Taking Over Automobile Lease - How now?
July 25, 2010 4:16 PM   Subscribe

How do automobile leases work????

My lover left her body in May and I am thinking of taking over her automobile lease. I just came from E-How site that gave some pretty good information. I like the idea of leasing a vehicle rather than owning one. There are 21 payments left to go, I can build my credit and I am essentially getting a new car that at this time I would not be able to get.

What are the other pro's/con's? Who's had experience?
posted by goalyeehah to Travel & Transportation (12 answers total) 3 users marked this as a favorite
I've leased a car before.

If you're the type of person who always wants to be driving the latest and greatest, a lease isn't such a bad thing. I used to be quite comfortable with the thought that I would ALWAYS be making car payments, just because I LOVE a new car.

But then time sets in... 21 months is just shy of two years, and outlooks can change. I had a three year lease. At month '30' I reallly wanted to get another car. So I took it on the chin and financed the last months of my lease into my new car-payment. Susie Orman would have me for lunch if she knew... but I was totally and utterly financially irresponsible at that point in my life.

Upside of a lease - always (or almost always) driving the latest and greatest.
Downside - you never own your car. If you put miles over the allowed limit, you pay extra.
posted by matty at 4:39 PM on July 25, 2010

If you are taking over an existing lease (and I think you are) some of the upsides are: you maybe able to negotiate a better deal than the existing lease as the leaser does not really want the car back; if you can simply assume the existing lease you should be able to avoid a number of charges you might incur if you were taking out a new lease. If the dealer (lease holder) starts adding a number of miscellaneous charges beware. Most of those costs have already been paid. I think the most important issues have already been pointed out--you are not building any equity and be sure you understand the mileage limitations and additional mileage charges. If you are assuming the lease you might be able to negotiate a more favorable mileage allocation. Remember--they do not want this car and much of their profit has already been earned. Make sure any problems/defects with the car are identified and you are relieved of responsibility before leasing it. Good Luck
posted by rmhsinc at 4:50 PM on July 25, 2010

In the long run, you're going to spend a hell of a lot more money leasing a car than you would buying one. In general, it's a really bad financial decision.
posted by chrisamiller at 5:10 PM on July 25, 2010

You may need to repair (or get charged for repairing) damage to the car at the end of the lease, as they expect you to return it in the condition you got it. Some people pay a little extra to get the "don't charge me" option. You should look into if the lease has that or not, or what the deal is. If you like the car, you can always buy it at the end of the lease. Remember everything is negotiable at every step.
posted by jeffamaphone at 5:22 PM on July 25, 2010

In general, I agree with chrisamiller that it's a poor financial decision.

However, I've had pretty good luck with the two I've had. Mid-college, I owned an older car and had a bunch of random costs come up right in a row (as things broke down or needed repairs). My budget wasn't able to always cover these "out of the blue" $500 repair payments on my student work income. So, I started leasing, since I knew I could budget for a set lease payment each month. Since the car is new (and therefore parts are under warranty), I didn't have any unexpected repair costs, which was really helpful as I went through school.

I'll likely buy my next car, not lease, but leasing has worked pretty well for me for the last 5 years.
posted by JannaK at 7:54 PM on July 25, 2010

Best answer: In the long run, you're going to spend a hell of a lot more money leasing a car than you would buying one. In general, it's a really bad financial decision.

Not necessarily. It's a different financial decision, but corporations lease stuff all the time because it can be a good financial decision in certain circumstances. If this is tl;dr, then just know this: leases are worse than the best case scenario for buying, but they're a hell of a lot better than the worst case scenario for buying.

Leases are essentially an alternative way of apportioning the risk of having the use of a vehicle. When you buy the vehicle, you bear the cost of depreciation, maintenance, etc. yourself. You own the thing. But when you lease, the dealership still owns the car, and you generally only pay for the depreciation that you actually use.

JannaK gets at this in part, but let me go into some more specific numbers. I used the Cars.com loan/lease calculator to get these numbers. It's worth mucking about with it a bit to see what we're looking at.

Say you're talking about a car that costs $20k. If you're going to buy it, you're probably going to need a $4000 down payment, a 6.75% interest rate, and 6% sales tax, you're looking at monthly payments of about $530 a month for three years. That ain't chump change, and you need to be able to come up with the $4000 at the time of purchase. You're also spending around $3000 in interest. In three years, you're going to spend

But let's say you want to lease the same $20k car. With a $1000 down payment, and the same sales tax rate, a three-year lease will be about $320. That's a lot less money you're throwing at the car all at once.

If you buy the car, you have to spend about $23,000 in three years. If you lease it, you only spend about $12,500. The liquidity implications for this are huge.

The big catch with the lease is, of course, that at the end of the contract, you don't have a car, whereas at the end of a loan, you do. But two things about that.

First, once you actually on the car outright, you're probably nearing the end of your warranty, meaning that any future maintenance is on you. As this is the time when most cars start to actually need maintenance, you won't necessarily be saving any money. Also, remember that you need a sizable down payment to buy a car, so you're probably going to be socking all that money away to save for your next vehicle. And if you aren't lucky, you're dropping $500-1500 every year or two to fix something that breaks. Your timing belt alone is going to cost a couple of hundred bucks.

But second, if you lease a car, you're spending a lot less on it than if you buy it, as you aren't investing in the principle of the vehicle, only paying for its depreciation. This lets you spend or save all of the money that would have gone into purchasing the vehicle--over $12,000, remember--on something else.

In essence, a lease is sort of like insurance in that, for a price, you're transferring some of the risks of ownership to the dealer instead of retaining them yourself. This has the disadvantage of costing slightly more in the long run than the best case scenario for buying it--insurance is a "waste" if you have no losses--but has a significant advantage, namely that tou know you'll never need to spend more than a certain amount on your car. This gives you the ability to plan your finances with more specificity. It also minimizes the severity of the worst case scenario, because you're essentially already paying for it.

If you want to make the annual cost of ownership for buying equivalent to the annual cost of ownership for a lease, you generally need to own the car for quite a bit longer than you'd have leased it for, because you're paying for all of the car up front.

I just signed a new lease on Thursday. It's actually the only way I could replace my vehicle, which as a 1999 with 138k miles, was really starting to get expensive (over $1000 in the last year). There's no way I could save up $4-5k while spending money on car maintenance, but I could get into a lease really easily.

Use the calculator above and see what you can come up with.
posted by valkyryn at 6:13 AM on July 26, 2010 [12 favorites]

valkyryn makes interesting points, but only if you really, really want a NEW car. valkyryn is right to point out that when you lease you are just paying for the depreciation. The problem is that new vehicles depreciate the most. If you buy a new car and keep it for several years--six, say--at least then you are only suffering the bad depreciation for three years. If you lease two cars in that same time frame, you are paying high depreciation for all six years.

Depreciation is one of the biggest expenses of driving a new car, whether you own or lease it. valkyryn is right in the sense that leasing may not be a bad decision compared to buying new cars all the time. However, the really bad financial decision is to always need to drive a new car. Once you've decided to always drive a new car, your money-losing fate is sealed and whether you buy or lease is not going to make you much difference.
posted by massysett at 1:12 PM on July 26, 2010 [1 favorite]

Best answer: Once you've decided to always drive a new car, your money-losing fate is sealed and whether you buy or lease is not going to make you much difference.

Again, not necessarily. Most cars need at least a couple of thousand bucks worth of maintenance of the course of their lives. If you own a vehicle, you pay that. If you lease, you don't.

Say you buy a used car, three or four years old, with 30-40k miles on it. You'll probably pay between a half and 2/3 of the MSRP for a similar new vehicle. But you're more than halfway through the warranty and in another couple of years, you're going to drop hundreds if not thousands of dollars getting your timing belt replaced, etc. I did just that in 2004, got a nice little sedan for $6700. Paid cash. Between then and now, I spent about $3000 in non-routine maintenance and needed to put in another $1500 when I traded it. Include that, and we're looking at about $200 a month over the time I owned the car.

Was it cheaper than buying a new car? Totally. But I got it for a song from a private seller; thing would have gone for $9000 at the dealer. At that price point, the TCO would be about $240. You can lease a new car for that.

But the important thing is that I was fortunate: I made it to almost 140k miles only needing one major service and a couple of minor ones, none of which I did at the dealer. If my transmission problems had been serious instead of trivial, or if I'd run into problems with the engine itself, or the drive train, we'd have easily been looking at another $1500-3000. Which at no point during the past five years could I have afforded. So the car could easily have cost me a lot of money, and in the past year, it was really starting to do that.

Cars are expensive. Even as cheap as you can go, i.e. buying $1500 pieces of shit and hoping they last a year or two without incurring any major repair costs, is going to cost you north of $100 a month when you amortize out the cost. Leasing is way more expensive than that. But if driving a decent car is something you're willing to spend money on, then the difference between leasing and buying, even buying used, is more a matter of how much risk you're willing to deal with. Leasing can be more expensive, but it's also the option with the lower degree of uncertainty.
posted by valkyryn at 3:03 PM on July 26, 2010

valkyryn, I think you're overestimating the average costs of repairs and such.

Here's an analysis from Edmunds, where they crunch some reasonable looking numbers and calculate the costs of buying new vs buying used vs leasing. (For the final results, scroll down to "Comparing Ownership Scenarios" near the bottom of the page). Their findings:
5-year cost of a car:
New Car:    $25,388
Used Car:   $16,390
Leased Car: $32,140
So buying new saves you almost 7 grand, (or 110 dollars per month) over leasing. The actual out-of pocket costs are nearly the same, but at the end of 5 years, you own that car and you are then able to sell it (or continue driving it).

Now let's say you keep that car for another 5 years. Your maintenance costs go up, but your insurance costs go down. Let's go high - we'll grossly overestimate and say that you spend $1500 per year on maintenance. Your insurance rates lower significantly, though - let's say they're 500 dollars a year.

So then the second 5 years look something like this (my numbers)
second 5-year cost of a car:
Car you own:        $10,000
Another Leased Car: $32,140
Your car also depreciates significantly, so Let's say it loses almost all its value and falls to a value of only 1000 dollars. That still leaves you saving something like 23,000 dollars over the course of 10 years, or nearly 200 dollars per month.

So, really, the only reason to lease is if you absolutely have to drive new cars and have lots of money to burn.
posted by chrisamiller at 6:16 PM on July 26, 2010 [1 favorite]

Best answer: chrisamiller, even if you're right about my estimates for repairs, the Edmunds numbers are screwy. They're making the highly questionable move of giving the buyer a $7,000 credit for the value of the car he owns while not giving the leaser any credit for the money he's been able to save by having lower monthly payments all those years.

The difference in payments is significant. The buyer paid $608 a month for three years, but the leaser paid $350. Over five years, that's a $9,200 difference. If the leaser had simply socked that away instead of giving it to the dealership, at the end of the lease he'd have no car, but he would have a cool nine grand. Not giving credit for that in the calculations seems inappropriate to me.

"But wait!" you say, "The buyer can start saving the whole $600 a month once he pays off the car after three years while the leaser still has to pay!" True, but he'll only be gaining by about $250 a month, meaning it will take another three years to close that gap.

This is important, because those numbers don't seem to consider the fact that you're going to have to get another car someday. If you're buying, this means that even once you've paid off your vehicle, you still need to save at least couple of hundred dollars a month to have a prayer of being able to afford a $3,000 down payment when it comes time. So even once your payments go away, you still can't change your spending habits, because saving that for the new down payment--and maintenance, even if it's smaller than I estimated--is next on the list.

I say again: the difference between buying and leasing is a lot smaller than people think, and while the latter may cost slightly more in the long run, it is arguably balanced out by reduced uncertainty.
posted by valkyryn at 1:24 PM on July 28, 2010

The only valid argument you make is that leasing requires less up-front investment. That is, you don't have to lay out a down-payment, and your monthly payments will be lower for the period when you're paying off the car loan. I don't contest either of these points.

With a longer-term, smaller payment loan, you'd lose a little bit more money, but it's still way less than the $7k (5 year) or $20k (10 year) savings you get from buying.

You're trying to resort to some seriously fuzzy math to justify your 'leasing is cheaper' position though.

They're making the highly questionable move of giving the buyer a $7,000 credit for the value of the car he owns

That's not questionable, it's how buying something works. The buyer paid his money and got two things in return: the use of the vehicle, and ownership of the vehicle (which can then be resold, if desired) The leaser got only one thing in return: the use of the vehicle, and when the lease is up, the car is gone.

The difference in payments is significant. The buyer paid $608 a month for three years, but the leaser paid $350. Over five years, that's a $9,200 difference.

$608/mo for 3 years = $21,888
$350/mo for 3 years = $12,600

now, there are the next two years to consider:

$0/mo for 2 years = $0
350/mo for 2 years = $8,400

So that 9k you saved? Oops - it went right back into your lease. Now add them together:

out of pocket buy: $21,888
out of pocket lease: $21,000

Yes, you're paying that 21k more quickly with a loan than a lease, but after 3 years, you get two benefits: a) you have zero payments, while the payments on your lease will continue indefinitely. b) you own the car, and can resell it for whatever it's worth.

those numbers don't seem to consider the fact that you're going to have to get another car someday. If you're buying, this means that even once you've paid off your vehicle, you still need to save at least couple of hundred dollars a month to have a prayer of being able to afford a $3,000 down payment when it comes time.

If after 5 years, I want a new car, I can sell my old one for $7,000 dollars and use that money for a down payment. If I keep the car for ten years, as outlined above, I save somewhere in the neighborhood of 23k over leasing. So I can put away my 3 thousand out of that and still be up a cool 20 grand.
posted by chrisamiller at 2:25 PM on July 28, 2010

TL;DR version of this conversation:

The only ways to justify a lease financially are:

1) you absolutely can't afford a down payment and high monthly payments. (This raises the bigger question: why aren't you buying used or getting a longer-term loan?).

2) if you expect your car to utterly and completely fall apart on you before the break-even point, which is somewhere around 4 years. (This raises the bigger question: why are you buying this car?)

Then you're left with the vanity/comfort reason, which is that you always want to drive a new car. That's okay, if you can afford it, but you can't claim it makes sense financially.
posted by chrisamiller at 2:57 PM on July 28, 2010

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