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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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If I buy a vehicle, at the
end of 4 years I have an
asset, If I lease I have
nothing.
We would agree with the critics,
that at the end of 4 years, if you purchase a vehicle you have
an asset. What these critics conveniently forget to tell
you, is that you have paid several thousand extra dollars in
order to own this asset.
Let's look at an example of a
2006 Honda Odyssey 5D Wagon Ex Van. You could purchase this
vehicle for $29,000 or lease it for $422.44 for 48 months.
If you are a typical American, you will finance your purchase
and out no money down. To make the math easy, let's assume
that you make a down payment of $719.94 on your loan (this
matches your upfront fee on your lease). You will thus
borrow $28,289.06. If you obtain a 48 month loan at 7.2%
to match the lease term, you will have a loan payment of
$679.83. Your monthly lease payment will be $257.39 less
than your monthly loan payment.
If you lease this vehicle, you
will have an initial lease fee of $719.94 (which includes
license & registration and the first lease payment) plus 47
additional payments of $422.44, for a total expenditure of
$20,574.62. If you purchase the vehicle you will make 48
loan payments totaling $32,631.84 plus the down payment of
$719.94 for a total cash outlay of $33,351.78. This is a
difference of $12,777.16.
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So we would agree with the
statement, that if you purchase the vehicle you will have an
asset at the end of 4 years, but if you lease you will have
nothing, except the $12,777.16 that you would have saved
over the 48 month period.
Hopefully you will now be ready
to admit that these critics didn't give you the whole story.
But maybe you still want to argue that the asset that you
own is worth more than the $12,777.16 that you have saved.
When calculating the lease, we assumed a residual of $14,208.
We will leave the argument of whether your vehicle will
really be worth $14,208 at the end of 4 years for another
time and place. For now we will agree that the $14,208
residual is $1,430.84 more than the $12,777.16 that you
would have saved over the 4 year-period. So ,are the naysayers
still correct that leasing is a bad choice since you are
over $1,400 in the hole if you lease?
The $12,777.16 results from
a monthly lease payment that is lower than your monthly loan
payment, and gradually builds up over the 4 year-period.
If you took your savings and just put it under the mattress
for 4 years then we would agree that you would come out
behind by leasing. But most people would probably have
a better use for the money than just letting it sit there
doing nothing. Let's look at some alternative uses of
your money and see what they do for the equation.
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Table 1:
Total Cash Outlays |
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Lease |
Purchase |
|
Initial Cash Outlay |
$
719.94 |
$
719.94 |
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Monthly Pymt |
$
422.44 |
$
679.83 |
| # of
Pymts |
47 |
48 |
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Total Cash Outlay |
$20,574.62 |
$32,631.84 |
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Difference |
$12,777.16 |
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Table 2:
Total Cash Available |
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Investment |
Cash Available |
Residual |
Difference |
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Money
Market |
$13,624.83 |
$14,208 |
$(
583.17) |
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House
Payment |
$14,278.69 |
$14,208 |
$
78.00 |
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Mutual
Fund |
$14,833.13 |
$14,208 |
$
625.13 |
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Prepaid
Tuition |
$15,413.04 |
$14,208 |
$1,205.04 |
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Credit
Card Debt |
$18,067.02 |
$14,208 |
$3,859.02 |
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- Money Market Account
- First, let's assume that you are very conservative and
just place your extra money in a no risk money-market
account. At the time that this is being written, in
late October 2005, you can earn about 3.5% in money
market accounts. If you put your $257.39 in a
money market account monthly at 3.5% annual interest, it will be
worth $12,945 at the end of 47 months. Now add in
the value of the last loan payment( remember there is no
lease payment the last month since you made your
payments in advance) of $679.83 and you will have
$13,624.83 at the end of the 4 year period. This
cash on hand of $13,624.83 is only $583.17 less than the
residual value, which isn't much of a penalty at all.
- Make an Extra House
Payment - Let's assume that you were financially
astute and refinanced your house over 30 years at 6%.
You could take your extra $257.39 each month and make
extra principal payments on your house. Paying
down debt with a 6% interest rate is the same as earning
6% on your money. If you take this strategy, you
will be able to pay off an extra $14,278.69, and you
will actually be ahead by $78.
- Invest in a Mutual Fund
- Historically you can earn 8-12% annually over the
long-term by investing in fairly low risk mutual funds.
If you were to invest the $257.39 each month in a mutual
fund earning 10% annually, at the end of 47 months you
would have $14,153.30. Add the $679.83 savings
from not making the 48th loan payment, and you now have
$14,833.13, or $625.13 more than the residual.
- Increase Investments
in Retirement Accounts - Invest in a mutual fund as
outlined above, but do it inside of an Individual
Retirement Account. This subject is too
complicated to address here, but depending on your
individual situation, in addition to having the
$14,833.13 calculated above, you could save an
additional several thousand in taxes.
- Invest in a Prepaid
Tuition Plan - Do you have any children under the
age of 18? Have you already put aside enough money
to pay for their college education? I'm sure that
many of you answered yes to the first question and
no to the second one. College tuition continues to
increase at a rate well in excess of inflation.
Increases of 10-15% per year are not unusual. Most
states now have some type of prepaid tuition plans.
Let's assume that tuition continues to increase 10%
annually. If you invest your $257.39 in a prepaid
tuition program you will have $14,733.21 at the end of
47 months, plus $679.83 for a total of 15,413.04.
This will go further towards paying for college than
purchasing a car and hoping that you can sell it for
$14,208 at the end of 4 years. In addition, most
of these plans have tax advantages that can save you
thousands in taxes.
- Pay off Credit Card
Debt - The average American has several thousand
dollars in credit card debt. Let's assume that you
are paying 18% annual interest on your credit cards, and
you take your extra $257.39 and make extra payments on
your credit card. At the end of 47 months your
credit card debt will be $17,387.19 less, and you will
have an extra $679.83 the 48th month for a total of
$18,067.02. This is an impressive $3,859.02 more
than the residual of the vehicle.
Please give us a call or
email us and we can examine your particular situation. |
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