Walking Away from an SUV Lease

[johnnymk]

I was thinking about how new SUVs aren't selling. Just a year ago, a used SUV was bringing approximately 45-50% of it's original price after 3 years. It has to be significantly lower now.

From what I have read, banks boosted the resale value of leased vehicles so that customers could afford the lower monthly payments.

Since I don't know much about leasing and buybacks, would it be beneficial to just walk away from the early stage of let's say, a 4 year lease, knowing that the residual value will be much lower than originally calculated or wait till the end of the contract period when it could be worth nothing at all?

Or enlighten me...is there a connection between monthly payments and what you have to pay at the end of the contract?

[ufcrusher]

Unless a major fluke occurs, the residual values on leases are typically pretty accurate. In my experience, I have noticed that although my cars may seem to be WELL above the residual the entire time I have the vehicle, several months before D-day the value of the vehicle drops in a very unexpected way. At that point, the car generally is in a much closer proximity to the residual than expected. (This happened on several of our cars...all of which had exceedingly low miles well below the allotted amount of miles)

If I am understanding your train of thought, you feel that with gas prices the way they are SUVs/Trucks are not selling the way they did before the devil started controlling our oil prices (a joke, not a political comment). Thus, if the new models arent selling you figure they would have difficult in the secondary used market...lowering the actual value that the vehicle can fetch. Since they calculate your residual before they started to charge body parts for oil you think that the truck will be worth less than they calculated.

Here is an explanation of the residual:

Residual Value - A car's residual value is the largest contributing factor to the cost of a lease. Residual value is the amount it will be worth at the end of the lease. Depreciation is the difference between the selling price and the residual value estimated by the leasing company, expressed as a percentage of Manufacturer's Suggested Retail Price ( MSRP). If the market likes a vehicle (for example the Toyota Avalon, Ford Explorer, Lincoln Navigator, Honda CR-V), it will have a higher than average residual value. Cars with lower perceived values (Contours, Metros, Neons, and most Hyundai's) have low residual values. Lessors use ALG (Automotive Lease Guide) residual guides to determine the value of vehicles 24, 36, 48, and 60 months old. Before you lease, check out the residual values of the cars you're considering at the Edmunds, Kelley BlueBook, or CarWizard websites. Your bank or credit union may have a copy of the Automotive Lease Guide, which reviews residual values in greater detail. Usually depreciation eats up 20-30% of a vehicle's value during the first year, and another 15% during the second. In general, lower depreciation gives a higher residual value, which means a lower monthly payment for you.

A vehicle's perceived value leads directly to its wholesale (dealer-to-dealer) auction value. In an effort to move more new cars into the market, some new-car manufacturers subsidize artificially high residual values in order to offer low monthly lease payments. Ford Credit reportedly lost millions of dollars on early groups of Ford Tauruses and Contours coming off lease. The flooded marketplace reduced their wholesale values to the point where the vehicles were worth markedly less than their original residual estimates. If the residual value estimate is too high (as in the case of Ford), the lessor loses money because the lease was structured to repay a set amount of depreciation. Don't hold your breath, Ford isn't going to make the same mistake twice.



Quite simply unless you are buying the truck at the end of the lease, which most people dont do, the residual is of NO real consequence to you other than how it is used to calculate your monthly payment. Given the fact that you already have the SUV, turning it in early/terminating the lease is going to cost you money and be of no benefit.

[Burzhui]

walking away from a lease will have a negative effect on your credit history, and getting a 4 year lease is not the smartest thing you can do

[Jihforce]

... and getting a 4 year lease is not the smartest thing you can do

why is that may i ask?

[johnnymk]

I have a hard time believing that Ford would have calculated a year or two ago that the SUV market would tank as quickly as it has. The dealers who are leasing these vehicles are going to be taking a gigantic bath when these leases expire, even with the monthly payments as high as they are. I wouldn't want to be in their shoes right now.

[ufcrusher]

Yes, its the DEALERS who take the bath, not you.

Interestingly enough, we did some creative financing with my truck. They wanted some insane monthly payment for the purchase of the car outright......since they had screwed me on the value of my Mustang! While we only wanted to purchase it, they ran the truck as though it were leased for the period of time that we had wanted to spread the purchase. The amount of payments made on the lease plus the payoff at the end equals the wholesale cost of the truck. (Usually it ends up being higher as they want to make some money on the lease.)

While it wasnt optimal, it ended up lowering the monthly payment by a few hundred dollars and in the end it will work out as though we had done a 0% loan for the life of the truck. The negative part is that we will have to pay it at the end vs. down payment. Although, in reality if we decide to just dump it it would probably be near what the truck is worth.

For what its worth:
Typical advertised lease of BMW X5=
$461/mo for 39 months = $1797
Down payment/drive offs = $4000
total $21979 paid
Estimate residual on X5 ~ $30,000 (Figuring trade in value of 3 yr old x5)

Thus total payment if bought $52k vs. $49760 new MSRP and that is without discounts.

[Maarchk]

For what its worth:
Typical advertised lease of BMW X5=
$461/mo for 39 months = $1797
Down payment/drive offs = $4000
total $21979 paid
Estimate residual on X5 ~ $30,000 (Figuring trade in value of 3 yr old x5)

Thus total payment if bought $52k vs. $49760 new MSRP and that is without discounts.

I think you are missing a 9 for your 461/mo for 39 months = 17979
Hmm yeah, i think leasing is not the best idea. Just get a residual X5 @ 30,000$ and you would still be pretty styling...

[bachviet]

If you are not keeping the car after 4 years, why buy the car? YOu are going to get nailed by depreciation for the first 3 years. I don't know if you could trade in an X5 for $30000 after 3 years.

[Burzhui]

why is that may i ask?


because as the car is depriciating you are paying for it as if it were new. You can have a brand new car for the same ammount of money. Anything above 36 month is not good ;)

[Jihforce]

because as the car is depriciating you are paying for it as if it were new. You can have a brand new car for the same ammount of money. Anything above 36 month is not good ;)

Hmm not sure if i agree with it. I've leased for 3 and 4 years and i'm thinking 4 is better. Your car depreciates most within the 1st year anyway and much less between year 2 to 4. Definitely don't wan't to exceed 4 years.

[Mike_N_Ike]

If you can get an accurate residual value and a decent money factor on a lease, the amount of time doesn't really matter. Most of the time when people get laid-away in leases, it's because the money factor is too high so they're paying more than they should for the depreciation.

[ufcrusher]

If you are not keeping the car after 4 years, why buy the car? YOu are going to get nailed by depreciation for the first 3 years. I don't know if you could trade in an X5 for $30000 after 3 years.

As I said, that was based on the wholesale cost of the a 3 year old X5. Most of the dealers will probably give you near the wholesale cost on an X5 due to its desirability. If not, they might go 2k back of wholesale so 28k.

[bachviet]

As I said, that was based on the wholesale cost of the a 3 year old X5. Most of the dealers will probably give you near the wholesale cost on an X5 due to its desirability. If not, they might go 2k back of wholesale so 28k.
But you have to pay higher down payment, more tax, and most likely higher monthly payment if you buy the car instead of leasing it. The whole point of leasing the car is to have lower monthly payment with small down payment and get an new car every 3-4 years.

So let say you buy a brand new X5 for $50K. Here is the calculation

Down payment: $20000
Sale tax (7.75%): $3875
Interest rate: 4%
Amount finance: $33875
Monthly payment: $623.86 ($22458.96 after 36 months)
Approximate balance after 3 years: $17600
Trade-in value: $31000
Amount left after paid off the loan: $31000 - $17600 = $13400
Amount total paid: $20000 + $22458.96 - $13400 = $29058.96

That comparing to the $22K paid on the lease is still a better deal. BTW who here has $20K to down for a car?

[ufcrusher]

You get equity in cars that you own...you dont in a lease. Once you are done with all your payments, you are done making payments. Its that simple, drive the car for as long as you want or until its no longer driveable.

As for the amount of down payment, on my first new car I purchased in 96, I put down $12k (on a $26k car). An old co-worker of mine put down $18k on his BMW 325 (on a $25k used car). Since you own the car, the larger your down the lower your monthly payment. Frankly, most people only put down $5k on a purchase. Higher downs are solely because you want to lower your monthly payment. Remember, for every $1000 down you save between $16-20+ depending on the rate.

As for the issue with the tax. With leases you only pay tax on the part you use...thus its part of your monthly payment. IF you buy it out on the end, you pay the rest of the tax on the backside. Financing, you pay all the tax at once.

The danger many people run into on purchases is becoming top heavy (negative equity) on the loan. This means that you owe more than the car is worth. This happens when you finance more money than the car is worth after standard drive off depreciation. The longer your own a car, the less chance that you will be in a negative equity situation. Most people run into this situation when they try to flip a car in less than 3 years with little down.

The X5 owner in your example who put down $20k can sell that car at anytime. He might lose some of his money from the depreciation, but his large down insures that he can easily unload it. Assuming he keeps it for the same amount of time as the lease would have been and sells it, he will end up walking away with some money after paying everything off.

I even have friends who buy cars at auction, drive them for periods of time and then sell them, ending up having used a car for that time for free. One extreme example had the guy driving the car for over a year and making a few grand in the end.

[bachviet]

That's why leasing is for pple who wants to drive a new car every 3-4 years not for pple who want to keep the car for 10 years. I wouldn't buy a BMW since I don't want to be stuck with the maintenance after 3-4 years.

You were the one who compared btw buying and leasing with the buyer sells the car after 3 years with advantage. I just wanted to show that there is no advantage in buying a car and selling it after 3 years.

I never want to lease and then buy it off after the lease since the residual value sucks.