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Debunking Common Arguments
Against Leasing
A lot of people dismiss
leasing as being worse than
buying in all cases.
The fact that leasing has a
significant market share
should be an indication that
leasing serves a purpose in
the marketplace. The
anti-leasing forces use
various arguments to show
that leasing is "bad."
In this section we are going
to evaluate these arguments
and show why they are bogus. |
Bogus Arguments
If I Buy a vehicle, at the end of 4 years I have an asset,
if I lease I have nothing.
I drive a lot of miles so I can't
lease because the mileage charges will kill me.
I put too much wear and tear on a
vehicle and the lease turn-in charges will kill me.
I don't want to lease because it
is so expensive to get out of a lease early.
When I purchase a vehicle I keep
it forever. Leasing would be twice as expensive.
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I don't want to lease
because it is so expensive
to get out of the lease
early.
We would agree that it is
expensive to get out of a
lease early. In a
perfect world you want to
match your lease term with
how long you are going to
keep the vehicle. But
we realize that reality
doesn't always work this way
and you may need to get out of a
lease early. However,
we don't agree that this is
a reason to avoid leasing
because it is also expensive
to purchase a vehicle and
sell it after a few years.
In many cases, you will
have negative equity in this
situation.
Let's look at an example of
a 2004 Lexus RX330 that you
acquired in October 2003 and
you want to get rid of it in
October 2005. Let's
look at the consequences of
buying it and selling it and
signing a four-year lease
and terminating it at the
end of two years. The
MSRP on the vehicle is
$40,908 and you can purchase
it for $37,100 plus sales
tax at 6%.
Look at Table 1 for the
costs of owning this
vehicle. To make
things simple, we assume
that the down payment on the
loan is equal to the initial
lease fee, but any number
would have worked. We
calculated a 48 month loan
at 6%, with an initial loan
amount of $38,613.86.
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The monthly loan payment
will be $906.85, so at the end of 24 months you will have
made $21,7640.40 in loan payments and the loan balance will
be $20,461.03. The residual of this vehicle at the end
of 24 months is 65%, so we assumed that you could sell the
vehicle for $26,590.20. Since the same figure is
plugged into the lease the purchase section, the exact
amount that the vehicle is sold for will not make a
difference in the analysis. The bottom line Total Cost
of Ownership is $16,376.87.
Look at Table 2 for the cost of
leasing the 2004 Lexus RX330. The initial lease fee is
$741.64. You have 23 additional lease payments of
$544.14 each for a total of $12,515.22. Different
financial institutions use different methods to calculate
the payoff on a lease. We have chosen the Constant
Yield Method, which is the most popular one. Under
this method, the lease payoff at the end of two years would
be $29,223.49. Most lessors also charge and early
termination fee on a lease. They will typically charge
extra payments or a percentage of the residual. We
have used a penalty of 2 extra payments in this example.
We then show the same selling price of $26,590.20. The
sum of these numbers is the total cost to lease of
$16,978.34.
So in this example it does
cost $601.47 more to end the lease early than to purchase
and sell the vehicle, but this number is pretty
insignificant compared to the total cost of ownership. |
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Table 1:
Cost of Owning Vehicle |
| Down
payment |
$(
741.64) |
| 24
payments of $906.85 |
$(21,764.40) |
| Loan
Payoff |
$(20,461.03) |
|
Selling Price |
$ 26,590.20 |
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Total Cost of Ownership |
$
16,376.87 |
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Table 2:
Cost of Leasing Vehicle |
|
Initial Lease Fee |
$(
741.64) |
| 23
lease pymts of $544.14 |
$(12,515.22) |
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Lease Payoff |
$(29,223.40) |
| 2
pymts as penalty |
$( 1,088.28) |
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Selling Price |
$
26,590.20 |
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Total Cost to Lease |
$
16,978.34 |
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However, you may notice that
the monthly cash flows between buying and leasing are not
equal. When you purchase, your monthly cash outflow of
$906.85 is $362.71 higher than the $544.14 lease payment.
The purchaser only catches up at the end of the two-year
period when the vehicle is sold. In reality, most
people will invest their excess cash, often times in methods
that you may not have thought of. Please see our
article titled, "If I Buy a Vehicle,
at the end of 4 years I have an asset, if I lease I have
nothing", for details of different investment options.
If you could invest your $362.71 monthly savings at 8% you
will earn $704.87 in interest over the two year evaluation
period. This more than makes up for your $601.47
deficit. If you are
considering leasing and you think that there is a chance
that you will have to terminate your lease early, make sure
that you understand the early termination clause in your
lease contract. In most cases there will be more than
one financing choice available to you, each with its own
cost of early termination. Sometimes it is worth it to
have a slightly higher monthly payment in exchange for a
better early termination option.
Analyzing early termination
options is one of the services that we offer to our
customers. If you have any questions or concerns in
this area, please call us at 1-800-800-5327 or shoot off an
email. |
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