that super juicy monthly effective cost. Then, your engineering-ballerness provides a big red button for them to smash. This magic black box calculator tells the user how many months they would need to own/finance the vehicle for the effective monthly cost to be the same as the lease.
But owning the vehicle has these extra “costs” baked into the ownership horizon. So while there’s a point that the depreciation starts to break even, the financing option should also be saddled with…
Assuming interest at Tier 1 rates on financed principal. Also assume the DAS of the lease were instead re-deployed as a down payment on a loan. Maybe just scrape rates from Bankrate?
Opportunity cost of the higher cash payment (equity) trapped in an asset class that does not appreciate.
Non-warranty costs or pro-rated portion of an extended warranty that a buyer may incur that a lessee may not incur. It seems everyone on LH is an expert on extended warranties… who knew?
Estimated residual assuming no pack or recon costs to prepare the vehicle for sale (individual pack/recon closely mirrors the lease disposition fee, and I think they could just wipe each other out in this comparison). I’m sure @HersheySweet has residual data for days.
Forward swap/cost to hedge the residual on a purchased vehicle to the extent the buyer can capture upside, but be protected from downside residual losses. @themachine 's Black–Scholes model will need to have a special Elon-Musk-shaped-variable for the volatility on EV’s.
LOL!!!, I like precise math scenarios but it really has to be simple for the masses to utilize (or ‘good enough’)…I’ve trained a lot of non tech people to do tech things for example…and I couldn’t exactly go down to the 1’s and 0’s level or I would lose them all.
But to your point there are a lot of variables to creating a ‘black box’ calc…especially with assumptions on value at any point in time…that make this difficult to get exactly right…or even ‘good enough’.
I’ve leased back in BMW glory days and just write a check since but the additional costs of owning can really add up like you said…losing return on money used to buy car…diminished value if accident…potential out of warranty costs…it is a complex picture to model accurately!
Well the flip side is worse. Now you have people with only a gut feeling and some memes telling everyone how financing a car is smarter than leasing just because the lease feels expensive.
Agreed! Oh for the days of subsidized MFs and inflated residuals making leasing a no brainer…way more difficult scenarios now! And heck that is all on purpose because manufacturers really lost on leases back in the day…they have run the analysis and set MFs/RVs to get more $ out than used to.
PS, and now things like EVs where regardless of numbers I can’t see owning/financing making any sense due to the inherent risk of all the newer tech.
I’m considering writing my business management finance thesis on captive lease incentivization; I worked for a captive as a strategy intern so I got the ABCs on that down.
I was planning on collecting raw incentivization data re interest rates and front end incentives from edmunds, and then collecting rolling residualized data using the cargurus index, which does average pricing for both segments, trims, and models to see how incentivization changes real world residual/resale values. It’d be really interesting to see in the short term on electric vehichles that did not pass the federal rebates then changed to doing so like Porsche & Audi.
Finding the volatility for a black-scholes model could be interesting but I’m not nearly advanced enough to approach that. Re residuals I’m not so sure on how that black box works, the residual accountants worked in a different area than I did so I never got to pick their brains on that.
