My Maserati Does 185
I lost my license and now I don’t drive.
– Joe Walsh, Life’s Been Good
After many, many years of outright car ownership, I’m returning to leasing. Why? Well, two reasons really.
Firstly, a car (no matter how nice when new) is a depreciating asset (like many other business assets). That means when you pay cash for it and keep it for five years say, it’s worth a hell of a lot less than when you purchased it.
The second reason is one of cash flow. I no longer think of a car as an asset but an expense. When you acquire a car outright, you generally part with tens of thousands of dollars up-front and get the shock of your life when it’s time to sell at around 30% or less than what you paid for it. That silent expense – called depreciation – has been working to make you poorer whilst you owned the car.
With a lease you can select a residual value that closely resembles what you think the car will be worth at the end of the lease (subject to tax office thresholds). So for a 3-year lease, that’s commonly 50% for a 5-year it may be up to 30%. You then make monthly repayments in increments that you can afford.
Let’s go with an example. Let’s say you wanted to acquire a vehicle for $50,000 and lease it for 5 years. The following is what the lease would look like.
Purchase price of vehicle: $50,000
Term of lease: 5 years or 60 months
Residual: 30% or $15,000 to be paid at the end of the lease.
Estimated interest rate: 4.42%
Monthly repayments including all up-front costs: $730 per month
Now, many of us don’t have $50k lying around but we may be able to stretch to $730 per month. Some customers choose to pay an up-front payment (usually the GST amount) that further reduces the repayments.
At the end of the lease you have a few choices (depending on the type of lease). You can payout the residual and keep driving the car. If you don’t want to part with $15k, some leasing companies allow you to roll the residual into another lease.
Some types of leases allow you to hand the car back at the end of the lease period. You can opt to do this and lease another car.
Some customers may choose to consolidate their debt and payout the lease and add the residual amount to their home loans. We would strongly recommend that you not do that – unless you plan on immediately selling the car. Otherwise, you will have an asset that will last another couple of years and you’re funding it with 30-year debt. The debt will still be around long after the asset is gone.
One common mistake made by many potential customers is that they sign up to a lease at the car dealership without comparing what they could get elsewhere. They will usually spend many hours negotiating the purchase price of the vehicle but take the first finance option that’s placed in front of them.
Others will try and negotiate a better interest rate. As you can see from the example above there are four factors that go to make up a lease repayment. The price of the vehicle, the interest rate, the term of the lease and the residual.
Trying to negotiate a reduction in one or two without focusing on the others is a trap many potential clients fall into.
We would recommend that you speak with a broker prior to going to the car dealership – you will have a rough guide as to what price you will pay. Get the broker to provide a few different scenarios.
Compare what the broker gives you with what the dealership finance team is offering. Sometimes car manufacturers will have lease deals that are too good to compete against (these usually last a few weeks).
Keep your eye on all the facets of the lease, in particular the monthly repayments. Ensure, all other parameters of the leases are comparable. In other words, don’t compare a 3-year lease with a 5-year lease from different quotes. Then there’s residual management…that’s a whole separate article.
Finally, before you sign ensure that you speak to your broker, if for no other reason than to get you a better deal from the dealership. You can sign up at the dealership subject to finance being approved.
So, if you’re car hunting (or any asset really), give us a call we can instantly compare 19 leasing companies. I bet your car dealer can’t do that.