If you are a RIDE with G regular, you have probably heard me talk about “lease-to-buy” numerous times, specially when it comes to Mercedes-Benz models. The whole concept of “lease-to-buy” refers to the idea of leasing with the intention of purchasing the car at lease-end. It is a very good way of getting into a nice ride with little or no money down and save some money should you decide to buyout the car. In this post, I will examine some key aspects of “lease-to-buy” and how it can save you some money compared to other leases and traditional financing.

When you lease a car, you normally want a high residual value and a low money factor since this combination yields the lowest monthly payments. This is because when your depreciation and money factor are low, your payments stay low. In a “lease-to-buy” scenario, you want the majority of your payments to go towards the depreciation of the lease loan so the payoff price at the end of your lease is lower. The best way to accomplish this is to find a car with a low residual value and a low money factor. This will ensure that the bulk of your monthly payments go towards the car, instead of the financing charge.

For the sake of comparison, lets take the CLK350 coupe vs the BMW 528xi Sedan. I know they are different classes of cars, but this is purely a numbers comparison, so bear with me.

2009 Mercedes CLK350 Coupe
36-month | 15k miles | residual 44% | .00008 base money factor (0.192% APR)

MSRP $48,975
Invoice $45,608
Monthly $668 (depreciation) + $5 (finance charge) = $673 + tax
Payoff $21,549 + tax

2009 BMW 528xi Sedan
36-month | 15k miles | residual 58% | .00175 base money factor (4.2% APR)

MSRP $48,925
Invoice $45,075
Monthly $463 (depreciation) + $128 (finance charge) = $592 + tax
Payoff $28,376 + tax

At first glance, you will notice the higher payments on the CLK350, don’t panic. It ends up being about $81 more per month on the CLK, which boils down to about $2,916 over the course of three years. Not bad considering the difference between the BMW and MB’s payoff is about $6,827 ($28376-$21549). That’s a savings of about $3,911, should you decide to buy the CLK instead of the 528xi at lease-end. As you can see, certain cars should never be bought at the end of a lease, specifically those with high money factors and high residual values. Now, if you plan to lease forever, then the BMW is clearly the better choice due to the lower monthly payments.

Here are a few things to look out for before you decide whether you want to “lease-to-buy”:

  1. Make sure the money factor is much lower than the best purchase financing rate that’s available. You can find out what APR your money factor is by multiplying the money factor by 2400.
  2. At lease-end, you will need to either pay the entire payoff balance upfront OR secure a low rate for the remainder of your loan to keep some of those savings. Keep in mind that your car would be considered “used”, which means low rates on loans may be a bit tough to get. The upside to this is that you aren’t taking out a loan on a $48,000 car.

Lastly, some cars are being heavily discounted from month-to-month, such as the CLK in April 2009. The monthly payments may very well be less than the $673 + tax that I estimated depending on how much you can lower your gross cap cost. The bottom line is this, you can save money even if you decide to buyout your car at lease end, you just need to know what to look for and plan ahead.

14 thoughts on “Lease-to-Buy

  1. oh yeah, 48-month leases work well too if the residual is extremely low. Just make sure the money factor is low as well, preferably below any purchase financing incentive the bank can provide.

  2. Thanks G. As an example say you lease an ml350 for 48 at 15k per. If you only average 8k per yr then you have a you only have 32k miles on a severely depreciated merc. Could you sell it for enough to recoup the higher monthly lease or would you be better to structure the lease based on actual projected mileage?

  3. I would probably suggest structuring the lease based on actual project mileages due to the uncertainty of a car’s resale value. You will stand a better chance recouping most of your “extra” payments with cars that have more “realistic” residual values. I think overall, it will be no different than if you bought the car and sold it after 3 years. The key here is how much you ended up paying on interest, that’s where your savings would come from.

  4. Sure! Jags would work too. Last month, the 09 XF Luxury’s 24mo/15k’s rates was .00015 base rate and 52% residual The numbers for the 09 XF Premium Luxury were .00023 and 51%. With residuals and mfs this low, it could work. However, I am a bit leery about the car’s overall built quality.

  5. I have read before that when you are nearing lease end, if the residual value of the car as specified in the lease contract is considerably higher than the market value of the car, you could potentially negotiate a better purchase price from the bank. Can you confirm/deny such a possibility?

  6. It is possible, although it has become increasingly difficult to do so because more and more leases are starting to use more “realistic” residual values. I would say that you will have better luck with certain brands more so than others. For example, my sister was able to knock off a few grand on her Volvo V40 right before her lease ended.

  7. sorry mike, i pretty much stopped tracking the jags due to the lack of news coming from then. To be honest with you, I don’t even know who finances their leases since Tata took over.

    • lease to buy is just a method to get into a car that may have a really high financing interest rate. For example, say you want a Mercedes Benz GLK350 and the best financing you can get is 5.9% APR for 60 months. Now, lets also assume that if you wanted to lease that car, the residual value for the 48-month term is 35% and the money factor is 0.00008, which breaks down to about 0.192% APR (MF x 2400). So this basically means that if you lease, you can pay off 65% of the car over 4 yrs at 0.192% APR. The catch is that at the end of your lease, you would have to pay the remaining 35% of the car’s value in a balloon payment OR find financing for that amount if you wanted to keep the car. You can also simply walk away from it if you decide that you didn’t like the car during those 4 years, something you can’t do easily if you finance a purchase. Just remember that the only way to make this work is that the money factor needs to be much lower than what you could get if you finance a purchase. You also want the residual value to be low as well in order to have a low payoff amount at the end. Lastly, if you find financing that is low, it is always better to just financing it and buy it outright. Of course, should you not like the car in 3-4 yrs, you will probably have to absorb the risk of depreciation.

  8. The logic here seems flawed. The residual value is not just a number pulled out of a hat – it is based on the estimated depreciation that the vehicle will realize over a period of time. Even though the Mercedes and the BMW have the same MSRP when new, their estimated value on the used market after 36 months are very different – so the fact that the Mercedes’ lease-end buyout is $6800 less than the BMW’s doesn’t make it a better post-lease purchase value. I think if you were to shop for used CLK350 or 528xi, you would find a similar spread in real-world used car pricing.

    • The residual values are pulled out of a hat, to an extent. Bank say they “estimate” the depreciation, but in reality, they are making an educated guess. How would they know the depreciation of the 2010 E-Class 3 years down the road if the new vehicle is newly redesigned? In my experience, resale values have either been around the residual value OR a bit higher for most vehicle in great condition. But that’s not really the point of this article, the main point I am trying to focus on here is how much interest you pay and where your money goes. If you have intentions of purchasing the car at lease end, you are better off finding one that has a low residual value and low money factor, that way your payments go towards the principal of the loan, instead of the interest. Notice how I broke down the finance charges on the CLK vs the 5-series. You are paying a measly $5 per month to borrow from MBFS vs $128 with BMWFS. If you are the type that leases every year, this technique certainly would not work for you.

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