Does this make sense to you...?

[blackmercedes]

A friend of mine's son graduated from university in the spring and started a job with Xerox a few months ago. He's doing okay, enjoying the job and had a ball during training. I had the same job years back and highly recommend it as "get your feet wet" experience for new B-School grads. The training is incredible, and sales training will serve you well in all aspects of business.

However, we got into quite the discussion last evening concerning his newest aquisition: a 2004 Acura MDX.

In Canada, this SUV costs about $55K with taxes. I was a little shocked that someone so fresh out of school would pay so much for a new car. Here's his take on it:

In some B-School class he learned that in lease vs. buy decisions, you generally should purchase appreciating assets and lease or rent depreciating assets. Of course, there is an NPV calculation that takes salvage value and other variables into consideration, but it's a rule of thumb to some extent. So, cars should be leased. Well, that does make some sense. On we go...

Well, the MDX has a very high residual value, so his payments are pretty decent for that price of SUV (about $600 a month with taxes) and he can afford the monthly payment. Here's where we part company. At the end of the four years, he has to pay $30,600 plus taxes to buy the SUV out. He will either re-lease it or simply lease a new one. In the future he sees having to pay $600-$700 a month for a car just as a natural expense that will never end. Kinda like taxes or insurance.

What of this thinking? Am I funny in buying a car, paying it off in 3-4 years, and then driving it for another 5-10 with no payments? Is it normal now just to build a significant payment into your budget and expect that it will be a life-long expense?

This young fellow looks at me like I'm completely "tuned-out" to the "new" thinking concerning automobiles and their financing. I had always thought this to be a less than prudent financial decision, but evidently I am in a shriking group of "old people."

[rickg]

Good subject. We bought our Chrysler new, it's now paid off. I had the idea that we'd keep the thing for awhile after it was paid off. But now wish we'd leased it, and did the trade in thing after a 2 or 3 year lease. The car's a POS now, with just over 100K miles on it. Can't get anything in trade for it, and it's $500-ing us to death, now that the warrenty is well gone.
The wife wants to keep it because it's paid for, and the repair bills are cheaper than the payments were, if you ammoratize the repairs out over time. But we now have a car I don't trust any further than the local grocery store.
Ok. So we should have bought a good japanese car instead of the Chisler. But that's what I thought we were getting. It's nothing but a Mitsubishi under the skin. So much for that theory.
I'm not convinced that much any car is worth keeping long term anymore. You can't repair them yourself anymore. I won't touch the Chisler except oil changes and brakes. And I've always worked on my own cars. And repairs are terribly expensive when they do break. (Cost us $1028 to have the water pump and timing belts replaced!)
Next time, we'll either lease, or find another old Benz diesel that I can fix myself.

[schwarzwagen]

I think that many things contribute to this new type of thinking. Here are a couple:

Cars are laden with electronic gimmickry these days at the expense of the basic areas of the platform that give the car longevity so reliability suffers.

Product life cycles are shorter, thus making models seem more dated when they aren’t.

Cars these days are looking more and more the same with each new model run, taking away some of the character of the car and making it boring. Would you want to live with a boring car for 10 years, No.

If you continually lease a car, it is always under warranty. Maintenance costs become a moot point, not to say that maintenance costs are as much as a car payment. It is, however, certainly a contributing factor.

[Flash Gordon]

Yes, John, you and I and some others belong to the Old Gizzard Group I bought an extended warranty for my 2003 because I plan to keep it for least 7 years. My Acura is all paid for and I plan to keep it for at least another 3-4 years. To maintain a constant leasing program is really a very expensive way of driving cars. We all know that cars depreciate the most in the first 3 years. The only advantage in leasing that I see is that you get to drive a car that you normally cannot offered to OWN. My 2 cents

[rickg]

We did the extended warrenty thing, but it still wasn't long enough.
I know there are 2 sides to this issue. I always thought leasing was way stupid. I kind of think it just depends on what you buy, and how often you plan on trading up. For instance, I don't think I'd ever buy a new Benz with all I hear about them. I'd lease. Trade that sucker off before all hell breaks loose. But a Subaru or Toyota would probably be a decent gamble to buy and plan on keeping for 200k miles.(I see the flames a-coming )

[kerry]

I guess I must be one of those 'old people' to. But I think it's partly a matter of social class. I'm a teacher and I can't imagine a teacher having a permanent car payment, even for a cheap car, on their salary. On the other hand, even if I was rich, I can't see spending that much money on transportation or a status symbol.
I'm inclined to think that that line of reasoning has been developed by the automakers. Then again, my newest car is an 85 and I live in a downtown area where I can walk to most places if I want.

[Zeitgeist]

I would question both his choice of vehicle and his choice of payment plan.

Doesn't it make more sense to purchase a 'slightly-new' (or slightly-used, however you see it) vehicle? This allows the original owner to absorb the initial 'drive it off the lot' depreciation, while still providing most of the benefits of new car ownership. I honestly don't understand why folks purchase cars new, unless they're gonna keep em for ten years at the very least. We purchased our '96 Passat from the original owner in '99 with this strategy in mind--best vehicle 'investment' I've ever made.

Just curious John, why did you get rid of your E300 turbodiesel? That's probably the newest vehicle I'd consider purchasing -- primarily because of its (theoretically) impressive engine.

[blackmercedes]

Originally posted by Zeitgeist
Just curious John, why did you get rid of your E300 turbodiesel? That's probably the newest vehicle I'd consider purchasing -- primarily because of its (theoretically) impressive engine.

My wife owned the E300 turbo, and she reached her breaking point with the car, as many other 98-99 diesel owners have. The car spent more time at the dealer than on the road, and always had a long list of on-going problems. Most of the problems were engine related, surprisingly. The work was all covered under warranty, but not being able to trust the car was a sore point.

Thanks to MB's discontinuing production, the diesel has become quite sought after, and for the first time in my life, we made a profit on a car. Almost enough, in fact, to buy the Subaru outright. The Outback is an amazing car with not one unscheduled pit-stop so far. The car is still rattle free, drives perfectly, and is downright luxurious with leather, heated seats, etc. Not the mileage-maker the diesel was, but no more "pray the thing starts" mornings for my much-much-much-better half.

[G-Benz]

I think his approach to financing a new vehicle is wise...the high cost of said vehicle is another story...

...that said, us old geezers got along with more modest "starter" vehicles when we were junior execs, despite the good starting income.

You look today, and high school kids have better rides than a lot of us...and it ain't just the suburban kids!

Go find the thread about the age of members of this forum...we have a healthy group of members under 20 with late-model MBs...so your friend is under a LOT of peer pressure!

[jcyuhn]

Yeah, we're all a bunch of old fogeys, that's why we hang around a diesel 'Benz board.

You'll never win this arguement with him. It's a personal choice as to what percentage of his income stream (for leasing) or what percentage of his net worth (for purchasing) will be represented by automobiles. This is a subjective decision, one which most people make unconsciously.

The basic tradeoff is, of course, that money spent on a vehicle cannot be put to other uses - be they travel, entertainment, or bulding wealth. This last one is the one which generally suffers due to excess consumption.

If your friend chose to purchase a modest vehicle and keep it for the duration of its useful lifetime he would be able to generate a more robust stream of capital to invest. You're well familiar with the time value of money and realize the wealth which can be accumulated via a stream of monthly investments. Eventually this wealth would permit him to purchase vehicles outright. He could avoid the financing costs associated with monthly payments, lowering his cost of owning any given vehicle.

His decision to take on an expensive monthly lease is simultaneously a decision not to accumulate this wealth. This of course increases the opportunity for auto makers to lock him into monthly payments - and collect interest payments from him - forever.

How's that for a doomsday scenario?

The other big problem with leasing is that it removes your ability to decide the timing of when to acquire your next new car. When the lease is over, you are forced to act. In the U.S. at least, leases are written to dissuade you from purchasing the vehicle at lease expiry - the buyout price is almost always substantially higher than the fair market value of an equivalent vehicle.

The big risk here is of course that you may be unwilling or unable to acquire a new vehicle when the lease expires. What if you have a job loss, or just purchased a house? Your ability to control your transportation costs going forward is substantially diminished by leasing a vehicle.

My $.02

- JimY

[rickg]

Isn't there several different lease contracts you can get into? Giving you several different ways to end the contract, depending on if you think you'll buy it, or trade it? A friend of mine was able to extend the lease on his Jeep Grand Cherokee for instance.

[Botnst]

Bought a 2 year-old Infiniti still under full warranty. Paid about 1/2 of new car price. Paid it off in 2 years. Just gave it to my oldest daughter after I put 70k miles on it. She gets a well-maintained reliable older car. I didn't pay a car note for three years and had low maintenance expenses.

Bought my wife another car under similar circumstances. She'll drive it until the next-oldest kid moves out.

etc.

I bought the older M-B as a beater for my middle kid and have horded it for myself. I've dumped about twice the money I'd intended to (now up to about $8k and still need some non-critical work) because I like the dang car and can't help myself.

Next year I'm going to buy another w124 or perhaps w126 but this time I'm buying it for myself--not a beater. I figure I'll budget about $8k-12k for purchase and refurbish and pay it off in a year.

We had a good plan for cars until I bought the Mercedes. Now I'm on my way to spending a lot of money for maintenance. Why? Because I like the cars and I can afford it.

[Zeitgeist]

My wife owned the E300 turbo, and she reached her breaking point with the car, as many other 98-99 diesel owners have. The car spent more time at the dealer than on the road, and always had a long list of on-going problems.

Thanks for the heads-up John. I think I'll stick with old-tech diesels for now...except our tdi of course, which has been an exemplar of reliability and performance.

[blackmercedes]

I'm not saying this young'uns thinking is wrong, but it doesn't fit with my thinking at all. I had thought that people that took out seven year car loans or leased them and then 100% financed the residual were just stretching too far for a car. This fellow has no such thinking. He's "normal" as he sees it. A car is just another monthly expense.

I always took the other approach, and worked with the approach if I couldn't pay the car off in 3-4 years then I just plain couldn't afford it. You know, you can buy a car over 48 months and then buy another car at the end of the loan term, just like leasing. The main difference is the purchase price. No way could someone making $50K buy a $60K car then. It's why I have a C-Class and not an E or S. When I bought the C230, I could have swung the lease payments on an S430, but cripes, why would I do that? Well, this fellow would! Happily!

Leasing has it's own set of problems. A friend of my Dad's had an Explorer on lease, and when it came time to turn it in, they assessed him thousands of dollars in lease end charges. The windshield was pitted...of course, it's three years old! Rock chips added up to something like $1700 to repaint the front clip. I saw the truck and thought it was in really nice shape. Then Ford had him. they "forgave" a chunk of the charges as he leased another Explorer. This time he got smart and found someone to take over the lease right away, bought a 1992 300E for cheap and hasn't looked back. Leasing scares me thanks to the uncertainty of the lease end.

The main problem as I see it is the relative high price of a new car. Most Canadian families have to really stretch to buy ANY new car, and leasing has opened up the market for them. Buying domestics for years, they've been burned on out-of-warranty major repairs and huge depreciation and find leasing works for them.

Perhaps it's the youth? Helen and I put our money into our house (an appreciating asset) and other things. Heck, we've been talking about her working three days a week. Thanks to no debt, we can have one person work part time and the other at home. Four day weekends EVERY week? Can't do that with a G-note lease payment.

My daughter attends a playchool and I've got to know some of the Moms. It never ceases to amaze me how stressed people are over money. We're not talking about low income families. But, they're carrying huge mortgages, two big lease payments on two late-model SUV's and so on. These folks are amazed that we can have so much time, but they don't seem to be able to klick on the secret. We have a very modest home and don't have any "toy debt." Nothing gets bought on credit.

In conclusion, I think it's just an attitude towards things versus time. Maybe I just think my time is worth more?

[rickg]

Bottom line, I agree with you. We have no credit cards, all our cars are paid for, and we have a cheap mortgage. My wife is right not wanting to get into another car payment. It's nice not having lot's of bills hanging over our heads.
But if we do decide to get another new(er) car, it'll be a toss up which way we go.