The 1% question

[Lalin]

I see in several posts that a monthly payment of 1% of car’s price with zero down is considered a good deal on a 36/10K. Is that rule of thumb based on the car’s MSRP or the discounted price?

[mllcb42]

It’s a bs rule that has no business existing. It doesn’t inform you if a deal is good or not. Forget you ever heard of it.

[adamcar]

The rule is based on MSRP. And while it is not perfect, it does give you a ballpark to shoot for, generally speaking.

[Jrouleau426]

Although a lot of people think is a bs rule. I think it’s a good rule of finance. I personally won’t pay more then 1% on a lease but I prefer .5% obviously. So call it a reference point not a rule and run all the numbers the way you’re taught to here on the website.

[wtwo3]

I really dislike that rule because it generalizes things and you end up excluding cars where, for example, 1.5% on a certain car might be an incredible deal when that car typically leases at say, 2%.

Conversely, 1% could be a terrible deal on a car that typically leases for 0.5%, but if someone was to follow the rule they’d end up overpaying for a car all the while thinking they got a great deal.

It also doesn’t consider situations where incentives are applied. Should someone who’s never owned a BMW be SOL because they don’t qualify for the loyalty that would get them to 1%?

A much better way to approach evaluating if a deal on a car is good or not is to compare it against what that car typically leases for, and consider all factors (pre-incentive discount, MF, etc etc)

[mllcb42]

It doesn’t work for anything. There’s too much variation in individual situations for it to inform anything. When two people can get the exact same discount in the exact same car, and one person’s deal is 1.2% and the other person’s deal is .7%, you should know everything you need to know about the validity of using a percent of msrp as a target.

The problem is people are looking for a shortcut metric to inform them of the validity of a deal and it just doesn’t exist.

A better approach for looking at the validity of something like the 1% rule is to ask “for a rule to be useful, what do we need to it to tell us?”

If that’s the question, I would say it would need to say one (or more) of the following:

• Is this a good deal on the car? (Meaning how does the deal compare to what is possible on this vehicle currently)
• Is this lease a good value? (Meaning how does the deal compare to other competing vehicles)
• Is this better to lease than buy (Meaning over the period of the lease, it would cost less to lease than to purchase and sell)

Now, let’s caveat this with one more assertion: it would also be helpful if the rule applied to at least a good chunk of the people that want to apply it.

So let’s look at each of those…

1. Is it a good deal for the car?

It certainly doesn’t tell us that. All one needs do is look at the vast change in incentives and regional pricing to determine that. I’ve seen incentive swings between two people of $10k before. Two people can get the exact same discount, but because of incentives, be hundreds apart on the monthly payment. Throw in regional taxes and you can literally have the same deal be off by .5% of msrp per month. Further, even when incentives are standardized and taxes/fees are ignored, what is a good deal for a vehicle varies wildly. On some cars, 1.25% is essentially impossible. On others, .75% is mediocre at best. There are definitely times when 1% is a good deal, but it varies by month, by person, by region, by vehicle, etc. A stopped clock is right twice a day.

2. Is the car a good lease value?

Obviously as payment as a % of msrp decreases, you’re getting more for your dollar relative to msrp, but so what? Some brands have a marketing strategy where they inflate the msrp and then offer large incentives so you feel like you’re getting a deal. Others don’t subvene their rates to hold value. There isn’t some magic % where this suddenly becomes a good thing.

3. Is it better to lease than to buy?

The argument that gets used often with the LH score is that it gives some inclination as to when it makes more sense to lease than to buy. This, of course, assumes that you purchase at msrp with no incentives, no taxes, no fees, no interest, etc. The problem is that it doesn’t actually compare the lease terms against the financing terms. When the msrp gets subvened by significant incentives, a % of msrp number is suddenly a % of a completely irrelevant number.

So here’s where that leaves us… We have a rule that isn’t applicable to a variety of people, doesn’t tell you if something is a good deal, doesn’t tell you if something is a good value, and doesn’t give you any insight as to if leasing is a better financial decision.

So maybe if you’re looking for a bmw 330, in North Carolina, in January, after leasing a previous bmw, joining bmwcca, and are named jason it applies; but you’d only know that after actually calculating and researching, which is exactly what you need to do to actually answer any of the above questions.