This is the 5th article in our Car Buying Guide series:
- How to pick your BMW, what options should you choose?
- BMW special programs that can save you big dollars
- How to negotiate a good price?
- How to financing your purchase?
- Why leasing a BMW maybe better?
- Leasing process fully explained
- How to use our Lease Calculator
BMW may be one of the brands that are most suitable for leasing. In fact, nowadays its business model seems to be specifically tailored to make the leasing program more beneficial to consumers.
Not just limited to BMW, generally speaking you should consider leasing instead of purchasing/financing if the car has the below characteristics:
- High maintenance cost after factory warranty has expired
- Relatively low private party resale value (which means if you want to get rid of the car later and do this privately, you have to sell at a cheap price)
- Large discount off MSRP when you buy new
- High residual value (RV) set buy the auto manufacturer’s leasing program
- Low money factor (MF) available in the leasing program
The reason behind this is simple: for lease you only pay for the depreciation (your negotiated price – residual value). The more sales discount you negotiated and higher residual value, directly leads to significantly lower depreciation you need to pay over the whole lease term.
There is another major advantage for leasing a vehicle: in many US states, for vehicle lease contract, government only collects tax on the portion of the depreciation, not the whole car’s value. So the more expensive your car goes, the more tax saving you will get. For example in California, suppose your local sales tax rate is 8%: if you purchase a vehicle with MSRP = $100k, and you negotiated the sales price to be $90k, then you need to pay a total tax of $90k X 8% = $7,200; however, if you go for the lease route, and the residual value is set at 60% of the MSRP, then you just need to pay the 8% tax on the depreciation portion, which is: ($90k – $100k X 60%) = $30k, so under this scenario your total tax bill will be just $30k X 8% = $2,400. Compared to purchasing, there is an immediate tax saving of $4,800!
The downside of leasing is some extra cost: 1. acquisition fee; 2. disposition fee. Depends on different brands, acquisition fee ranges from $500 to $1,000; disposition fee usually runs from $300 to $400 (however if you lease another vehicle under the same make, the disposition fee can be waived). But as can be seen above, if you the vehicle you lease is expensive, the tax saving is way more than enough to offset the acquisition fee and disposition fee.
Please note that, since you need to pay extra money per mile exceeding the contract limit (typically 10k/12k/15k miles/yr), if you do a lot of driving in your daily life, leasing may NOT be a good choice for you. Also if your credit score is relatively low, dealership is allowed to jack up the money factor to compensate the credit risk. Under this situation, with high MF you may find leasing is not attractive.
Now let’s go back to our BMW topic.
Regardless its reliability or resale value, BMW vehicles generally are good candidates for leasing, due to the fact that BMW USA usually provides a very generous residual value and money factor for most popular models:
– High residual value: for example the M3’s 36-month lease residual value has even reached 62% in several months last year
– Low money factor: BMW’s common rate is around 0.00130 (equivalent to 3.12% APR), however if you put down 7 security deposits (7 MSDs, refundable after lease end), it can be lowered to 0.00081 (1.94% APR)
– Large discount for new vehicles: I have seen countless examples that a typical buyer got at least 10% off MSRP for many different BMW models. Take myself as example: I knocked 19% off MSRP for a new 2015 750i series last year.
With that being said, what will a good BMW lease deal look like? For example, one customer I worked with previously, has successfully leased a 2016 535i (MSRP around $60k) for 36 months, with ZERO downpay the monthly payment is only around $450.
Not only BMW, sometimes you can get extremely good deals on other cars. For example several months ago when Chevrolet is clearing up the Cruze inventory, the lease term is so good that the total lease cost is negative – it means you not only drive the car for free, but also earn money from the auto maker!
In next chapter, I will walk you through the whole leasing process.