This is where I am in total darkness. You said "the actual residual value was much lower then market value of the car. So bottom line is we paid off the car and pocket $6K."

That couple of sentences I just don't understand. I have never leased a car. Both of us keep our cars a long time. 200.000 miles on our 1989 MBZ so when you speak in lease terms (actual residual value vs market value of the car. So bottom line is we paid off the car and pocket $6K. I am totally in the dark. Explain. Although we have always purchased our cars we are open to the lease thing as long as we understand what's going on.

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I bought mine on a lease originally but then bought the lease out after a year. The lease allowed for a smaller payment and since I knew going in I would buy the car out, I didn't have to worry about mileage or any of the lease "rules".

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So how do you buy out the lease? Just add up all the remaining lease payments and the purchase price (at the end of the lease term)? Did the bank charge you any penalties or extras?

If you call BMWFS, they'll give you a payoff quote which is essentially the residual value plus all your unpaid principal balance from the lease. There are no pre-payment penalties.

Well, the residual value is the price the bank assumes the car will be worth at the end of the lease... it's a percentage of the original MSRP. Let's say 60% and an MSRP of $50,000.

So, in three years, if the car is worth more than the residual (i.e. if you can find someone that will give you $35,000 but you only have the pay $30,000 to buy it from the bank), you can buy the car and turn around and sell it again. You "pocket $5,000" in theory.

In reality, it is not so clear as that. In some states, you need to pay sales tax when you buy the car off lease. In Rhode Island, that would be $2100 on that $30,000 residual. There goes some of your profit.

It's also not free money... you've paid that money over the term of the lease, and you've had an opportunity cost associated with giving it to the bank (vs. if they had a higher, more realistic residual that didn't require you to give them that money to begin with). Really, all you're doing is getting back some of the money that you've paid in excess, but after accounting for taxes (if you have to pay them) and your opportunity cost, the return is less than you initially thought it would be.

You're very true. The point here that we are all making is that it is not a clear cut one is better than the other scenario. Depending on each person's situation, you can have pro's and con's for buying and leasing.

I should clarify a few points... I'm in the business, so those points were partially my own and partially comments that I have picked up from clients over the years. Some are true, some are true only under certain conditions.

I should also point out that I am in favor of both... we both "own" and lease our various BMWs.


Now to address some of our points:

-Mileage: this is a tought one. On some cars, excess mileage doesn't hurt the value that much, so even .16 or .20 per mile is excessive. On other cars, excess mileage kills resale value, so their price per mile is very generous. It all depends. Neither one of us can make a clear yes or no distinction here.

-Lease rates: it also depends. Right now lease rates on the X5 are cheap, around 2.4-3.0%. Retail rates are going up and are in the 5-6% range or more. Advantage: lease. How about other models like the new 3-series? Lease rates are currently in the 6-7% range. In that case, you can probably get a cheaper retail rate if you have good credit. Once again, it is really a tough one to call either way.

-By ownership interest, I mean having your name on the title vs. having the bank's name on the title. When you own/finance your car, this gives you the freedom to modify it, race it, etc. When you're leasing, you're more limited in what you can do, either because some things are specifically prohibited in the lease agreeement, and other things are costly or labor intensive to return to stock at lease end.

-Payments forever. This one is tought, and I agree that you have the edge. The point is that with a retail loan, you can pay payments for 3, 4, or 5 years and then own something. Sure, there will be some maintenance expense but it probably will be a fraction of what the monthly payments were. Then again, you're driving an older car so it should be cheaper. With a lease, you're constantly paying payments with no end in sight. If you ever wanted to stop paying lease payments in the future, you'd have nothing. If you wanted to stop paying loan payments after your loan is over (i.e. not go out and get another loan), you'd at least have a car that you'd own free and clear to show for it.

-On my last point, I made some assumptions. 1) the lease rate you get is normal, not overly high or overly low, 2) you finance the payoff balance. If these two apply, then you'll probably pay more at the end to buy the car than if you had just financed it to begin with. Remember that you pay interest on the average daily balance of the cap cost, not just the amout of the car's value you pay over the lease. So, on a $50,000 car with a $30,000 residual, you are paying interest on the lease on the average balance that goes from 50,000 to 30,000 over the term of the lease, essentially interest on $40,000. When you buy it and finance it at the end, you pay interest again on the remaining $30,000.

If you pay cash for the lease end buy out (and couldn't do so at the beginning), or if you score a really cheap lease deal, or if you can buy the car for less than residual at lease end, you probably can come out equal or ahead doing this.

I think it should be noted that if someone goes over the lease mileage, your residual should be lowered by exactly what you're charged by the leasing company for the excess mileage.

Mileage charges are directly connected to residual.

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One other thing that no one has mentioned is that depreciation on a car the first few years is large. For example, I bought my X5 last year for $52,500 out the door. If I were to put it on the market today, I think it's worth around $42k . So I lost somewhere in the neighborhood of $10k the first year. If I had leased it, my total first year payments would have been less than $10k. Second year, I expect my depreciation to decrease, and even more so the third year.

So if I have to sell or change my cars the first three years or so, I would have been better off leasing instead of buying. But the longer I own the car, the economics works such that it makes more sense to own the car. I would imagine the breakeven point to be around 5 years or so.

It really doesn't matter if you own or lease if you have to get out of the car after a year or two. Either way you're going to take that same depreciation hit. And, from what I've seen, it is usually more painful (read: you need to come up with more cash) to get out of a lease early on than a retail loan. So, if your situation changes 12 months into your 36 month lease, you're probably in trouble because your car has had its major 1st year depreciation hit but your monthly depreciation from your lease payments is linear and doesn't depreciate the car enough in year 1.

You're entirely right about the long term economics, though. After the first few years, your car's depreciation is very stabilized and it is usually pretty cheap to keep the car. For example, there is not that big of a difference in resale between 3, 4, and 5 year old BMWs vs. 1, 2, or 3 year old BMWs.