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Leasing vs Buying a BMW: When is it right for you?

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Leasing is a word frequently used when deciding to purchase a car. It’s an easy way to acquire a vehicle without a huge down payment. …

Leasing is a word frequently used when deciding to purchase a car. It’s an easy way to acquire a vehicle without a huge down payment. But many times you’re paying into a car without ever building equity. But do you ever build equity into any car? Well, the answer may surprise you.

Sometimes it can be as simple as having the required (larger the better) down payment to leave yourself with the most affordable payment possible. If you don’t have the down payment, then leasing may be an alternative.

The Leasing vs Buying argument can and probably will go on for centuries. First off there is the mileage requirements on leases. Then again, maybe I don’t want to own a depreciating liability. What if I want a new car every 3 or 4 years before my warranty expires? I’m the easily bored type and can’t wait to get a new car. So why should I own? Leaving myself exposed to a future “what if” trade in value, or worse, having to slap a “For Sale” sign on my prized possession and having to subject myself to would be buyers poking and prodding at my BMW.

Leasing vs Buying a BMW: When is it right for you?For the sake of this story I’m going to take a normally equipped 2011 BMW 535i, a model that sells very well and has been credited in the BMW’s best first quarter earnings in the history of the company. It is a BMW affordable to many customers in this segment, and almost 80% of them choose to lease. So what do they know that the rest of us don’t?

The MSRP of the example I’m using is $59,125  (see below the build sheet from BMWUSA for explanation of options included). This 535i is representative of what most customers are buying. I’ll be using a sale price of $56,500 for calculating the finance and lease figures. To simplify things and not introduce even more variables, I did not include your state taxes, local taxes or motor vehicle documentation in these figures. Just the options and destination.

Leasing vs Buying a BMW: When is it right for you?

In either of these examples your credit score plays a huge part in whether or not a bank will finance you and at what terms and rate. The better the credit, the lower the rate and length of term. For this example, we’re assuming a FICO score of 700 which is the average for most BMW purchasers.

Leasing, in it’s simplistic description, is a “back end” loaded finance. You are borrowing the full purchase price of the vehicle with a BMW Financial Services set “buy- out”. There is a mileage restriction on all leases. These restrictions will play into whether you should lease or not. The monthly payment is comprised of principal depreciation plus a use charge (Interest). The buyout at the end of the term can be paid in full or it can be refinanced by BMW Financial Services at the end. You will be subject to whatever the interest rates are 3 years down the road, in case you choose to finance the buyout.

Financing is simply borrowing against the collateral of the car. The payment is comprised of principal and interest. You choose how much or how little down payment, and finance the rest. Without mileage restrictions.

In our example with the 535i, the lease payment is $771 for a 36 month term with a $34,292 buy out. That brings the total to $62,048 (not including taxes and title). The important part in that figure is that you paid BMW FS $2,923 in finance charges for borrowing their money for 3 years. If you have no intention in buying the car, then your only exposure was $27,756 in payments for borrowing this new BMW 535 for 3 years. You never owned it, you built no equity. If you do buy out the lease, you will have paid $62,048.

To finance the same BMW 535 with a $10,000 down payment would leave you with a payment of $881 for 60 months at 4.9% interest. Total of payments with interest and down payment; $62,860. Pretty close to leasing the car at a total of $62,048.

The “What Ifs” of Car Purchasing

Here’s where it gets interesting.

For most people, the “what if” future value of the car is enough to scare them into leasing. After all, no one knows what the future holds and how the used car market will look like. Or worse, what if I wreck my car? What will my insurance company give me for it versus what I still owe on it? In these cases, leasing allows you to pay for the set depreciation and the rest is BMW Financial Services’ problem. If the car’s trade value isn’t worth the buyout, give it back. Or try and negotiate the buyout.

In a finance situation, you are locked in for 5 years; your payment never changes. For those of us that see security in consistency, and have the down payment, financing is your blanket. But what if after 3 years, you want to trade in your BMW? According to today’s wholesale and auction reports, a 3 year old BMW 535i with 36,000 miles is worth around $26,000. By now, you will have paid $31,716 in payments. But you still owe $21,144. So my $10,000 down payment just became $4,856 in equity. Yikes! Guess I have to keep going.

Well, after 4 years of payments totaling $42,288 and a trade value of $20,500 I’m still only left with $9,928 of equity. Getting better, but now my new car warranty is expiring. What do I do now? Go for a $3,000+ extended warranty? Trade it and hope I kept the car clean enough that it’s worth the $20,500? These are the “What ifs” that uncertainty bring.

It’s been my 20+ years of experience in the auto business that tells me unless you plan to keep this car for 5 years or longer, leasing is the way to go. With the ever changing models, technology, and resale killing redesigns, the future value of cars is always a “what if”.

As you see, both options have pros and cons and the final decision comes based on your own situation:  income, down payment, and specific set of circumstances. However, based on my experience, I will tell you this: if you like to keep up with the newest and latest tech, design, or want to stay in warranty, leasing is your answer.

  • Ajuskelis

    Another great advantage to leasing to consider is the effect that accident damage can have. If you finance a car and it gets damaged at no fault of your own, even if it’s repaired you are liable for that decrease in resale value. Your car likely has a bad Carfax and paintwork, which no matter how good it is can always be noticed. If you lease, as long as the damage is repaired through an insurance company, the reduction in value is the leasing company’s fault. 

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  • Marekjavorek

     What if you Live in Illinois, here we have wired leasing laws. We get taxed heavily on the purchase and have to pay an extra monthly tax on the payment itself  PLUS we pay the whole tax for the car at the time when we sign the paperwork.

    What would you recommended?
    Lease or Buy Illinois ?

    • Manny Antunes

      Thanks for your question Marek. I would weigh your target payment and down payment VS the cons of leasing in your particular state. If the payment is still cheaper than financing and you want a new car every 3 years, leasing is still a very attractive alternative. 

  • Howie_in_AZ

    “With the ever changing models, technology, and resale killing redesigns, the future value of cars is always a “what if”.”

    I believe the reliability and repair costs associated with the E90 and newer Bimmers have a lot more to do with the depreciation than newer models.  When you confront a potential buyer with a $250-$500 receipt for something as simple as replacing the battery, that puts a lot of people off.  My local indy mechanic will do the reprogramming for free (assuming I buy the $250 battery through him), but why does the car need to be reprogrammed for something as innocent as a battery replacement?  With my E46s I pop in the new battery and away I go.  Then again if I don’t drive my E46s the battery will be dead in 2 weeks, and I assume the battery drain problem occurs in the E90+ series as well.

    In my opinion, owning is always better.  With leasing you’re always going to have a car payment, but after ~5 years you could own the car outright and only pay for maintenance, stuffing the rest of that car payment into savings.  Even in my E46 M3 the maintenance is nowhere near $800/month (Inspection II is $750), and my 330i’s maintenance is far less. 

  • http://www.facebook.com/teune Tony Van Schaik

    In the Netherlands a 535i costs €65000 (approx. $92.000)  without options, we have some ridiculous taxes and gas prices are insane. An M3 coupe costs about $188.000 :S, maybe i will sell my house and live in the car LOL. Buying or Leasing no option you have to be a millionair here…

    Oh I forgot we also have road taxes that’s also around $150 a month and insurance $100, only joy we have when we have an M3 or M5 is, i’m just 5 miles away from the AutoBahn ;)

  • socdoc

     The problem with this analysis is that it doesn’t document the moving parts of the lease (money factor, residual, multiple security deposits etc.). It also ignores the fact that the benefits of leasing varies greatly from model to model and month to month. In April Leasing a M3 convertible was an outstanding deal. This month the Z4 have great lease deal (mostly because of really high residuals). The 1-series are a poor lease deal relative to buying.

    • Manny Antunes

      Discussing money factors and multiple securities and the minutia of leasing is for a follow up story.

      As for the ever changing BMW lease promotions; i had to pick one car and base the example on it. I do sell BMWs so i’m well aware of which cars are currently offered on incentive. *Thumbs Up*  

  • Anonymous

    I’d agree with the fact that ridiculous repair costs are the real factor driving resale values downward.  Having worked in the business for the last ten years I’ve seen a major shift in the industry.  Cars are no longer built to last, they are built to be consumed. They’re no longer made to be the best product they can be, they are made to be the minimum quality that is acceptable by the majority.  In the past decade the lifespan of a car has been cut in half.  Gone are the days of getting to 200,000 miles, these cars are meant to hit the recycling bin after 10 years/100k miles, whichever comes first.  E60 5 series and e90’s are falling apart.  Electrical components fail way prematurely and cost $1000’s to fix on every repair visit.  Some of the mechanical components and trim look like they’d pass for something off Korea’s brand offerings.  The new board took whatever remaining control the engineers had away in pursuit of making everyone in the world a BMW driver.  The problem is, everyone in the world shouldn’t be a BMW driver.  Nor do they want to be.  Take the new 5 series for example.  It’s the first new model 5 series since the new regime took over.  Now after building 5 series cars with outstanding steering feel and just the right amount of resistance, the new model feels like you are driving a Lexus/Acura/whatever other boring car you can think of.  BMW used to build ultimate driving machines.  Every car they built regardless of options was still an outstanding performer when compared to that models competition.  Now the only ultimate driving machines BMW makes are the ///M division cars, but even those are going sour since the introduction of the turbo M car.  BMW never used turbo’s on M cars before because the surge of power from a turbo engine is way more difficult to control at the limit than that of a high revving naturally aspirated motor.  Now they use them because they sell them to poseurs who race from stoplight to stoplight all while cooling their ass with their ventilated seats while updating their facebook status via iDrive’s new BMW Apps option.  The board has either lost total control of their identity or they just don’t remember what their true identity was to begin with.  Either way, someone better do something to stop it or BMW will be just like Lexus before we know it. 
     
    Back to my point…
     
     If you don’t drive lots of miles every year and you can stay under the 10-15k miles per year that leasing permits, you’d be a fool to buy a new car with how much it’s going to cost to repair it 5-10 years from now. 

    • Howie_in_AZ

      BMW will never be like Lexus; Lexuses (Lexii?) are far more reliable.  BMW has a “War On Maintenance” ever since they started offering free maintenance for 4y/50k miles.  Funny how BMW vehicles were supposed to get oil changes every 5k-7.5k miles but after BMW started picking up the tab the engines could suddenly go for 15k miles before “needing” an oil change.  Don’t even get me started on the lack of manual transmissions in BMW vehicles…

      As much as it pains me to say it, my E46 330i (183k miles) and E46 M3 (57k miles) are the last Bimmers I expect to own.

      • Manny Antunes

         While the fact is true that modern BMWs scare me once warranty expires (and I work for them), i think the “modernization” of BMW is a main source of it’s maintenance troubles. But then again, what OEM isn’t struggling with these issues….

    • Manny Antunes

      Couldn’t have said it better myself…. ;-)  

      • Horatiu

         Manny, thanks for the great topic, educational.

        I have to agree with the Chicago-based reader, we are getting killed here, between luxury tax and the high city taxes, Chicago is the worst place to lease something.

        • Manny Antunes

          Thanks H.

          Agreed that huge “city taxes” are ridiculous. It’s an easy “cash grab” for cities with wealthy residents that can afford to and will continue to drive expensive cars. 

  • Buckeye

    I wonder if there would be any interest in compiling a survey of the repairs that people have had to do on their respective BMW.  I know on my e46 it seems to eat window regulators and rotors regularly.  I still can’t imagine driving a Lexus.

    • Howie_in_AZ

      Mike Miller of Roundel and Bimmer magazines has a bunch of data for this. 

  • http://twitter.com/mybeanus my_beanus

     You also can take into consideration the tax writeoffs of certain models as a Section 179 business expense (some models up to 100%) if you qualify. There are several tax writeoff topics like bonus depreciation but there are also caveats.

  • http://twitter.com/cparente Chris Parente

    Most of my points already made — reliability is way down, which drives down residual value, which in turn drives the argument for leasing. Of course when a driver knows he/she will be out of the car in three years, they don’t connect with the car nor maintain it like they would if they owned.

    Two small points re your argument — your three year value example is comparing an E60 — widely criticized as a lousy successor to the E39 — to a F10, which has gotten much better initial reviews and (may) be worth more in three years. 

    Second, if the leasee really needs to drive the car, the mileage limit can be a real show stopper to leasing. 10K miles goes really fast with a long commute.

  • http://twitter.com/HazelLCottrell Hazel Cottrell

    The best saying I ever heard is “If it depreciates that lease it!” < this is true for the BMW.

    However, the reason I saw your post was in following from an IBM post that I saw – please see the following link, keen to hear your views;

    http://www-03.ibm.com/financing/uk/lifecycle/

    http://public.dhe.ibm.com/common/ssi/ecm/en/gfl03081usen/GFL03081USEN.PDF

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