At Roadster Concierge, I discuss leasing with clients every day. Clients that have not leased before will often say something like,
“I don’t want to make payments for 3 years and have nothing at the end.”
The truth is you will be able to keep thousands in your pocket and have more flexibility.
Here is why:
- You only pay the expected depreciation on the car plus interest and sales tax on your monthly payments; More importantly, you do NOT pay any sales tax on the residual value of the car. This alone can save you thousands of dollars.
- You have great flexibility as technology changes. You may opt to upgrade every 2-4 years.
- If you don’t own the car, you won’t suffer from any collision-caused devaluation (a bad CarFax, for example).
Here is a quick calculation to help you better understand the mechanics of a lease:
The assumptions:
- Car has MSRP of $40,000
- Dealership has agreed to sell the car for $37,000 (cap cost)
- Adjusted cap cost is $37,725. For this example, we add $725 to cap cost to roll in the lease acquisition cost. If there was a down payment, then this amount would be subtracted from the cap cost.
- Residual Percent (assuming 12K miles per year) is 56%.
- Money Factor (referred to as rents or interest) is .00120 (equiv APR is 2.88%).
- Term is 36 months.
- Lease acquisition fee $725 (ranges from $650-$925 in CA).
- Sales tax rate is 8.5%.
The simple math:
- Calc Residual: MSRP x Residual % ($40,000 x 56% = $22,400)
- Calc Depreciation: Adjusted Cap Cost – Residual ($37,725 – $22,400 = $15,325)
- Calc Rents/Interest: (Adj Cap Cost + Residual) x Money Factor x Term ($37,725 + $22,400) x .00120 x 36 = $2,597)
- Calc Base Payment: Depreciation + Interest ($15,325 + 2597 = $17,922)
- Calc Monthly Payment: Base Payment / Lease Term ($17,922 / 36 = $498)
- Calc Monthly Payment w/ Tax: Payment x Tax Rate ($498 x 1.085 = $540)
Conclusion:
There you have it. $540 per month and drive off is only first month’s payment and vehicle registration. Thus, approximately $1,000. The out of pocket for 3 years is $1,000 + 35 payments at $540 = $19,900. You may say, Wow – that is a lot of money to essentially rent a car. Let’s say you put down $1,000 and financed the car for 36 months at 1.9%. The payment would be $1,135 per month vs. $540 per month.
There is certainly no right or wrong answer when it comes to whether you should lease or buy a car, but as you can see, there are many advantages to leasing. Another thing to consider is that you have the contractual right to buy the car at any time during the lease term. You know in advance exactly how much you will have to pay to buy out your lease ($22,400) at the end of the term. I think about it as a “call option.” If you love the car, and are not excited about any new cars available in the market, you can buy the car. How great is that? You get to buy a pre-owned car from yourself!
by Chris Gross,
EVP/GM, Roadster and Head of Roadster Concierge
