I was thinking about car leases today, and although typically I have had a bad view of them - I have been rethinking it.

I like the new BMW 3-series. If I want to get a 330i new pretty loaded, it would run me around 42-45k.

Assuming I were to finance it for 5 years, during the first 2 years I would pay around $14k. After 2 years, it would likely depreciate around $10-15k. Basically I would be paying off the depreciation.

Or I could lease it for 2 years, pay around $10-12k, and then get rid of it.


Plusses? Minuses? The longest I would keep the car is about 5 years before I sold it.

 

The shorter you keep a car, the better a lease is for you. Your lease payment depends on:

1. Length of the lease.
2. The amount of miles you drive.
3. The resale value of the car.

 

Agreed. Also, the interest rate. Typically, the interest on a lease is fairly low...ask them for the break down. They'll probably give you a 'money factor' figure...just tell them to convert that to APR.

Sweet spot for leases is between 24-42 months...typically 39 is the magic number. However, new models(like the new BMW) often have shorter lease specials because manufacturers want those cars back ASAP...while they're still 'hot' items.

Whatever you do...do not lease longer than 42 months. Once you pass 36 months, the benefit of a lease diminishes...in essence, you're buying too much of the car.

 

If I lease, I would keep the car for 36 months/3 years.

If I were to buy, I would keep the car for 5-7 years. Less if it gave me serious problems and less if I just wanted something new (I am in my early 20s, very likely).

New 2006 BMW 330i.

Which is probably the best option for me?

 

Well, if you like a new vehicle every 3 or so years...lease. If you were older & settled, I'd say buy...but, in your early 20's...there's just too many different styles to try before you really decide what's the best vehicle for you, long term.

 

I'm willing to bet by the time you're 24, you're going to want to buy a new car. I'd lease it as long as you don't drive a lot of miles.

 

Well, generally on a lease, all you're paying is the depreciation plus some interest....

 

I say, lease the best damn thing you can afford and enjoy life.

Once you decide you are getting married it's time to buy a car. You should definitely be in buy mode once kids are coming. Once you have kids you will see your car hit 100k and hope you get another 100k out of it.

This all assumes you don't have money falling out of your ass. If you do, then F what I just said.

 

One thing to keep in mind: Your insurance will be slightly higher on a leased car because you're required to carry higher liability limits.

 

The major difference between carrying a 25/50/25, a 50/100/25 and a 100/300/50 (What lease banks require) isn't that much a difference. IMO, I'd rather have a higher limit anyways....

 

For me, it was about a 10% difference between what I had when I had a car on loan and a car on lease.

 

I'd say it was about that or maybe 15% for me...but once I got used to the higher amount, that's all I ever carry now. Better safe than sorry, etc.

 

In theory:

Lease a depreciating asset

Buy an appreciating asset

Lets add a condition for cars:

Lease a high residual car
Buy a low residual car (and keep it longer than 5 years).

A 330i should have a residual of around 58% after 3 years, which is very good. But be aware that they are gonna bank with them selling at MSRP as they are new.

The amount financed on a lease ~= (MSRP - Residual) * interest.

Also, the residual = residual % x MSRP.

If the sale price is below MSRP, the residual should not change.

Ideal scenario: Lease a high residual vehicle being sold @ invoice.