Buy or Lease? The Justification of the Throwaway Mentality
I’ve been told a hundred times that I am wasting money on leasing new cars; the responsible choice is to purchase a vehicle which would be a better “investment” and better use of the money. The reality is that “investment” and “new car” hardly make sense in the same sentence, its all wasted money anyway.
After spending hours in the dealer negotiating with your salesman/manager, spending another couple hours in the finance department and finally getting to drive off the lot in your shiny new piece of depreciating sheet metal, your brand spanking new car… loses thousands of dollars the minute your sparkling rubber hits the asphalt. That’s because cars lose value the minute they are considered “used”, despite the fact that the car is basically unused at that point and realistically you would not be able to tell the difference between this car and another replica sitting on the lot next to you.
Purchase Example:
Take for example, a beautiful Lexus IS250 F-Sport (see review) that has basically been ranted and raved about by just about all critics. Now, being the responsible adult that I am supposed to be, I’ll consider buying the car and financing it over 60 months (5 years). The first thing you do in a dealership when purchasing a car is negotiate, which we can assume will bring the sticker of $43,000 down to a “steal” of $44,000 including taxes and drive off costs (sticker discount of $2,000 + 8.5% sales tax=$44,485). Being that we are financing the car with an estimated APR of 2.9%, let’s put down $5,000 so we are only going to finance $39,485 over 60 months; monthly payment comes out to $677.16 after figuring the interest rate.
Now the standard argument: “But you can sell this car after x years, you’ll have an asset at that point!” Let’s analyze this a little further: This specific model has a retail residual value of around 60% after 3 years and 44-50% after 5 years if you get a good deal on the sale price. In dollars: $25,800 after 3 years and $18,920-$21,500 after 5 years; if you sell the car after 3 years: Total spent: $29,377, estimated 2nd hand market value (85% retail value / retail value -$3,000) $21,500-$22,000. You still owe 24 months of payments, coming out to $16,252, of which you can pay with your sale and net you around $5,000, leaving you with the total investment of around $24,000 over 3 years- but nobody is arguing you can sell a car after 3 years, let’s look at the options:
5 Years:
Total Spent: $45,629.60
Retail Value: $19,000-21,500
Realistic Sale: $17,000
Cost over 60 months: $28,629
Summary: Don’t expect to use retail financing over a 5 year term to be a “profitable” or cheaper way to own a car.
8 Years:
Total Spent: $45,629.60
Retail Value: $13,000-17,000
Realistic Sale: $10,000
Cost over 60 months: $28,629
Savings over 3 years*: $6,000
Purchase summary: 2015 IS250 costs us $5,000 down + $565.95 for 60 months. Total cost over 5 years: $38,957 – Value of
Opportunity Cost?
Note, before we go any further we need to address the incurred opportunity cost; we’ve just “invested” $5,000 into the down payment of this car, which avoided $85.05/month (including the APR) at the rate of 2.9%. The standard ROI on $5,000 in a money market account can be assumed at around 5% per year. It costs us 7.9% to put the $5,000 into the car. But, for arguments sake, we are going to ignore the opportunity cost for now as it has too many assumed variables that can’t be proven including market instability and the lack of guaranteed return.
Yosef Adelman on Google+
