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Investing & Finance

Doug Cutler has been in the real estate and finance industries his entire working career. He became a charter Certified Residential Specialist (CRS) and completed a wide array of the Certified Commercial Investment Member (CCIM) courses. When the Financial Reform act of ’86 destroyed the S&L industry, Cutler with his partners created Mundaca Investment Corporation. MIC ( Mundaca) ultimately purchased and resolved over 10,000 impaired real estate loans from RTC, FSLIC, FDIC, NCUA, HUD and private sellers. Resolutions included thousands of financial instruments in all fifty states and US possessions. With the closure of the RTC, Cutler began developing office and retail space in suburban Nashville, totaling approximately 150,000 square feet in five projects. With the current financial meltdown, he has reactivated Mundaca Financial Services, LLC to purchase performing loans with selected partners.

Auto Leasing De-mystified or Don’t Get Taken For A Ride

Auto makers love leases! They sell cars, and they don’t even have to tell you what you paid for it! If that gives you the willies – read on and we’ll tell you how to figure out a fair deal if leasing is in your future.

To the dealer or manufacturer, it’s simply another sale. So they obviously want to get as much as they can for the vehicle. To do this, they pitch the lease as “how much monthly”, like the tote the note places to obscure the real transaction. Let’s set some parameters and do the math: You’re looking at a car that has an MSRP of $30,000. They sell every day for $25,000. Right now they are offering 0% interest to credit worthy buyers ( this will make our math easier). At 60 months you have $25,000 divided by 60 or $416 . Easy enough. They also pitch you a lease, how do you compare them, apples to apples?

You need more info, namely, the residual value. This is what they think the vehicle will be worth in 36 months, at the end of a three year lease ( notice the time frames are different to make your real comparison more difficult). You want a higher residual. They know how their product is made and will hold up, if this figure is low, watch out ! They’ll also tell you what the monthly lease payment will be. As an example, let’s assume a $15,000 residual and monthly lease of $512. How did they get that number?

You’ll have to back into this transaction, this is why you MUST understand financial calculations! The deal can be broken down into two pieces: rent (interest) on the money for the residual piece ( $15,000) and amortization and interest to pay off the depreciating part (presently unknown). To make it easy, I used 5% ( the salesman thought you were a real bumpkin and went for the whole hog). During the lease, you are using, and are not going to pay off the $15,000. If they can, they’ll try to charge you interest on that, in our example 5%. Here’s the math: $15,000 at 5%= $750 yearly or $62 monthly. Then, you have to pay for the part you’re using up. Take the lease offer of $512 monthly, subtract the $62 rent on the residual, it leaves $450. At 5% interest for 36 months (lease term during which you are paying off the difference between sale/residual) we get a present value or amount of $15,000. So, if you took the first offer, you would be buying the car for 36 months at $30,000 ( $15,000 plus 15,000) AND giving them 5% interest ! Not too bright.

What might be a more realistic deal? They were offering 0% interest, remember? First off, we’d scratch the rent on the residual (or resale, they are agreeing to buy it back at that price in three years). Next, the sale price should be $25,000 not $30,000, so you only have to repay $10,000, not $15,000 and at zero interest, again. So the math is: $10,000 divided by 36= $278 monthly. That is a HUGE difference, and we only changed two items. Two details they hope you don’t know how to figure! Imagine if you held out for a better resale? Lease payment goes down again.

Now, if you can negotiate that, which deal is better? Your taxes, registration and insurance are all the same. In the buy case, you are obligated for 60 months at $416 at your best scenario. At the end of 5 years, it’s yours, if you can squeeze more miles out, your riding at only operating cost ( gas, oil, tires, repairs, tags, insurance). By leasing, assuming the same financial parameters, you drive it for $278 , give it back at the end of three years and get a new one, before you start having repairs, etc.

Of course, every case will be different. A car you want to hold long term, modify, etc you may need to purchase. It’s slightly more complicated if there is an interest component. At least now you can avoid being taken for a ride!

Feel free to ask questions or make comments below.

admin | February 17, 2010 11:36 PM

3 Comments

By Steph, February 18, 2010 @ 11:49 AM

Be sure to get gap coverage on your insurance when leasing too!
By Brian Fennegan, February 18, 2010 @ 11:51 AM

Doug… Aren’t there times though when a lease is better for a company that doesn’t want to always be reselling their vehicles?
By Doug Cutler, February 18, 2010 @ 11:52 AM

MOST certainly. The idea here is to understand what you are paying for and how to do the math to negotiate the best lease. For a business, I might suggest leasing is probably preferred, IF you cut yourself a good to fair deal.