Vehicle lease vs purchase
Many people have written about the topic of a lease or purchase of a vehicle. In most instances a vehicle is a depreciating asset. In other words you lose money on it. It is completely fair to not have the expense of a car. If you do obtain one expect to pay for it, the insurance, the maintenance, fuel, etc.
A lease is an agreement with a dealer that you agree to pay the amount per month to essentially rent the car. You then get the option of buying the car at the end of the lease term.
A car purchase you either take a loan or pay with cash.
In order to decide which is financially beneficial for you let’s crunch some numbers.
Example:
A 2022 Toyota Corolla is MSRP 20k.
1. You pay cash. 20k is gone and you pay expenses for the car. You keep it for 36 months. Expenses for the time frame are: 3600 fuel, repairs 800, 4500 insurance, 2100 in taxes and fees. Car value is 17k. If you sell the car you have lost a total of 14k.
Total loss of 14k.
2. You take a loan. A 36 month 2.9% APR with 0 down will cost you $568 per month. You will pay for maintenance. If you sell the car you have lost a total of $14448. If you have 20k in cash that you didn’t use then you could invest it and make 12% or more. You invest in QQQ and make 22% per year. You end up with $33316 investing the 20k. You had the car for almost free.
Total loss of $1132.
3. Lease for 36 months will cost you $297 per month plus $947 due at signing. Mileage limit is 12000 per year. If the car is not turned back in with no damage or issues/higher than mileage limit you will not have to pay them more. If you have any damage or higher mileage expect fees. You will not pay for maintenance. You spent $11649 for the car. You will also pay all other expenses except repairs and maintenance. Total loss is $22649 granted you are not hit with fees for going over mileage or damage. In most instances you will be hit with fees. You do not own the car and have nothing to sell. If you have 20k in cash that you didn’t use then you could invest it and make 12% or more. You invest in QQQ and make 22% per year. You end up with $33316 investing the 20k.
Total loss is $9333.
Choice 2 works out the best. Keep in mind that these numbers are not static and do vary by state and location. Dealers will also change the fees and APRs of loans.
In order to reduce the expenses you should search for cheap car insurance and bank loans. Usually credit unions have the lowest rates for loans.
An argument to this strategy could be that the car is a business vehicle only. That would not change the math. You would just write off the expenses from the business income. Keeping the business income as high as possible is better so you can contribute more to a self employment IRA.
What I do personally is buy used with choice 2. That way you miss the worst depreciation years (first 5 years). The overall price is less and then I extend the loan to a 72 month loan. This will keep the payments low and you can hold onto your money to put it to work for you.
What about vehicles as investments? That is an article for a different day.
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