Topic: First brand new car - Financing or leasing

[Niklasky]

Hello all,

I live in Oakville, Ontario since August 2011 when we immigrated to Canada with my wife and 2 kids. I was wondering if you could help me with my next car purchase.

Our 2 cars are quickly approaching 100kkm (2010 Ford Escape V6 AWD and 2008 Suzuki SX4). My wife uses the Escape as her daily and we're starting to see maintenance costs go up so I was thinking about trading it in for something else, maybe more fuel efficient.

I drive the Suzuki as I have a long commute in the GTA and I save on gas that way versus the Escape. My wife also has to drive the kids around and since she isn't very comfortable with winter driving I prefer to see her in the 4X4.

Anyway, I'm 37 and I've never bought a new car, always used ones. This time, I was thinking about treating my wife to a new car for the first time. Now the car would also serve as the family car on week-ends and road trips, so it has to offer plenty of room, safety and some nice features. I considered something like the Pathfinder for a while, but it seems a little big and I know my wife would enjoy driving a compact SUV like the new Nissan Rogue, the Kia Sportage or the Mazda CX5. All 3 are very nice and close in terms of offering, however the Kia seems more expensive.

So I was playing around with the "build and Price" simulations online and here is what I found :

- The 2014 Nissan Rogue SL AWD with Premium package is $35,063 including destination and handling. With Ontario HST, the total price is $39,774. There are two financing options, financing or leasing.
With financing over 60 months, the monthly payments are $696 including destination, handling and HST.
With leasing over 60 months, the monthly payments are $477 including destination, handling and HST.
This is a "0 down" scenario,  however I will be trading in the 2010 Escape.
So there is roughly a $220 difference in monthly payments in favor of the leasing option. So essentially, if I finance the car, after 60 months I will have spent $13,200 more but I will own the car. With the leasing option, I will return the car and own nothing but I will be $13,200 richer.

So which is better ? Owning a 5 year old CUV, which may or may not be worth $13,200 as a trade-in or in a private sale, or having $13,200 more in my pocket to invest in a new ride after the lease expires ?

Note that I've never kept a car longer than 3 years, I get bored with the cars rather quickly and I hate having to do expensive maintenance like changing tires, brakes, etc. so I usually sell or trade my cars before they start costing me money on maintenance.

I did the same simulation with the Mazda CX5 and the 60 months finance and lease numbers are $699 and $523 including shipping and HST, so that amounts to $176 per month and $10,560 after 5 years.

The Mazda is more expensive to begin with so I am leaning towards the Nissan. I also have a friend who works at Nissan and will be benefiting from their VPP program which basically means I'm getting the car at dealer invoice price (about $2k off MSRP).

Thanks for your help in this important purchase coming up for us.

N.

[wing]

Well... maintaining a vehicle is always cheaper than buying a new one but hey you get bored so ignore that.

I hate those buyout options, IMO you either lease and return or buy and keep.  Anything else is delusional unless you have money to burn.  If interest rates were identical between lease and finance the total cost of ownership over 4 years would be VERY close.

So watch the interest rate that is the killer in all the calculations.

[Niklasky]

The Kia has the following numbers (including shipping, handling and HST) also with 0 down :

- Financing 60 months : $735.90 monthly ($671.90 throwback pricing for 15 months)
- Leasing 60 months : $590.68 monthly

At the end of the 60 months, the difference is $7,753.20. Not very interesting considering the market price for a 5 year Kia Sportage EX Luxury is likely to be higher than that.

Based on these calculations, the Nissan Rogue would seem like a pretty good leasing deal.

Am I completely wrong here or is this making sense ?

[Niklasky]

Well... maintaining a vehicle is always cheaper than buying a new one but hey you get bored so ignore that.

I hate those buyout options, IMO you either lease and return or buy and keep.  Anything else is delusional unless you have money to burn.  If interest rates were identical between lease and finance the total cost of ownership over 4 years would be VERY close.

So watch the interest rate that is the killer in all the calculations.

Thanks for your reply.

In my calculations, I am not even looking at the residuals/buy-out options or the interest rates, I am only looking at how much I've spent in each scenario after the 60 months and what I'm left with (a 5 year old car in one case, $13.2k in the other).

The question is then, If I financed the car and owned it after 5 years and wanted to sell it or trade it, would I recover the money that I am saving in the leasing scenario ?

I know it's an odd way of looking at the financing and leasing, but it's the one that helps me understand better.

Thanks,

[ArticSteve]

The question is then, If I financed the car and owned it after 5 years and wanted to sell it or trade it, would I recover the money that I am saving in the leasing scenario ?


Too many unknown variables.

Lease the Rogue

Get the Nissan dealer to cut you a cheque for the Escape (warning: the amount will be disappointing) and then apply the trade in sales tax credit to the lease payments.

[Niklasky]

In the case of the Kia for example, after 60 months the difference is only $7.7k so I would be more inclined to finance and own then sell, rather than lease. But the Rogue lease numbers are tempting. The interest rates are close (1.9 for finance over 60 months and 2.9 for lease over same period).

Concerning the Escape, do you think the trade-in amount will be different whether I lease or finance ?

[blotter]

I have owned (all used) and leased.

this comment:

Note that I've never kept a car longer than 3 years, I get bored with the cars rather quickly and I hate having to do expensive maintenance like changing tires, brakes, etc. so I usually sell or trade my cars before they start costing me money on maintenance.

this is why I'd say lease.   

at the end of the day leasing is simply renting a car.  If you always plan to change, leasing gives you that option and keeps you always under warranty.   

However, if you want to buy and hold - making the purchase is the way to go.
Leasing always ends up more expensive.  But you're also always living with a payment.

My wife has always leased due to wanting to change cars but this year she bought because she wants to have some life without a payment one day.   

You mentioned this will be mainly for your wife.   Perhaps she won't get bored?
If you finance over 60 months, at least at the end of 5 years you're payment free and have a sizable trade in to change.  (if you wanted to).   

[Niklasky]

Well, that's the beauty of these lease numbers for the Rogue.

At the end of the 60 months, leasing will have saved me $13.2k over the financing, and the residual value is $13,374. So if I want, I can buy out the lease with that money, it will only cost me $174 more than if I had financed it from the beginning.

I can always change my mind is what I mean.

I'd rather live with a payment now that I can afford it, and be able to drive recent cars, than own a pile of metal that is costing me more money each year just to run. And by the way, even if I finance the car, at the end of the payments, i'll probably end up trading it in for a newer one and then more payments... So one way or the other, I am making payments continually.

And yes, my wife may not get bored, but I will... 

[dash]

I was in the same position many years ago, total lease and finance cost were almost equal. I decided to lease with the intent to buy out (Honda Accord), at time of buyout there was a major decline in used car values (many cars from US were flooding the market), so I returned the lease at end since market value was lower then buy out.  As stated above leasing is generally more expensive, but at least you have more options (including the excuse to change cars!).

[Niklasky]

I was in the same position many years ago, total lease and finance cost were almost equal. I decided to lease with the intent to buy out (Honda Accord), at time of buyout there was a major decline in used car values (many cars from US were flooding the market), so I returned the lease at end since market value was lower then buy out.  As stated above leasing is generally more expensive, but at least you have more options (including the excuse to change cars!).

Quite true. And when there is a decline in used car values, it not only means the market value is below the buy-out value, but also if you financed and own the vehicle, it is worth less and will trade for less than you had anticipated.

Now there are two many variables to be able to know what's gonna happen in 4-5 years, but in some cases leasing does make sense (even if you can afford to finance or buy cash).

[ArticSteve]

Concerning the Escape, do you think the trade-in amount will be different whether I lease or finance ?

NO.  However, the trade amount paid will differ significantly between dealers.  Some will want it and some will not.  Those that do not will offer considerably less.  Easily 2K.

[Niklasky]

Ok, good to know. I'll have to get quotes from several dealers before signing.

I'm wondering though, since I will be going through the VPP program of Nissan and getting the dealer invoice price, they might try to make up some of their profit on the trade in by offering me a low price.

[superukr]

I say - if you want new car but not sure if you should leas it or buy it than lease it first and if you really like it buy it out later, this applies only to cases when lease rate is lower than financing.

[blotter]

At the end of the 60 months, leasing will have saved me $13.2k over the financing, and the residual value is $13,374. So if I want, I can buy out the lease with that money, it will only cost me $174 more than if I had financed it from the beginning.

i think you're missing something.   
I've looked at your numbers again for the Nissan:

With financing over 60 months, the monthly payments are $696 including destination, handling and HST.
With leasing over 60 months, the monthly payments are $477 including destination, handling and HST.
and the residual value is $13,374

assuming the above numbers are final.....
total cost of financing equals $41,760
total cost of lease equals $28,620

if you lease AND buy out it's $28,260 + ($13,374 x HST $1738.62) = $43,372.62

the cost overall to lease (because of a lower payment) and buy at the end will always cost more.
In this case assuming you'll have the cash, it's only $1612.62 but if you have to finance the buyout, costs will be much more.

I've done the same once.  Lease because I didn't want the big payments.  The plan was to buy it out at the end, even though I knew it would cost me far more in the end.  I didn't buy it out, I didn't follow the plan and I actually regret it.
My next car will be a purchase simply because I'm tired of ongoing car payments.

[Niklasky]

All good points, thank you all for your inputs.

As for the interest rates, let's be realistic, lease rates are rarely below financing rates. And if they are, the caveat is that generally the residual value will be less. You can't have it both ways and YES, leasing is always going to cost you a little more, depending on how you manage it.

In most cases, lease rates are 1 point higher than financing rates. In the case of the Nissan Rogue I'm looking at the current finance rate is 1.9% over 60 months and the lease rate is 2.99% over the same period.

And Blotter yes, I did forget to factor in the HST on the buy-out, so that $1612.62 difference at the end of the lease buyout versus financing is basically the cost of that 1 point difference in the interest rate.

But the question is : do I want to own the car after those 60 months ? Does it make financial sense ? I mean I can buy another car with the money saved with the lease, or use that money as a down payment towards another vehicle finance.

Yes, I see your point about wanting to get out of those perpetual monthly payments, and owning the car is the way to do that, but realistically for people like us who like cars, will that really put an end to monthly car payments ? Whether I own the car or not after 60 months is not going to get me out of monthly payments because I'll want a newer car then and will get into more car payments eventually.

One thing I like about financing is that you can pay it off at any time (or make early repayments against the principal), should you have cash available. This is what I did with my current Escape. I financed it and when I had some spare money available, I paid off the loan and saved on interests. You then of course have to make sure that your finance agreement allows for early repayment.

And to answer your question about whether I would have the cash to buyout at the end of the lease, the answer is yes. Basically I can afford to finance the vehicle, but before I make any decision I wanted to see if leasing would make financial sense in my situation. Therefore, the money I would save on lease monthly payments vs. financing would be used at the end to buy out the vehicle, should I want to do that. I would never finance a buyout, this goes against the whole spirit of leasing. If you can afford to make further payments to finance the buyout, why not just lease another car ? Right ?

Two more questions for you Blotter :

- When you say "assuming the above numbers are final.....", are you suggesting that there are hidden costs, on top of destination, handling and HST ?
- So you will purchase your next vehicle, but will you finance it or buy it cash ? And how long before you'll want a new vehicle after that one, which will draw you into more car payments ?

[Niklasky]

The other thing I could do, to limit the impact of the exchange rate on the lease, is bring a down payment, on top of the Escape trade-in.

Does it make sense to bring a large downpayment on a lease ?

[blotter]

Niklasky:

the caveat is that generally the residual value will be less

when leasing the residual value is set in the contract.  Whether or not that's true value at the end won't matter.

do I want to own the car after those 60 months ? Does it make financial sense ? I mean I can buy another car with the money saved with the lease, or use that money as a down payment towards another vehicle finance.

It's not an easy question to answer (if you want to own the car in 60 months) and only you can make that choice.
It all depends on where you seen yourself financially in 5 years and what your priorities are.
In terms of having the lower lease payment and using the "balance" to save up.  If you're disciplined (and it sounds like you are) that'll work out, but most people always say they'll put the balance aside, save or whatever and it doesn't happen.

Yes, I see your point about wanting to get out of those perpetual monthly payments, and owning the car is the way to do that, but realistically for people like us who like cars, will that really put an end to monthly car payments ? Whether I own the car or not after 60 months is not going to get me out of monthly payments because I'll want a newer car then and will get into more car payments eventually.

we all love cars but not all of us want a car payment all the time right?

One thing I like about financing is that you can pay it off at any time (or make early repayments against the principal), should you have cash available.

  I'm not sure about every lease contract, but my last two leases from Toyota allowed me to buy it out anytime.

- When you say "assuming the above numbers are final.....", are you suggesting that there are hidden costs, on top of destination, handling and HST ?
- So you will purchase your next vehicle, but will you finance it or buy it cash ? And how long before you'll want a new vehicle after that one, which will draw you into more car payments ?

if your numbers are from building the Nissan on the website, it will be potentially different at the dealership.
some sites don't factor dealer admin fees (Toyota's site excludes this because fees vary)

I'll be financing my next vehicle.  I don't have $40K cash to buy it.   
I've made a decision that this next vehicle is going to be a keeper.  I'd like to finance it over 4 years and spend hopefully 5 without a bloody car payment!!!    After owning two used vehicles and going to a lease (which I had planned to buy out) and leasing again, I'm tired of "renting" a car.    Sure there's going to be a desire at some point for a new car, but my priorities and budget is going to be spent elsewhere for a while, instead of always changing.

[Niklasky]

One thing I like about financing is that you can pay it off at any time (or make early repayments against the principal), should you have cash available.

  I'm not sure about every lease contract, but my last two leases from Toyota allowed me to buy it out anytime.

When you say it allows you to buyout the lease at any time, do you mean get out of it and return the vehicle before the term, or pay off the remainder of the payments in one shot to save on interests and still keep the car until the end of the lease ?

[dash]

You normally can get out of a lease early, but you pay ( x months left by monthly payment). Rarely leasing company will knock off interest cost for early payment. Leasebusters exist as a solution to mitigate cost of early termination.

[Niklasky]

I've seen that some dealers offer you to pay the entire lease amount in one shot, and have no monthly payments. I don't know if that saves you the interest. It should.