Throwing Out the Old rules of Money #5

Tax and Money Tip of the Week:
Throwing Out The Old Rules of Money
June 29, 2011 | No. 49

Leasing vs. Buying a Car……
When Leasing is Better than Buying a Car

Leasing can make sense for certain people in certain situations.

Leasing isn’t for everyone, so here are some cases in my CPA practice where it makes sense:

  1. If you drive less than 15,000 miles per year, and if you buy a car every few years.
  2. If you have a steady income stream, and/or
  3. If you are self-employed and use the car for business.

When negotiating the vehicle, watch out and make sure you don’t let the sales person talk you into these mistakes:

Mistake #1: Not haggling over the cost of the car
The capitalized cost of the car is one of the critical starting points; negotiate the cost of the car before saying whether you want to buy or lease.

Mistake #2: Not paying attention to the residual value used in the lease calculations
The residual value (or buyout value) is the estimated fair market value at which the lessee may buy the vehicle at the end of the lease.  It pays to choose a car that retains its value since depreciation is the largest component of the cost of owning a vehicle.  So watch that residual value when negotiating car leases.

Mistake #3: Just give me the lowest monthly payment for a lease
Frequently car dealerships get lessees to think only about the monthly payment so that there are bad terms in other parts of the lease like overage charges for driving over the contracted number of miles per year.

Mistake #4: Not noticing the interest rate used in the lease calculations
This interest rate is called the implicit interest rate of the lease and is important to get the best rate, just like if you are going to buy the car.

Mistake #5: Not negotiating the lease acquisition fee
The lease acquisition fee for a lease can run from several hundred to more than a $1,000 depending upon the automaker. Frequently, a lessee is told that there is no way to avoid this fee. This is sometimes true, but the dealer may say it could be reduced.

In these times of low interest rate financing, it pays to see if a properly structured lease with a low implicit interest rate is the best way to go.

Let us know if we can help.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
mark@markvitekcpa.com

…until next week.

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