Super confused about the $7500 and leases!

5450 Views 15 Replies 9 Participants Last post by eric_n_dfw, May 25, 2014

prismonix

Discussion Starter · May 23, 2014

How is the $7,500 tax credit used by the leasing companies such as US Bank and Ally?

From the Chevy national deal and and other posts here I understand that the savings are passed down to the leasee, but the math doesn't make sense to me.

For the example below I'm not considering any fees, taxes, etc just the basic numbers.
Approx $35,000 base price X 58% residual value = $20,300

If the car costs $35,000, and you subtract out the $7500, you are left with $27,000.

Keyes and Rydell are offering $5000 off invoice, so that comes to $22,000.

Cap $22,000 - Residual $20,3000 = $1700

$1700/36 = $47 a month.

Now I know a brand new car is not going to lease for $47 a month, but what am I misunderstanding here to get to that number?

Some other poster said it is the leasing companies money and not mine so I shouldn't have to worry about it, but then why advertise that the savings are being passed on?

For a real world example, I got a quote for a US Bank backed lease. The dealer had put the residual at 37% for a value of $12,948 and then added in the $7,500 to get to $20,448 which is 58% and some change.

From other websites the residual for the 2014 Volt is around 58% BUT that doesn't include the $7500 tax credit.

Where is the supposed $7500 savings in the US Bank lease?

Ally does something similar as well to come with a ~20K residual.

What am I getting wrong here!?

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llninja

· #2 · May 23, 2014

You are double counting the $7500 in your calculations. Read post number 16 in this thread

http://gm-volt.com/forum/showthread...l-That-cant-be-right&highlight=Lease+residual

And it explains it. US bank uses a lower residual then adds $7500. Everyone else builds their residual to account for the 7500. Bottom line is for your $35000 estimated car you have to make payments for the difference between $35000 and $20,300 (this number would vary between leases). So $15K (I'm rounding a bit) / 36 would be $416 per month. If you knock $5000 off the price, then $10k/36 is $277 per month. If you put $3k down then $7k/36 would be $194 per month. So US bank makes you feel like you got the full 7500, but they make it up in the 37% number. The others probably in reality only gave you $3-5k of the tax credit when they keep the rest. Obviously they are making money off of you unless future resale values plummet.

That said, I continue to say over and over again on these forums that I've never seen a lease that I liked. It's all a number game (it's a trap)

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Joule

· #3 · May 23, 2014

^^ that's correct, except it's not a trap unless you get tricked. Any 55-62% "residual rate" applied is an adjusted rate to include the $7500 tax credit. Here's another discussion thread (with a chart), before the sticker was lowered:

Question-about-application-of-7500-credit-to-lease

llninja

· #4 · May 23, 2014

Joule said:
^^ that's correct, except it's not a trap unless you get tricked. Any 55-62% "residual rate" applied is an adjusted rate to include the $7500 tax credit. Here's another discussion thread (with a chart), before the sticker was lowered:

Question-about-application-of-7500-credit-to-lease

Excellent chart, so basically at each arrow, there is an opportunity for the dealer and the bank to pad a little and make money without you knowing it as you are looking for that "low" payment.

http://youtu.be/vYyx3CBSO_0

DonC

· #5 · May 23, 2014

As everyone is telling you, the credit gets added to and increases the residual rather than, as you (and everyone else) would think, subtracted from the selling price. The treatment doesn't change the lease cost since it just changes the order in which the credit is applied. It would be the same either way. However, adding the credit to the residual makes buying the car at the end of the lease much less attractive since the buy out price will be high.

In your example, the car would be $35K. If the residual starts at 50%, then that's $17.5 (FYI I don't know what the residual is, I'm just guessing). The $7500 tax credit gets added to that, making the residual $25K. The adjusted cap cost is the $35K minus the $5K mark downs, giving a net buying price of $30K. So the depreciation for the lease period would be $30K - $25K = $5K, and the depreciation would be $5K/36 months = $138.88. That won't be the lease price because you have interest both on the depreciation and the part of the car you're not buying as well as various other fees, but that's basically it.

At $22K the Volt is the best buy for a car on the planet. Even with the way the residual is treated, it's a very good deal on the lease well but going in you need to know you won't want to keep it.

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Dyohn

· #6 · May 23, 2014

llninja said:
That said, I continue to say over and over again on these forums that I've never seen a lease that I liked. It's all a number game (it's a trap)

That's why I never lease a personal car and do not understand why anyone would - except they get tricked into thinking a lower monthly payment (rent, rather) means they are saving money.

MTN Ranger

· #7 · May 23, 2014

I think leasing was important in the first year or so. Back then the Volt was $45-50k with no discounts. That's the main reason I leased. Now with the MSRP drops and dealer discounts I would just buy it.

Sent from AutoGuide.com Free App

Joule

· #8 · May 23, 2014

llninja said:
Excellent chart, so basically at each arrow, there is an opportunity for the dealer and the bank to pad a little and make money without you knowing it as you are looking for that "low" payment.

Thank you, and yes that's correct- dealers often do make extra $ from people not understanding the lease. That's why it's important to know the numbers before signing. I've never bought or leased a car without having worked out the amounts before delivery. My lease with Keyes was the first time I ever accepted a car and the bottom line number on the paperwork was perfect on the first go. My lease was exactly as promised, to the penny, no last minute switcheroo.

There are many advantages to leasing. For me it was about not trusting the long-term reliability of the car. I now know that my Volt is a solid, reliable car and will consider buying it out at the end simply because I know I have a good one.

Fulgerite

· #9 · May 23, 2014

Dyohn said:
That's why I never lease a personal car and do not understand why anyone would - except they get tricked into thinking a lower monthly payment (rent, rather) means they are saving money.

Simple answer: If you own a business the lease payments are a 100% tax write off. Finance payments are NOT.

Paulacton84

· #10 · May 23, 2014

Fulgerite said:
Simple answer: If you own a business the lease payments are a 100% tax write off. Finance payments are NOT.

or if you don't pay $7500 in income taxes, (this credit does not roll forward I think). the leasing company can take the full value.

to the OP. a lease is a complex loan where you are buying the depreciation and paying interest on the residual and paying the lessor's profit, it makes sense in some people lives, not in others( not in mine for sure). It is less expensive per month than buying only because your are not "buying" the residual value. The Lessor uses the tax credit to make the situation as confusing as possible to the buyer. AS with buying a car, you need to shop around and establish real competition for your leasing business. Focus on your end of the deal, but as others have said, If you are willing to keep this car for 6-7 years, you will likely be better of in the end buying

DonC

· #11 · May 23, 2014

Fulgerite said:
Simple answer: If you own a business the lease payments are a 100% tax write off. Finance payments are NOT.

Unlike an ICE vehicle, where you never want to take the standard mileage deduction, with an electric you're probably better off just taking the standard mileage. Your accountant probably won't ever even think of this unless he/she has an EV.

llninja

· #12 · May 24, 2014

Paulacton84 said:
or if you don't pay $7500 in income taxes, (this credit does not roll forward I think). the leasing company can take the full value.

The leasing company can take the full value, but the leasing company won't really give you that full value of the tax credit.

I don't want to sound disingenuous, but if someone isn't earning enough to pay $7500 in taxes, they really should be looking at a much less expensive car unless they are retired and have a nest egg. I drove an old paid for Toyota for over 15 years and bought several used cars before I bought my first new car. And even then it had to be the deal of a lifetime ($34K car on a special clearance for $23K in March the following calendar year). If I look at just 10 years of vehicle expenses between someone who leases throughout the 10 years and me who borrows some money, pays the car off then pays for maintenance and saves the money not spent on a car payment, I come out way, way ahead. This also requires you to take better care of the interior and exterior of the car rather the treating it like a rental.

prismonix

Discussion Starter · #13 · May 24, 2014

Thanks everyone, this really cleared it all up.

eric_n_dfw

· #14 · May 25, 2014

Dyohn said:
That's why I never lease a personal car and do not understand why anyone would - except they get tricked into thinking a lower monthly payment (rent, rather) means they are saving money.

This argument is sounding like a broken record around here, but let's kick that dead horse around some more.

If I take my MY2013 to the end of it's 24 month lease term (3 months from now) I will have paid $299.91 x 24 months = $7197.84 out of pocket, after which I have no equity nor liability (provided I don't beat it up).

If I had bought the car for the $39,020 negotiated price (which included lease rebates that the dealer passed to me, so I'm not sure I could have gotten that deal), less my $7,500 tax credit, I would have paid $31,520. In my area, I could probably get about $25,000 to sell my car today, a difference of $6,520. (This also assumes no interest paid on the car.)

My savings if I had bought it: $677.84, and that's assuming that in the next 3 months the used market for this car doesn't go down any when the 2015's hit the market.

Given the uncertainty of EV technology advances over 2 year terms and the benefit of not having to deal with selling it I consider that $677 a wash. (Also, in another 12 months I'll likely need to buy a new set of tires which would cost right around that much anyway.)

NOTE: I've left Tax, Title, Registration, Doc Fee's, etc. out of these calculations as they would be identical for buy or lease where I live. (we have to pay tax upfront on leases at purchase, not monthly)

All that being said, my next Volt may be a purchase since we now have an additional $2,500 rebate in TX which would be cut in half on another 24 month lease. Like others have said, you have to research the numbers and see how they apply to your situation. If we're all honest with each other, the most financially responsible thing would be to buy a reliable used car that gets decent mileage (be it EV, or not), we just all love driving a cool, new Volt!

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llninja

· #15 · May 25, 2014

eric_n_dfw said:
This argument is sounding like a broken record around here, but let's kick that dead horse around some more.

If I take my MY2013 to the end of it's 24 month lease term (3 months from now) I will have paid $299.91 x 24 months = $7197.84 out of pocket, after which I have no equity nor liability (provided I don't beat it up).

If I had bought the car for the $39,020 negotiated price (which included lease rebates that the dealer passed to me, so I'm not sure I could have gotten that deal), less my $7,500 tax credit, I would have paid $31,520. In my area, I could probably get about $25,000 to sell my car today, a difference of $6,520. (This also assumes no interest paid on the car.)

My savings if I had bought it: $677.84, and that's assuming that in the next 3 months the used market for this car doesn't go down any when the 2015's hit the market.

Given the uncertainty of EV technology advances over 2 year terms and the benefit of not having to deal with selling it I consider that $677 a wash. (Also, in another 12 months I'll likely need to buy a new set of tires which would cost right around that much anyway.)

NOTE: I've left Tax, Title, Registration, Doc Fee's, etc. out of these calculations as they would be identical for buy or lease where I live. (we have to pay tax upfront on leases at purchase, not monthly)

All that being said, my next Volt may be a purchase since we now have an additional $2,500 rebate in TX which would be cut in half on another 24 month lease. Like others have said, you have to research the numbers and see how they apply to your situation. If we're all honest with each other, the most financially responsible thing would be to buy a reliable used car that gets decent mileage (be it EV, or not), we just all love driving a cool, new Volt!

How much of a down payment or a trade in did you put on the lease to get that monthly payment? That has to be part of the equation also. In my case my 2013 ended up $21K after rebates and tax credits mostly due to end of year deals and incentives. By leasing, you are stuck getting a new car after your lease runs out which gives the dealers the advantage as you need to drive something. By not being on a timetable, one can look for the deals of the decade.

eric_n_dfw

· #16 · May 25, 2014

llninja said:
How much of a down payment or a trade in did you put on the lease to get that monthly payment?

$0 down

I did have out of pocket expenses, but they are what I would have had if I bought the car. (attaching a copy of the pertinent part of my Ally lease document)

My "out of pocket" on day one:

First months payment: $299.91
Refundable security deposit: $300.00 <--- should be getting that back at lease end
Title fees: $103.80
Sales/Use tax: $2389.06
Admin fee: $199.00 <--- the only part that may not have had on a purchase, but not sure.

As you can see in the attachment, the dealer passed $3950 in rebates (from either GM or Ally) back to me as a CapCost reduction.

llninja said:
By leasing, you are stuck getting a new car after your lease runs out which gives the dealers the advantage as you need to drive something. By not being on a timetable, one can look for the deals of the decade.

Maybe - or you can go buy a comparable used Volt and be in a similar situation to where you would have been if you had bought new originally. --OR-- You have that last month on the lease to go shopping for a new or used replacement - if you find one, you just turn in the lease and walk away. The security deposit refund makes that last month "feel" free. (I know, it's not, since you paid it up front; but it eases having 2 car payments during the overlap until you return the lease.)

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