Buying a car...lease it first, buy it later and save money

Ralph Hoffmann How to minimize car ownership

Lease the car you always wanted………………………….then buy it later.

Pity the automotive industry. Whereas the airlines are hurting under unsustainable wages and benefits, i.e. health insurance and pension contributions, they are likely to reduce them both in coming negotiations, whereas the Automotive industry is saddled not only with these same problems, but worse, not enough customers and too many plants worldwide making vehicles.

If China's car industry enters the United States in three or four years with the "Cherry" automobile, a talked about vehicle made in China with Chinese wages, the situation will only get worse.

Compounding the problem for some of the manufacturers is that their labor contracts are so juicy that they are better off continuing to give away cars rather than to close a plant and pay continuing benefits to laid off employees.

This situation will not change for several years until consolidation, plant closings, or bankruptcies have cured the problem. And plant closings will be a last resort. Therefore the glut of new cars will likely continue for a few years.

And the subsidized lease will continue to be offered.

During that time, new cars will be a real bargain.

Question: How best to minimize long-term car ownership.

Simply put…lease it now, buy it later.

In the past, the auto manufacturers moved cars by subsidizing leases. Without getting into the math, the monthly lease cost was lowered by increasing the residual value, thereby selling (leasing) more cars. But the value of the vehicle at the end of the lease was almost always less than the contracted residual and each of the off-lease cars then had to be sold in the wholesale market at a loss of several thousand dollars.

Hence several of the big backers of lease financing, Chrysler, some New York banks, and others, each lost several hundred million dollars in each of the past two or three years because they had to sell the off-lease cars on the open market for less than the residual value.

So why lease a car now instead of buying one right now?

Because by initially leasing a car, the maker is essentially offering a price that can't be beat. It's actually lower than the "employee cost" widely advertised. Then buy the car at the end of the lease.

At the end of the lease the company financially backing the lease most likely will sell the car on the open market at a loss. Why not intervene at that point and buy the car for less than the residual value and put that "loss" into your pocket as money saved?

A true-life example:

A business friend of mine had a three-year-old leased car with a contract residual value of $28,000. Looking at the used car lot he found he could buy one just like it for $24,000. He assumed the company that financed the lease would loose at least $2,000 in selling it for less than the contracted residual value. Through the dealer he offered $22,000 to buy the car as is and his offer was promptly accepted, including 3%, 3 year financing. His dealings, all by phone (no face to face negotiations needed) were with the company financing the lease.

So lease the car of your dreams today if you ultimately want to buy it. Let the companies financing the lease continue to subsidize your monthly lease payment. About three months before the end of the lease, cruise the used car lots and notice what your car is being offered at and then buy the car (no commissions paid to anyone on this transaction) at the end of the lease and keep several thousand smackers in your pocket.
About the Author

Ralph Hoffmann graduated from the Univ. of Wisconsin, majoring in Applied Mathematics. He has ten years experience raising venture capital and added business experience developing real estate properties. He has used his math background to develop web site http://www.AutoTruckData.com for anyone intending to lease or buy a new car.