Velocity Reviews > Why pre-ordering is dangerous (and often stupid)

# Why pre-ordering is dangerous (and often stupid)

Mike Benveniste
Guest
Posts: n/a

 06-30-2011
On 6/30/2011 6:29 PM, Alan Browne wrote:

> Prove it. Give me an actual case that shows end value better in a lease
> vs. an outright purchase for a car at a given price. Don't forget all
> the T&C's and the end states."
>
> I was referring to the last sentence obviously.

You also said 'I didn't say end value, but end "state".' You said
both. I did take into account all possible end states.

>> Wrong. He's had use of the car for three years at a lower cost and
>> at less risk than if he had bought it.

> He has nothing in hand. 0.

Wrong again. Using your figures, he has \$7200 that he hasn't had
to pay to the finance company. Is (600-400)*36 that hard to
compute?

> You conveniently deleted the other paragraph
> of course which shows a much lower overall cost of using a car. I guess
> that was inconvenient, huh?

Let's run some numbers, shall we? I'll assume a loan rate of 6.5%,
since that's what my bank is quoting today. That means he financed
\$30,665. After 36 payments, he has paid \$21,600 and stills owe just
under \$13,000.

Now, let's assume he leased the car instead, and stuck that extra
\$200 in the bank at _zero_ interest. After 36 months, he now has
\$7200 in the bank. Looking at residual values of \$30,000 cars, we
see that after three years one needs to pay between 50 and 55% to buy
the car at the end of the lease. Let's use the higher figure, meaning
he'll have to shell out \$16,866. His net cost, less the \$7200 you
banked, is \$9,666.

But let's assume that he got a 1.9% promotional rate from the car
dealer instead. Now he financed \$34317 and at the end of three
years he owes just over \$13,500. The buyout on the car is now up
to \$18,874, meaning a net cost of \$11,674.

In other words, _using your own numbers_, he would have been better
off leasing even if he got a bargain rate. The inconvenient truth
is that he may have been a rube for turning in the car, but not for
leasing in the first place. The effective interest rate on your
hypothetical lease is 0.0%.

> Fact is, since a car loses so much value in the first few years, but
> still provides reliable transportation for 10, one is a fool not to take
> advantage of the low cost of the last 5 years.

Which one can still do with a lease. Which part of that don't you
understand? Since I turned in that Nissan, I've owned exactly two
cars. One I purchased in 1994 on a 0.9% finance deal. The other
I purchased in 2003 for cash. But I looked at and rejected lease
deals each time.

>> No, not understanding basic finance makes one a rube.

>
> So you're a rube. Too bad.

Reduced to name calling, Alan?

--
Mike Benveniste -- http://www.velocityreviews.com/forums/(E-Mail Removed) (Clarification Required)
You don't have to sort of enhance reality. There is nothing
stranger than truth. -- Annie Leibovitz

Mike Benveniste
Guest
Posts: n/a

 07-01-2011
On 6/30/2011 8:29 PM, Alan Browne wrote:

> Just shift those variables around to make your point and cherry pick
> differential interest rates. Bravo. Anyone can do that - doesn't make
> for a real world case though.

I supplied real world numbers. Here are my sources:

http://www.cars.com/go/alg/index.jsp
http://www.bmwusa.com/Standard/Conte...es/Offers.aspx
http://www.bankrate.com/financing/ra...massachusetts/

I used Microsoft Excel's PV function to determine the original
amount financed, based on a 60-month loan with a payment of \$600
per month.

The cars I chose to look at were the Audi A4 and Toyota Camry. Both
are excellent cars with high residual value. I assumed the highest
cost to buy at the end of the lease I could, and also assumed zero
interest earned. In short, I gave your numbers the best possible
chance. If I wanted to cook the books, I could have chosen a car like
the Buick Lucerne with a 36-month residual percentage of 38%.

I get a 0.25% discount at Salem Five, resulting in 6.49%. If you
care to choose a different interest rate for the loan, I'll run those
numbers as well.

If _you_ didn't supply real world numbers, whose fault is that?

> Face the facts. There is no lease that where you will come out ahead
> when you option to buy a car for the long term.

My own case was real world. I have the papers to prove it. But I'll
give you another example from today. Toyota has a lease deal on Toyota
Highlander at \$329 a month for 36 months, \$1,979 due at signing. I'm
going to assume that's for the least expensive model -- any other
assumptions would only make the lease a better deal. According to
cars.com, MSRP on that car is 28,200.

Next, I'm going to compute the present value of your predicted cash
flows for that lease. You pay \$1979 at signing, which includes the
first month lease payment. You then pay \$329 per month for 35 months.
Finally, using the cars.com figure, you pay \$14382 to purchase the car
at the end of the lease. I'm also going to use the 3-year T-bill rate
as an interest rate -- any higher rate would only make the lease a
better deal.

So that makes the Excel Formula for the present value of your payments:
=PV(0.81/1200, 35, -329, -28200*0.51)+1979 = \$27401.57.

Don't believe me about the interest rate?
=PV(1.9/1200, 35, -329, -28200*0.51)+1979 = \$26779.41.
=PV(6.5/1200, 35, -329, -28200*0.51)+1979 = \$24346.96.

The current cash incentive on the same car is \$500. So even if you
add in the incidentals of leasing, the lease is still the better
deal.

So if I were to buy that car today, I'd take the lease rather than
paying cash outright. Real world. Real Math. Right now.

--
Mike Benveniste -- (E-Mail Removed) (Clarification Required)
You don't have to sort of enhance reality. There is nothing
stranger than truth. -- Annie Leibovitz

PeterN
Guest
Posts: n/a

 07-01-2011
On 6/30/2011 8:29 PM, Alan Browne wrote:
> On 2011-06-30 19:57 , Mike Benveniste wrote:
>> On 6/30/2011 6:29 PM, Alan Browne wrote:
>>
>>> Prove it. Give me an actual case that shows end value better in a lease
>>> vs. an outright purchase for a car at a given price. Don't forget all
>>> the T&C's and the end states."
>>>
>>> I was referring to the last sentence obviously.

>>
>> You also said 'I didn't say end value, but end "state".' You said
>> both. I did take into account all possible end states.
>>
>>>> Wrong. He's had use of the car for three years at a lower cost and
>>>> at less risk than if he had bought it.

>>
>>> He has nothing in hand. 0.

>>
>> Wrong again. Using your figures, he has \$7200 that he hasn't had
>> to pay to the finance company. Is (600-400)*36 that hard to
>> compute?
>>
>>> You conveniently deleted the other paragraph
>>> of course which shows a much lower overall cost of using a car. I guess
>>> that was inconvenient, huh?

>>
>> Let's run some numbers, shall we? I'll assume a loan rate of 6.5%,
>> since that's what my bank is quoting today. That means he financed
>> \$30,665. After 36 payments, he has paid \$21,600 and stills owe just
>> under \$13,000.
>>
>> Now, let's assume he leased the car instead, and stuck that extra
>> \$200 in the bank at _zero_ interest. After 36 months, he now has
>> \$7200 in the bank. Looking at residual values of \$30,000 cars, we
>> see that after three years one needs to pay between 50 and 55% to buy
>> the car at the end of the lease. Let's use the higher figure, meaning
>> he'll have to shell out \$16,866. His net cost, less the \$7200 you
>> banked, is \$9,666.
>>
>> But let's assume that he got a 1.9% promotional rate from the car
>> dealer instead. Now he financed \$34317 and at the end of three
>> years he owes just over \$13,500. The buyout on the car is now up
>> to \$18,874, meaning a net cost of \$11,674.

>
> Just shift those variables around to make your point and cherry pick
> differential interest rates. Bravo. Anyone can do that - doesn't make
> for a real world case though.
>
>> In other words, _using your own numbers_,

>
> No. Using numbers you plugged in after the fact to make whatever point
> you like.
>
>> he would have been better
>> off leasing even if he got a bargain rate. The inconvenient truth
>> is that he may have been a rube for turning in the car, but not for
>> leasing in the first place. The effective interest rate on your
>> hypothetical lease is 0.0%.
>>
>>> Fact is, since a car loses so much value in the first few years, but
>>> still provides reliable transportation for 10, one is a fool not to take
>>> advantage of the low cost of the last 5 years.

>>
>> Which one can still do with a lease. Which part of that don't you
>> understand? Since I turned in that Nissan, I've owned exactly two
>> cars. One I purchased in 1994 on a 0.9% finance deal. The other
>> I purchased in 2003 for cash. But I looked at and rejected lease
>> deals each time.
>>
>>>> No, not understanding basic finance makes one a rube.
>>>
>>> So you're a rube. Too bad.

>>
>> Reduced to name calling, Alan?

>
> Really thin skinned I guess. Just don't reply if you don't like it.
>
> Face the facts. There is no lease that where you will come out ahead
> when you option to buy a car for the long term. It goes against the cost
> base that the leasing co. faces. They have to pay for all the costs that
> occur when you decide not buy the car in the end. It is a more expensive
> model of doing business - customer always pays for that - up front.
>
> Buy a car the way I buy it and there is no lease that can touch it.
>
>

You are forgetting financial facts.
If you finance a car the value of the vehicle after three years is
usually less than the balance due on your loan.The negative value will
vary with the interest rate.

If you lease a car you are getting interest free use on the residual. At
the end of the lease period you can then decide if you want to keep the
car. Sometimes it makes sense and sometimes it doesn't. The objection
here is to the essence of your comment that it never makes sense to lease.

--
Peter

Michael Benveniste
Guest
Posts: n/a

 07-01-2011
On 7/1/2011 9:51 AM, Alan Browne wrote:

> Real cherry picking. I'm not sifting through your data, validating it
> and then cherry picking the counter part.

Looking back up the thread, I see that you asked for _an_ actual
case, and your claim is that no such cases exist. If you don't want
people to cherry pick, why did you ask for cherries?

The point is that cherries exist. So do lease deals which are
financially better than conventional financing or buying outright.
They exist because car dealers know that most lessee's _won't_
exercise their option, giving the dealer additional profit down
the road by getting the lessee back into the showroom. That
creates an an arbitrage opportunity for those who _are_ willing to
buy at the end of a lease.

There's no need to cherry pick the "counter part." No one here
is claiming that leasing is always better. Most lease deal _aren't_
better, nor is leasing right for everyone.

But until one actually runs the numbers, that person is risking
leaving money on the table.

--
Mike Benveniste -- (Clarification Required)
Its name is Public opinion. It is held in reverence. It settles
everything. Some think it is the voice of God. -- Mark Twain

Michael Benveniste
Guest
Posts: n/a

 07-01-2011
On Fri, 01 Jul 2011 11:52:09 -0400, Alan Browne wrote:

> The real fact is that by constraining a case, picking numbers you can
> make the case for leasing as long as the buyer does not consider the
> longer term cost of ownership.

I suppose I could have, but I didn't.

1 presented numbers which did consider the longer term cost of
ownership by including the buy out. But you are apparently
unable or unwilling to do the math yourself, or even accept
that one _can_ and often _should_ buy the car at the end of
the lease.

That's fine with me. After all, when you and others leave
money on the table, it isn't coming out of my pocket.

--
Mike Benveniste -- (E-Mail Removed) (Clarification Required)
Amo conventum instituti. -- Artifex Hannibal

John McWilliams
Guest
Posts: n/a

 07-02-2011
On 7/1/11 10:13 AM, Michael Benveniste wrote:
> On Fri, 01 Jul 2011 11:52:09 -0400, Alan Browne wrote:
>
>> The real fact is that by constraining a case, picking numbers you can
>> make the case for leasing as long as the buyer does not consider the
>> longer term cost of ownership.

>
> I suppose I could have, but I didn't.
>
> 1 presented numbers which did consider the longer term cost of
> ownership by including the buy out. But you are apparently
> unable or unwilling to do the math yourself, or even accept
> that one _can_ and often _should_ buy the car at the end of
> the lease.
>
> That's fine with me. After all, when you and others leave
> money on the table, it isn't coming out of my pocket.

Alan has made his case, and he absolutely can not be proven in slight
error, much less flat out wrong......

John McWilliams
Guest
Posts: n/a

 07-02-2011
On 7/1/11 4:51 AM, PeterN wrote:
> On 6/30/2011 8:29 PM, Alan Browne wrote:
>> On 2011-06-30 19:57 , Mike Benveniste wrote:
>>> On 6/30/2011 6:29 PM, Alan Browne wrote:
>>>
>>>> Prove it. Give me an actual case that shows end value better in a lease
>>>> vs. an outright purchase for a car at a given price. Don't forget all
>>>> the T&C's and the end states."
>>>>
>>>> I was referring to the last sentence obviously.
>>>
>>> You also said 'I didn't say end value, but end "state".' You said
>>> both. I did take into account all possible end states.
>>>
>>>>> Wrong. He's had use of the car for three years at a lower cost and
>>>>> at less risk than if he had bought it.
>>>
>>>> He has nothing in hand. 0.
>>>
>>> Wrong again. Using your figures, he has \$7200 that he hasn't had
>>> to pay to the finance company. Is (600-400)*36 that hard to
>>> compute?
>>>
>>>> You conveniently deleted the other paragraph
>>>> of course which shows a much lower overall cost of using a car. I guess
>>>> that was inconvenient, huh?
>>>
>>> Let's run some numbers, shall we? I'll assume a loan rate of 6.5%,
>>> since that's what my bank is quoting today. That means he financed
>>> \$30,665. After 36 payments, he has paid \$21,600 and stills owe just
>>> under \$13,000.
>>>
>>> Now, let's assume he leased the car instead, and stuck that extra
>>> \$200 in the bank at _zero_ interest. After 36 months, he now has
>>> \$7200 in the bank. Looking at residual values of \$30,000 cars, we
>>> see that after three years one needs to pay between 50 and 55% to buy
>>> the car at the end of the lease. Let's use the higher figure, meaning
>>> he'll have to shell out \$16,866. His net cost, less the \$7200 you
>>> banked, is \$9,666.
>>>
>>> But let's assume that he got a 1.9% promotional rate from the car
>>> dealer instead. Now he financed \$34317 and at the end of three
>>> years he owes just over \$13,500. The buyout on the car is now up
>>> to \$18,874, meaning a net cost of \$11,674.

>>
>> Just shift those variables around to make your point and cherry pick
>> differential interest rates. Bravo. Anyone can do that - doesn't make
>> for a real world case though.
>>
>>> In other words, _using your own numbers_,

>>
>> No. Using numbers you plugged in after the fact to make whatever point
>> you like.
>>
>>> he would have been better
>>> off leasing even if he got a bargain rate. The inconvenient truth
>>> is that he may have been a rube for turning in the car, but not for
>>> leasing in the first place. The effective interest rate on your
>>> hypothetical lease is 0.0%.
>>>
>>>> Fact is, since a car loses so much value in the first few years, but
>>>> still provides reliable transportation for 10, one is a fool not to
>>>> take
>>>> advantage of the low cost of the last 5 years.
>>>
>>> Which one can still do with a lease. Which part of that don't you
>>> understand? Since I turned in that Nissan, I've owned exactly two
>>> cars. One I purchased in 1994 on a 0.9% finance deal. The other
>>> I purchased in 2003 for cash. But I looked at and rejected lease
>>> deals each time.
>>>
>>>>> No, not understanding basic finance makes one a rube.
>>>>
>>>> So you're a rube. Too bad.
>>>
>>> Reduced to name calling, Alan?

>>
>> Really thin skinned I guess. Just don't reply if you don't like it.
>>
>> Face the facts. There is no lease that where you will come out ahead
>> when you option to buy a car for the long term. It goes against the cost
>> base that the leasing co. faces. They have to pay for all the costs that
>> occur when you decide not buy the car in the end. It is a more expensive
>> model of doing business - customer always pays for that - up front.
>>
>> Buy a car the way I buy it and there is no lease that can touch it.
>>
>>

> You are forgetting financial facts.
> If you finance a car the value of the vehicle after three years is
> usually less than the balance due on your loan.The negative value will
> vary with the interest rate.
>
> If you lease a car you are getting interest free use on the residual. At
> the end of the lease period you can then decide if you want to keep the
> car. Sometimes it makes sense and sometimes it doesn't. The objection
> here is to the essence of your comment that it never makes sense to lease.

Well put. Clearly, it'd be a cold day in Belize when it would make sense
for Alan to lease.