Or I could buy the car, keep it for three times the length of the loan or the lease… and how am I at a disadvantage? That’s what doesn’t make sense in what you’re saying. Short term, yes, I might save money (though I’m not convinced - between mileage and the number of job sites I take my truck to, resulting in cosmetic damage, I still think I’d get charged for damage in a lease) but over 15 years? I just don’t see how 15 years of leasing is superior to spending 5 years buying the vehicle then keeping it for another 10 thereafter without either a loan or a lease payment.
There is no such thing as a 15 year car lease. What I am saying you could have done is lease your car, and at the end of the lease, which is typically 1-3 years, you could buy the car and keep it for another 12-14 years, or give it back. You say now that you want to keep the car, but I gave you an example of a situation where you may not want to - if the car turns out to have a major mechanical defect that radically reduces its value. You are correct that if nothing goes wrong, then you just buy the car at the end and are no better or worse off than if you had bought it, but having that option to return the car is worth something. Whether you then keep the car for 10 years or 20 is irrelevant.
Broomstick, no one is saying that leasing a car for three years and then getting another new car is going to be cheaper than driving a car for 14 years. Of course it’s not.
The question is more like this: Assume you want to trade up to a new vehicle every three years. Are you better off taking out a 3 year loan, then selling the vehicle at the end and buying a new one, or are you better off with a 3 year lease?
Any other comparison is meaningless. It may be true to say that I saved money by not leasing a BMW 335i, and instead bought a used Ford Pinto. However, it says nothing about whether leasing is a good deal. It just says that old Ford Pintos aren’t worth what new BMWs are.
I think you also misunderstood the point of this exchange:
Whether you drive the vehicle in the ground or not is irrelevant to his point. His point is that if you’re going to drive a vehicle for 15 years, it indicates a preference for driving older, used vehicles that cost less money. In which case, you’re defeating your own purpose by buying new.
For example, let’s say a new car depreciates 40% in its first two years. It costs $25,000 new.
If you buy it new and drive it for 15 years until it has no value left then scrap it, your cost per year is $1,666 in depreciation, plus the cost of money. Let’s say your $25,000 would have earned you 5% interest per year. In 15 years, you would have earned 26,973 in interest. So your real cost for that vehicle was $3,464.88 per year.
What happens if instead you buy a 2 year old vehicle and drive it for 13 years? It’s still 15 years old at the end, and overall reliability and such should be relatively equal.
In this case, the 2 year old car is worth $15,000. Your total cost, with interest, is 28,284.74. Over 13 years, the annual cost is $2175.74.
So for the sake of having 2 years of ‘new’ vehicle and the other 13 years being the same, you’re paying an extra 1289.13 per year for the entire 15 years. Those two years up front cost you $19,337 dollars.
The conclusion: If you’re the type of person that doesn’t mind driving used, and plans to drive the same car for a long time until its value is gone, it’s insane to start with a new car. Buy a car that is two, three, or four years old.
You’ve hit on the general principle of driving cheap: Own the vehicle after the period of major depreciation has expired. Your strategy goes awry because you choose to do that AND own it during the two years of maximum depreciation, which is fundamentally at odds with your overall strategy. You could save yourself a bundle by making that slight modification to your plan.
One other thing wrong with your strategy is that you intend to drive the vehicle until it dies. The problem with that approach is that vehicles rarely just ‘die’. Instead, they get progressively more expensive to maintain. At some point, you will be putting more money into the vehicle than is warranted by its value, and you should get rid of it.
Complex products like cars have a defect life cycle that follows a shape known as a ‘bathtub curve’. Imagine a bathtub with a low, flat bottom, and then steep curves at each end. In the product lifecycle, the first curve sloping down towards the floor of the tub is the rate of initial defects, which starts high and then trails off. This is the period that the manufacturer’s warranty covers.
Ever notice that when you buy a new vehicle, sometimes it has to go back to the shop three or four times to fix niggling little problems? And that sometimes you’ll have an early catastrophic failure of a transmission or engine because of a defective part? This is the early defect curve in action.
If you make it to the end of the warranty period and the vehicle has no obvious defects or signs of incipient problems, then you’re now on the floor of the bathtub curve, where defects are rare. If you maintain the vehicle properly, you could go for years without an unanticpated service. But the defect rate isn’t zero, so it can still happen. And with some cars, the overall quality may be low enough that the random defect rate is still expensively high.
Anyway, at some point stuff starts to wear out. If you keep to your maintenance intervals, parts that wear out on known schedules will be replaced (brake linings, seals, belts, etc). But at some point, the major components start to show wear. You hear howling from the rear end, or the engine has a slight irregularity due to worn valves, or the tranny is starting to slip because the clutch is going, or whatever. You’re now on the rising back slope of the bathtub curve, and it will start getting more and more expensive.
The key to finding the absolute cheapest way to buy a car is to buy it in the last year or two of warranty, so you have time to have all the initial defects corrected under warranty in case the last owner didn’t do so. If the car has too many defects and you think it’s a lemon, dump it before the warranty expires and you’ll lose little. But if it looks good, you’re now on the floor of the bathtub curve. Drive it there, until you start to see early signs of major components starting to wear. Then get rid of it, and buy another car that isn’t quite out of warranty.
My guess is that for the typical vehicle, this translates into an ownership period of about 8-10 years. High reliability cars can last longer, and are therefore cheaper to drive even if they cost a bit more up front.
Yes, but someone is paying for that risk. If all else is equal, the fact that the car company has to take the risk of having to take back a lemon at the average residual is going to be reflected in the cost of the lease in the form of higher interest rates or some other form of payment. Or, it may be hidden in the residual - the car company could set the residual slightly lower than what it thinks the market value is for an ‘average’ car, to account for that risk.
But it gets even more complex, because the leasing company may have a deal to simply sell every vehicle it gets to a broker at auction for the residual price, which offloads the risk onto the auto broker, who will then compensate by offering a lower wholesale price for the vehicle.
In the end, that price WILL be factored into the cost of the lease, however, if all else is equal.
What can make a lease a good value (or a bad one) is that the dealer may have other incentives for leasing. If the dealer finds that leases move more product, then if the manufacturer offers a flat payment bonus per sale, that may make leases more profitable and they’ll be discounted somewhat. That’s what happened to me - Ford had a glut of Windstars, and couldn’t move them all fast enough. So it put out a $199/mo lease deal to get them off the lots. It did this by setting a higher-than-average residual on the vehicle. I crunched the numbers, decided that Ford was insane, and took a lease. At the end of the lease, I handed over the keys and walked away. I noticed that over the next few months used car lots absolutely filled up with lease-back Windstars, heavily discounted below the residual price.
So whether a lease is a better deal than a loan is going to largely depend on external factors like this.
Sure, and I addressed this in a previous post. Someone is paying for everything, in the same way that someone is paying for the 0% financing incentive, or that someone who buys a carton of eggs at full price at the supermarket is “paying” for me to pick up the same eggs for 99c when they go on sale. It’s pointless to try and uncover the full cost structure of the car maker,they will give you whatever they want and there’s nothing you can do about it, so why worry? The only thing that matters to you is the final price, and having a lease is a good thing.
Our lease on one of our vehicles is up next month.
If I could go back in time and buy the car instead, I’d do it in an instant. Leasing was an awful, awful decision. The absolute fact is that it has cost us thousands of dollars more than buying would have. We’ve paid $25000 for a vehicle we’ll have to pay $4000 to hand back in and will have no vehicle, when we could have paid a tiny bit LESS than that and still owned it. Dumbest financial decision we ever made.
There’s a few problems with your numbers.
1 Right now, you’d be lucky to get 1% return. 5% is complete fantasy. So, it’s $25K +5400 or $1933/yr
- Your assumption is that since the vehicle has depreciated 40% (which is a very high figure, outdated from the days cars only lasted 3-5 years), then a dealer will sell it to you for $40% off. Completely false. On any decent car, the price for a 2 yo model is maybe 20% less. Try Edmunds, you’ll see.
So then, it’s 20K+2600= or $1738/yr. - Next you pay a much higher interest rate for used. Right now, there’s new cars going for 0% to 1.9%. Used goes for 6% or more. So, that means the used car will cost more per year.
People have very emotional reactions to all aspects of car acquisition (as I think we’ve seen so far in this thread).
Here’s my take: If you want to have a new car every three years, lease. If you want to drive it until the proverbial wheels fall off, buy. I’ve done both and have been happy with my choice.
Also, buying (or leasing) a new car (as opposed to a used car) is perfectly fine. You pay more (what with the depreciation in the first few years), but you get more (that intoxicating new car smell, factory warranty, and the knowledge that no one else has done anything that could damage the car).
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Over 15 years averaging a 5% return on money is not anything even close to unrealistic. If you invested in early 2008 and lost 70% of the value in your investment, I’d STILL expect you to be able to eke out a 5% average yearly return by 2022.
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I am paying less than 5% right now for a 2004 vehicle, and I took out the loan only a couple months ago. 6% or higher is for people who need loan terms that are much higher, like 72 - 84 months, or for people with crap credit who would not qualify for the 1.9% rate anyhow.
I’m 42 and have never purchase a new car in my life. I refuse to spend a lot of money on transportation; I would rather put my money elsewhere. So here’s my strategy, FWIW:
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Buy a car that is 2 to 8 years old. If I want something nice, like a van for the family, I’ll go for something that is 2 to 3 years old. If I just need something to get me to and from work every day, I’ll get something that is 5 to 8 years old.
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Pay cash; never take out a loan.
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Never buy from a car lot; buy it from a private seller using Craig’s List or whatever.
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Never sell the car; drive it until the wheels fall off.
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Learn how to work on cars. I do most of the maintenance myself.
Using this strategy, I have been able to buy other things [I deem much more important] that I would not have been able to purchase otherwise.
Subsidized financing isn’t free. Even car maker websites nowadays explicitly state that you get a cash rebate if you don’t take the subsidized finance rate.
Why don’t you just buy out the car then?
That’s a possibility. It’ll also raise the car’s end price to about $37,000.
There is no way around the fact that we would have been better off buying. Buying the car would have cost, with financing, about $28,000. It was a mistake I will never make again.
Sure, but that’s a ROI, not interest. Thus you mean the stock market or other investments. Which can go down.
And how much did you pay?
Some do, some you get that and cash back. It depends.
No fair using the artificially low interest rate of the recession as an example. But even now you can do better than 1%. You can get 15 year municipal bonds for close to 5% right now. In fact, 5% is very conservative. At any time other than right now, you should easily be able to do better than that if you’re willing to lock your money up for 15 years. If you put it in a balanced portfolio, the historical return is closer to 10%. Or even better, put your $10,000 in an 401(k), and you can reclaim your tax money on it.
I doubt that. You must be comparing apples to oranges, like the dealer wholesale price when new to the retail price when used, or something like that. There is no way that a new vehicle is only going to depreciate 10% in its first year.
In fact, I just went to the Kelly Blue Book, and compared trade-in values so we’re looking at the same thing.
A 2009 Taurus with 1,000 miles on it is worth 17,850 in excellent condition.
A 2007 Taurus with 25,000 miles on it is worth $7100 in excellent condition.
That’s a loss of 60% of its value in two years. (I compared the same trim level as best I could.)
Now, if you’re going to complain that I used a car with high depreciation, let’s do the same thing with a Honda Accord:
A 2009 Accord LX with 1,000 miles on it is worth 19,025.
A 2007 Accord LX with 25,000 miles on it is worth $12,550.
That’s a loss of 35% of its value or so over 2 years. But note that I didn’t start from new - I started from a trade-in of a reasonably new vehicle. If you start from new and work out the trade-in value, it looks significantly worse.
I have no idea how you came to believe that you only lose 20% of the value of a vehicle in 2 years.
That’s possible. In fact, I bought my Escape new, because it made sense over buying a 2-year old vehicle, much to my surprise. This was in 2004, and Ford was trying to move a lot of vehicles. My Escape was marked down by $7,000, and Ford offered 0% financing for four years. I worked the numbers and it turned out that this put the price of the vehicle within a thousand bucks or so of the price of a similarly equipped 2 year old vehicle, assuming a financing rate of 7% for the used vehicle. Sometimes you find deals like that.
But that was exactly my point. I said in my last message that the difference in value between a lease and a loan was going to come down to other factors, like which type of financing the dealership is trying to push, or how hard up they are for sales, or tax incentives, or whatever.
But when comparing new to used, it’s extremely rare that you’ll find that buying new is cheaper or even close to the same value as buying a car that’s been modestly used. The first year of a vehicle’s life is always the most expensive year in terms of depreciation. You’re paying a big premium for the privilege of driving new.
Missed this:
No. For that to be true, the depreciation of the car would have to be less than 10%.
In my example, which I think is realistic, the new car costs $25,000, and the two year old car costs $15,000.
If I pay no interest on the first loan, and pay 6% on the second, My total costs are now $25,000 vs 18,937.15. The used car is still significantly cheaper, and therefore will cost you less per month, even with the interest differential. All it does is makes the two choices a little closer together. If that puts the new vehicle within range of your willingness to pay for the slightly newer ride, go for it. Just understand that you paid $6063 to shift your 15 year ownership curve by two years newer. If you think that’s worth it, go for it. Just don’t fool yourself into thinking that you’re making a shrewd financial move. You’re simply buying a luxury. And there’s nothing wrong with that, if that’s what you value.
Hell, I could drive a car worth half of what mine is, and have a perfectly decent ride. It would probably be a better financial decision. I’d have more money for other things. But I’m willing to pay extra because I like my vehicle to be just a little newer, and just a little better than the bottom of the line. But my Escape is now seven years old, and I have no intention of trading it in any time soon. It looks and runs like new, so I’m now in the highest-value portion of its lifespan. I’d be crazy to trade that away. But the minute it shows any sign of major component wear, it’s history.
No you won’t. $15,000 at 6% for four years is 18,937.15. $25,000 at four years at 0% interest is… $25,000. Looks bigger to me.
You managed to use 2 cars, the Taurus and the Accord, that both became essentially completely different and much larger, higher end cars. The 07 Taurus and Accord were EPA midsize cars and the Taurus at that point was a legacy model no longer even being sold to retail customers, only rental fleets. 07 was also the last year for that body style Accord. The 09 Taurus and Accord are both EPA full size cars.
Resale value is much, much more complicated than that anyway. What usually happens is that a car at the beginning of a major refresh cycle usually sell for close to or even above MSRP (Dodge Challenger, Camaro) as people clamour to get in. As the years wear on, competitors start coming out with better models and the old model starts getting rebated and discounted, which in turn starts putting pressure on the resale values of the previous model year - $1,000 off the 2010s means the 2009s just lost $1,000 in value. Don’t think this only happens to American makes either, check out how old the Honda Element is, as an example. Trying to determine resale values accurately is largely impossible for the consumer, simply because there is no easy way to accurately determine original transaction prices. Many domestic cars get an unfair stigma for having lower resale value compared to MSRP simply because GM and Chrysler often slap so many discounts on the new metal that the actual new transaction price is quit a bit lower. I remember seeing people on local message boards who had paid full MSRP for 2008 Civic SIs (supposedly good resale value) in Calgary get pretty indignant in 2009 when There were still recession inventory 2008s on the lots with $5k worth of discounts on the hood.
If you’re worried about resale, lease the car.
Kinda my point. 
Thank goodness we are not your friends, then. :o