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      03-09-2011, 01:39 AM   #1
esk8mw
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Chicago resident - lease vs. buy vs. Owner's Choice??

I'm a prospective first-time car buyer in Chicago and looking for the best deal available from an "investment" standpoint. Assume I'm a buyer who can swing any of the options below and has a credit score around 800.

LEASING - I've been reading about the lease laws in Illinois and it appears that, as a Chicago resident, I am in the envious position of being in the single worst place in the country to lease a car. Chicago sales tax is at 10.25% and Illinois residents must pay sales tax on the ENTIRE COST of the car when leasing, not just the depreciation. Better yet, if we decide to buy at the end of the lease term, we are taxed AGAIN on the residual value. It is my understanding that there is no escape from this sales tax (even with ED?) because it is based on where you register the car, not where you bought it. (Did I mention state income taxes just increased from 3% to 5% for 2011?) Did I miss anything? If not, I think this effectively throws leasing out the window as an option.

BUYING - The best rate available right now for 60 month financing on an E90 is 1.9%, right? Is there any way to obtain a better rate? I know leases have MSDs to lower the MF, but I wasn't sure if BMW had some sort of a similar mechanism for financing arrangements. Obviously, with rates this low I wouldn't plan on putting any money down. At 1.9% (or lower?) this seems like a vastly superior option to leasing and it would be an easy decision if not for...

OWNER'S CHOICE - OK, this one's a little tricky. I understand the basic terms: you technically own the car but make "lease" payments based upon a chosen term, miles, etc., but they use traditional financing rates rather than a MF. Once the term is over you have a balloon payment equal to the residual value of the car based upon the "leasing" arrangement and you can (i) trade in to BMW for a new car, (ii) buy the car and refinance the balloon, or (iii) buy the car and pay the balloon payment in a lump sum. Here are my questions, if anyone happens to be familiar with Owner's Choice:

1. How much higher are the owner's choice financing rates than traditional financing and do they vary among different terms? Are these rates posted anywhere?

2. Can the financing rate be lowered by any means, i.e., MSDs?

3. If you choose to refinance the balloon, what are your options for terms and how do the rates look?

...and now for the bonus, extra credit question...

4. How is sales tax treated? Is all the sales tax rolled into the "lease payments" on the front end of the arrangement, or is the sales tax divided proportionately across the "lease payments" and the balloon?

For example, assuming a 36 month term, 60,000 car @ 10% sales tax and a 60% residual (for simplicity), would (i) 100% of the sales tax (6000) be evenly spread across the first 36 monthly payments, or (ii) is 40% of the sales tax (2400) spread across the first 36 payments and 60% of the sales tax (3600) rolled into the balloon?

I'm assuming (ii) is correct since taxes are usually spread over the life of the loan and Owner's Choice is structured as a single loan that can be re-financed, but I'm not sure. If (ii) is correct, that's a pretty strong point in favor of Owner's Choice if the financing rates aren't insanely high because 60% of the tax liability can be deferred for a pretty long time if I choose to buy and if I decide to turn it in I would have only paid taxes on the depreciation value of the car...like every other state in the union that is not Illinois or Texas.

Sorry for the length. Thanks a TON to anyone that can help with any of these questions.
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      03-09-2011, 09:25 AM   #2
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ill pass this thread onto AL (AFV335i) he is the money guy, he should help you out
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      03-09-2011, 10:58 AM   #3
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My strengths lie in other financial matters (income tax/retirement and , but lets give this a whirl. So is your question which way to go or more about the latter option?

The first question of which way to go - I guess we need more info. What are your plans for the car? IOW, how long do you plan on keeping? How much do you drive in a given year? How likely is that to remain constant? Do you plan on modding? Are there budget issues?

Typically I don't like leases. But that is me.

The questions about the sales tax, I don't know, sorry.
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      03-09-2011, 10:12 PM   #4
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Our strengths appear to be in the same areas, AFV. I'm a finance junkie and have already built excel spreadsheets around each of the 3 options. I'm basically hoping to get some answers to any of the questions above in order to tweak my models and make sure all my inputs are correct (i.e., I don't want to calculate financing rates at 1.9% if there is any way to obtain a lower rate, I have no idea if I am treating taxes appropriately in Owner's Choice numbers, etc.).

At this stage I'm just trying to discard all "soft factors" (i.e., things I can't assign a precise dollar value to) and analyze the bare financial numbers. Once I have that nailed down I feel like it will be much easier to pick among the 3 options based on soft factors. So if you or anyone else have answers to any of the questions in the OP it would go a long way in helping me make my decision.

What most call OCD I call due diligence.
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      03-10-2011, 12:41 PM   #5
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Where are you getting the 1.9% for 60 months financing from? If you look at BMWs website, the best rate for 60 months is 2.9%. with 1.9% only going up to 36 months. Sorry, can't be much help with your other questions -- I live in a Chicago suburb, and briefly considered OC, but don't really like the idea of paying for a car twice (kind of), so I pretty quickly decided to stick with traditional financing.
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      03-10-2011, 09:10 PM   #6
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You are correct, it is 2.9%. Sorry for the typo.

I also recently read that Chicago residents have to pay an ADDITIONAL 8% lease tax on TOP of the 10.25% sales tax on the FULL COST of the car if you lease. This just seems cruel and impossible to be true. Can anyone speak to this?

We get it Chicago - you want us to buy cars, not lease them!
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      03-12-2011, 03:20 PM   #7
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Lease tax in Chicago is sadly true. That's why they have Owner's Choice in the first place.
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      03-12-2011, 04:54 PM   #8
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The usage tax on leases in Chicago is ridiculous and effectively double taxation. Apologies in advance if I'm shown to be wrong on any of the following since my last Owner's Choice experience was in 2009:

Another option for Owner's Choice in IL is to simply turn the vehicle in and you're free to roam. What the dealer usually won't mention is your "trade in" value when looking at your next BMW will likely be lower than the resid/balloon offered in the program so you will likely lose out on the "trade in tax credit" on your next purchase. Pertaining to your question about timing of the taxes, I believe the full sales tax has to be paid before the balloon is due so I believe it amortizes over the period before the balloon. If it didn't, you could game the system with a big resid but the dealer/BMW financial wouldn't want to eat that either.

Also, be aware that the OC program has no gap insurance built in like a lease and if something terrible happens you may be liable for the diff between the ins payout and the amount due to BMW at that time. You can buy protection, but it's another factor you should consider when running the numbers.

Too many other factors play into your decision (lease, OC or buy) that trump the stuff I mentioned above but I hope this helps a bit. Good luck!
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      03-12-2011, 05:38 PM   #9
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Thanks cold - very helpful, especially the bit about the taxes - I've been looking everywhere without finding an answer. If you decided to sell the car back to the dealership (or to a private party) once the balloon payment comes due, wouldn't you get a credit back on the sales tax for the amount of the residual value of the car?

Side question - can you even turn the car back in and NOT buy another BMW? Or can you only turn it back in to get a credit on the next purchase?

Also, what kind of rates did you get for your OC financing? Are they the same for traditional financing? Are they published anywhere? If different than traditional financing, do they vary based on the term chosen?

The more I read the more it seems traditional financing (and the 10.25% sales tax) is my only choice here in Chicago - and I'm not sure I'm ready to commit to a purchase!
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