By on March 17, 2010

Andy writes:

Sajeev, I enjoy your posts on TTAC and I wanted to ask a quick lease negotiation question. Currently BMW has very good lease rates on their 5 series models. Is there a smart way to renegotiate the 10k mile/year limit? That just seems like a lot of money for 10k miles per year.

Sajeev answers:

Unless you are a very profitable business, enjoy tax loopholes for gigantic SUVs and just gotta have a new ride every 2-3 years, leasing isn’t great for anyone. But conservative fiscal policy aside, I’ve yet to see a negotiable mileage rates in a lease. That’s not to say you shouldn’t ask, but the (corporate level) finance guys usually lock that in.

I’d attack from a different angle: complain about the mileage limit and insist on leasing for Invoice price minus ALL factory incentives, including the ones given to dealers in their holdback. Don’t worry about being a tightwad, dealerships make good money on leasing. Not to mention they probably won’t give you all of that holdback anyway, but you still gotta play hardball.

Not only do the words “invoice” and “holdback” get a salesperson to take notice, they’ll take action if lowering the car’s transaction price sells the lease. Because lowering that price is far, far easier to finagle on the dealership’s part.

Hopefully you can make the numbers work from a different angle.

(Send your queries to mehta@ttac.com)

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33 Comments on “Piston Slap: Playing Stratego at the Roundel...”


  • avatar
    segfault

    Make sure they do the lease at BMW Financial Service’s “buy rate” and don’t mark up the money factor. BMW allows dealers to mark up the money factor to make extra money on leases.

    It can be difficult to get a good deal on a premium product.

  • avatar

    As much as I’m enjoying my current lease vehicle, I will never lease again.

    As an individual I get no tax write-offs and all of my lease money just goes towards something I will never own. In my case the minimum amount of milage per year was 10,500, and they said they could not lower that amount. I am way under milage at this point and knew I probably would be. Additionally any damage to the car, such as the sizable dent in the fender, has to be repaired before the car is returned or your get (no pun intended) dinged for it. If I owned or financed the car I could choose to not fix it.

    I’m just glad I’m able to get off the lease merry-go-round after just one ride, and chalk this one up to impulse buying (yes I impulse leased a car).

    • 0 avatar
      Disaster

      We finally got off the lease bandwagon last year. It was nice drivng new vehicles while it lasted but I wish I had the $10K to $20K it cost me over the years back now. Leasing can make sense if you are the kind of person who like a new vehicle every two or three years, but make no mistake, it is much cheaper to buy and hold onto a car for 6-10 years. In fact, the longer you can hold onto it, the more money you save (until things really start to break down.)

      Having said that, BMW is a good example of where that falls apart. The 3 series is the only BMW reliable enough to hold onto…likewise for the Mercedes C-series. Moving up the ladder with German cars can get expensive FAST.

  • avatar
    NulloModo

    Sajeev –

    Leasing is also great for those who want to drive more car than they could afford to traditionally purchase. It might not be good financial sense, but going through life basing all decisions of fiscal prurience is no way to live life either.

    As far as miles on a lease go, I can’t speak for BMW specifically, but I know all Ford/Lincoln/Mercury leases have variable miles. When you lease you are paying for the depreciation of the vehicle over the time you use it, or to put it another way, only paying for the chunk of the car that you use. If you drive more miles, you are using more car, it is going to be worth less at the end of the lease term, so you have to pay more.

    On FoMoCo leases roughly every 1,500 miles per year above 10,500 drops the residual 1%, and translates into around $5 – $20 extra per month depending on the vehicle being purchased.

    As far as renegotiating, you can certainly negotiate lease payments, but generally when you see an advertised lease on TV, everything has already been taken out of it. The TV ads, while not exactly loss leaders, are stripped out deals designed to get you in the door.

    • 0 avatar
      golden2husky

      Leasing is also great for those who want to drive more car than they could afford to traditionally purchase. It might not be good financial sense, but going through life basing all decisions of fiscal prurience is no way to live life either…

      One need not base all of life’s decisions of what is the most fiscally responsible, but if you choose leasing to drive more than you can afford, that catches up with you fast. In fact, I would be hard pressed to think of something more foolish. If you own a company and can take tax advantage of leasing, well, that’s one thing. But the thought of ending up at work when 68 years old because you needed an otherwise unobtainable new car every three years just doesn’t make any sense. But hey, to each his own.

  • avatar
    Da Coyote

    They’ve gotta keep the miles low so that when the car is resold after 3 years, the new customer will get at least 6 months of service before the $1,000/month maintenance starts. (Yup, I’ve owned German cars….once, and never again.)

  • avatar
    Robert Schwartz

    “leasing isn’t great for anyone. ”

    Depends.

    For instance in 1998 my wife wanted a T&C. I had reservation because the previous two Chrysler (may they rest in peace) vans we had owned, had been put out to pasture before 70,000 mi.

    So, I leased for 4 years @ 12,000 mi/yr. The mileage limits turned out to be a non issue because the kids started turning 16 that year, and my wife’s mileage dropped precipitously.

    When the lease ended, the van, because of the miserable reputation for transmission problems, was worth $3,000 less than the $13,000 buy out. The bank offered to let me buy the van for $10,000 if I would finance the buy out with them. Deal. And I felt pretty good about it.

    We eventually paid off the van, and in 2007 sold it to our bookkeeper for $3,000 after she totaled her van, and bought my wife a CUV.

    • 0 avatar
      Brendon from Canada

      Hi Robert – are you sure about your math? Typically the total out of pocket for leasing, then buying out the lease are significantly more then just purchasing – ie, total lease costs + total residual > total purchase price. The degree to which it is more expensive is usually quite a difference (at least in Canada)…. Knocking $3k off the residual should still take more out of pocket then simply financing the entire purchase.

    • 0 avatar
      Robert Schwartz

      I paid extra interest by stretching the payments over 7 years instead of the 5 I usually do, but And this is from memory. The NPVs worked out. Further, as I said, I was really doing it because my wife wanted a car that I feared would be mechanically problematic after the lease term. I wanted the put option in the lease, I could return the car for no payment. The cheap buy out and the fact that we kept the car for 5 years after the lease term without major mechanical problems were gravy.

  • avatar
    Tuce

    BMW offers leases with 10K, 12K, or 15K miles/year, with corresponding decreases in the residual by 1%-2% for each step up in mileage. If you plan to drive more than 15K/year, you shouldn’t be leasing.

  • avatar
    jmo

    leasing isn’t great for anyone.

    How do you figure? When an automaker (Nissan, GM, etc) writes off billions is lease losses those billions represent money saved by people who leased rather than bought.

  • avatar
    Contrarian

    Andy,

    Your wording is confusing me. (“very good lease rates on their 5 series models. Is there a smart way to renegotiate the 10k mile/year limit? That just seems like a lot of money for 10k miles per year”)

    Is it a “good lease rate” or is it “a lot of money” for what it provides. I’m guessing it’s a “good lease rate” only if they give you more than they are selling.

  • avatar
    Tiger Commanche

    Leasing isn’t great for anyone? I bet that everyone with an SUV lease that ended when gas was over $4 a gallon was sure happy they were not trying to sell in that environment. Also, any lessee with a recalled Toyota is probably going to be happier turning in the keys to the dealer rather than worrying about depreciated trade-in value.

  • avatar
    Litt

    In Canada BMW offers 20,000 km leases, or 24,000 km leases. That is 12k miles/year, or 15k miles/year.

    Of course you have to pay more for the higher mileage leases, but it is cheaper then the lease penalties if you go over the allotted miles.

    Anyone in business who uses their vehicle for business purposes has a great tax incentive to lease their car.

  • avatar
    blowfish

    only 4 yrs or so ago, some of these big SUVs were leased in Canada and sold to USof A after.
    Knew a person who leased their big Ford SUV, but being out of town they drove lots, so they’re prepared to pay for the mileage penalty.

    High mileage leased car is a big non no to them. But these folks are looking at the predicted value 4 yrs ago or previous track record. Quite often they do lose a shirt, as of the last big melt down, u think anybody will have $$ to buy any Ex Lease vehicle?

    Lease is a corp game to move Iron, quite often a way of factory to keep the assembly line moving. Oh well we as consumer we need to really sharpen our pencils.
    As compare to buying a car while financing u get 30% or more for the car value, but a catch u get dinged when u return the car. They look at the car even more harder than the Forensic team on TV.
    Mag wheels too, any scruffed u buy a new one, and dont let them buy on your behalf, as they buy new from the parts desk! Ouch. U could shop around for some good used ones for 1/4 of the price.

  • avatar
    Odomeater

    There is no way to “negotiate” 10,000 miles per year as the residual value is impacted upfront by this restriction. You can, however, ask what a 12,000 mile per year lease might cost or even a standard mileage (15,000 per year) might run. The dealer can lower the selling price to the lender (in this case BMW Financial) which will in turn lower your monthly payment. As far as demanding that BMW charge only the “buy” rate, good luck with that. It is not disclosed anywhere on your lease agreement.

  • avatar
    geozinger

    We leased cars for about 9 years, up until last year. As much as I didn’t like to do it, I did for many of the same reasons I’ve seen posted on this board. One, you can get a lot more car for the money, two, if the car is poopy, you just send it back at the end of lease, three, the leased car was my wife’s to drive. She had our kids in there all of the time and I didn’t want to risk reliability issues.

    In our case, we got GM cars that were loaded models, a couple of the leases were zero down and drive, although later I learned to negotiate more on the leases. Either way, it was still a lot of car for the money, and with virtually no repair bills, we were able to put a little away. Until wages in my trade totally tanked. Ugh. Unfortunately, the subsidized leases inflated the residual price on one of the cars I would have liked to keep, so we let it go.

    Now that the kids are old enough to drive their own cars, we have purchased a car, and are slogging through even more car payments. But, once this is done (we’re paying down the car faster), back to used cars for cash.

    • 0 avatar
      Disaster

      When all is said and done, typical leases range from $400 to $800 a month. People are often fulled by $269/month leases with $4000 due at signing….adding another $170 bucks a month on a 2 year lease. That seems pretty good compared to car payments starting $100 to $200 more per month, but the longer you keep the vehicle the more you see real savings.

      I’ve calculated our monthly vehicle cost for our latest plus $30,000 car at about $300, for 6 years. There is nothing close to that in a lease. If we stretch it to 10 years the cost drops closer to $250…and that includes money set aside for service.

    • 0 avatar
      NulloModo

      Disaster –

      I’m a bit perplexed at how you come to that figure. Payments alone for a 72 month car loan on a 72 month lease, even at 0%, are $416 a month. Assuming you are somehow including resale value of the car, a 2004 Toyota Camry XLE (Camrys have some of the best resale value around, and I am being generous) loaded up with pretty much every option you could have gotten in 2004, and with a very conservative 10,000 miles a year, has an incredibly optimistic excellent condition trade in value of $9700, so, taking that into your original equation you end up with roughly $281 a month, again at 0% for 72 months, not including any taxes, registration fees, etc.

      Keeping a car for six years you are going to need to replace the tires at least once, the brakes once or twice, and likely have a major service in the neighborhood of a couple hundred dollars in addition to the routine oil changes, etc. So, even under the most generous of conditions, the cost per month is going to be higher than $300 a month for a 30K car.

      One of the nice things about leases in general is that you don’t ever have to pay for any big maintenance. Tires shouldn’t go bad during the lease term, nor are brakes likely to, and any major service stuff you can just put off because the car won’t fail inside the alotted miles. All you have to do is put in gas, and, occasionally do an oil change, and you are good to go.

  • avatar
    twotone

    First, shop for the car.

    Second, shop for the lease.

    They are two independent transactions. Lots of third-party leasing companies.

    Twotone

  • avatar

    Sajeev is wrong on both accounts.

    First, you can modify the distance – most BMWs have the option of 10,12, and 15,000 mile leases. However, run the math and figure out how much do you actually drive per year – it may be cheaper to take the lower rate and just pay the overage penalty (usually ten cents/mile over, or $100 one time penalty/1000 miles).

    Secondly, leasing makes a s**t tonne of sense – why? Because if you are leasing it as a business use, you can write off nearly the entire amount of the payment as a tax deduction. Want to f**k the government back even more? Roll your sales tax into your monthly payment – then you get to write off the sales tax from your income tax. AWESOME!

    Think of it this way – your payment may be, for example, $600/month, but if you’re in the 33% bracket (which I hope you are if you’re looking at a 5-series, otherwise you may be stretching it . . . ), you’re paying it all pre-tax, so its only costing you $400/month from your paycheck at the end of the day.

    • 0 avatar
      jkross22

      How do you get a dealer to go along with rolling sales tax into the lease payment? I can’t believe it’s as simple as asking!! Besides, aren’t dealers then reflecting higher revenue and ultimately higher taxes for themselves to go along with this idea??

    • 0 avatar

      Ya know, I did mention the “business” benefits of leasing. Give me a little credit. :)

      I think the question was asking if the mileage/price ratio is flexible, not just one (or three) alternatives. But you have a good point and thanks for filling in that hole.

  • avatar
    FreedMike

    1) You can definitely sign up for a higher-mileage lease. It’ll just cost you either more up front or more per month.

    2) NEVER put ANYTHING down on a lease except for your first payment, security deposit, or taxes. NEVER. That’s literally tossing money away. In the case of this lease, the cash down payment ($3700) would simply end up capitalized and subjected to the money factor. Figure an extra $120 a month or so for a no-money-down lease. Keep your cash free.

    3) Cost-wise, if you compare a 3-year lease versus a 5-year buy on this car (figure you’re using BMW’s 4.9% purchase money), the payment will be massively higher on the buy – about $1,000 a month. But over time, the costs will actually be about the same, assuming an equal down payment.

    • 0 avatar

      Kudos on point two. I’ve explained that to several friends and it usually flies over their heads. One person put $2500 down to buy a Camry XLE. Ugh, hearing that killed me.

    • 0 avatar
      NulloModo

      Point 2 has some merit, but the way you state it isn’t entirely correct. Interest payments on leases work differently from buying (financing) and at th end of the day they can get so complicated that even most people who understand all of the ins and outs of buying a car are still confused when it comes to leasing.

      Lincoln offers a lot of deals on pre-paid leases, where you pay up front for the entire term, whether it be 24, 36, 39 months, or whatever. While there are still some finance charges built in to this (as opposed to a purchase where if you pay up front there are no finance charges) they are lower than if you make monthly payments throughout the lease, so putting all the money down, or even just some of it, can in fact save you more in the long run on a lease. You also, of course, can weigh the opportunity cost of your money, and see if the savings on reduced finance charges can be overcome by investing the money you put down over the same period, but then you are getting into some serious financial math best left to those who have the money to hire personal accountants to handle such matters.

      Sajeev – I’m not sure if you meant to say ‘lease’ instead of ‘buy’ but if you friend was indeed buying a Camry, and assuming it wasn’t a 0% finance deal, putting money down does save her money in the long run. On a purchase any money put down is not subject to finance charges, so the more you can avoid paying interest on, the better.

    • 0 avatar

      Yeah, I meant lease. Sorry, total brain fart on my part.

  • avatar
    stuki

    Currently, BMWFS have some 1 series cars at 71% residual in 24 months. Going for Euro delivery, you can get about 11%,( perhaps 12 if you sleep with the dealer) off US retail. And with lease financing at around 2.5% if you park enough refundable security deposits with BMWFS.

    So, you’re paying for only 18% depreciation in two years, or 9% a year, on a new car, with no downside risk come lease end. In addition to getting financing at way belowe bank rates on a car loan. BMWFS may well have subsidized loans as well, but in general, subsidized lease rates does not automatically imply loan rates are subsidized as well. In addition to “making money” on each individual sale, the captive finance companies also try to smooth out their dealers sales flow, and manage their estimated new / low mileage CPO mix. Be a bit f an opportunistic contrarian, and you can take advantage of this.

    In high tax states like CA, you also only pay tax on the actual lease payments, not on the entire purchase price of the car. Saving you additional money.

    So to say leasing never pays, is a bit myopic. In general, over a large enough number of cars, and long enough period of time, it probably doesn’t, but if you pick your car, and lease inception date, with an eye to incentives, things are not necessarily so black and white.

  • avatar
    saponetta

    Yea you can always roll in your taxes on a lease. In states with a usage tax leasing makes a lot more sense than states with cap cost tax. usage tax allows you to pay taxes only on the value of the vehicle oyu are using up by the lease. Capitol Cost taxes are taxed on the entire cost of the vehicle. Cap Cost taxes can add a lot to the monthly payment on an expensive vehicle. You can easily add $200/month to a 36 month lease on a 100k car at 7.25%. Cut that figure in half wiht a usage tax.

  • avatar
    jmo

    I’ve calculated our monthly vehicle cost for our latest plus $30,000 car at about $300, for 6 years.

    You obviously forgot to include the time value of your money.

  • avatar
    runwithscissors

    Aside from business application leases, especially those where the vehicle is going to be rightfully claimed as a 100% dedicated to business vehicle, I’ve yet to see a single instance where leasing is a more prudent financial decision than purchasing the exact same vehicle.

    As mentioned by so many earlier, the spread between the savings on a purchase versus a lease becomes even greater with the passage of time.

    Assuming a relatively normal 12,000 to 15,000 miles per year, depreciation on a car that was purchased new really slows down dramatically in about year 4, and grinds to a crawl in about year 7.

    In ‘The Millionaire Next Door,’ the two financial planners who authored the book speak about how most wealthy individuals buy modestly priced cars and drive them for 10 years or more.

    Interestingly enough, many of the cars the wealthy drive are domestic makes, and the Ford F-150 is among the most common vehicle they drive.

  • avatar
    detlump

    With leasing it depends. There is an old expression – never acquire a depreciating asset. Cars are the worst. If you buy, you lost so much the first few years. It makes sense only if you want that car for sure, for 8-10 years. Lifestyles change, etc. Could make you regret a particular car. Selling a used car is a hassle. You meet interesting people with ads and usually get the shaft at a dealer. Plus, what you think your car is worth is rarely what the market will bear (what someone will pay for it).

    For me, I have an old Volvo and just leased a Mustang GT for 250/mo, zero down. The Volvo will last another 10 years, if not, I will pick up another used Volvo since I know that car so well (it has been reliable). I would not lease anything that required a down payment, which is their depreciation.

    And leasing could be a good way to own a car you think you like but are not sure it is reliable. If it is, you can buy it out afterwards having known the car its whole life. There is something in that security. How many Toyota owners are regretting trading their old cars right now? Some are no doubt.

    Leasing luxury cars can be a way to avoid the massive depreciation hit of ownership. Who wants a 10 year old BMW? Look at Carmax to get an idea of what used cars are selling for (of course they paid less to their owners). It’s scary. Better to have a beater and new car every 2-3 years.


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