Facing the buy/lease question for a minivan (or SUV), we’re trying to figure out how to accurately compare costs. We could ask the dealer for help and advice, but when we asked the Mr. Fox how to best guard the Chickens last year, we weren’t too pleased with the results.
Since there are a host of variables (especially with different vehicles and different dealers), I’d like to set up a spreadsheet to make basic comparisons easier. But I don’t know what columns/cells need to be included (no experience with leasing means I’m not sure what questions to ask).
A wee hook in our situation: a wholly-owned S Corp is the primary source of our income, and we can justify it leasing/using the vehicle to varying degrees. That means that there may be tax implications (hey, where the hell did Rand Rover go?!) to offset the costs of leasing.
Both leasing and buying will have upfront costs (downpayment, loan initiation, etc…)
Then there is a per month rate. There are loan calculators everywhere. Google will not disappoint. I use the one on my phone, but have used the one on Yahoo Autos.
A loan is usually cheaper to start and more expensive on the monthly payments.
A lease is usually cheaper per month and cheaper over the terms of the contract - but at the end you will most likely have no equity in the vehicle beyond it’s depreciation. In other words at the end of the lease you may be offered a chance to buy the vehicle for it’s current blue book value or with a discount on the blue book value.
And when you turn in a leased vehicle, if the wear and tear is beyond what the dealer expects they’ll hit with a charge for that.
When you buy a Vehicle, you are sucking up the “off the lot devaluation” but start to build equity in the vehicle. Usually your debt to the cars value balances out in 2-3 years and after that you have an asset worth more than you owe on it.
We did something similar in finance class. You basically take the difference in cash outlays at each step in the process (month0 through the end month). If the IRR (internal rate of return) of the differences are greater for the purchase than what the loan rate would be, then go with the purchase. Otherwise lease.
I think in theory, though, if you are the type of person who wants a new or semi-new car all of the time, then leasing is best. If you want to drive it until the wheels fall off and then buy another one, then purchasing is best.
What they said. Don’t forget to consider that at the end of the loan you own something, at the end of the least you don’t.
A VERY simplistic example: say you lease a 20,000 car and your lease payments (including down payment or whatever it’s called) over 4 years total 18,000. The car is worth 5,000 at that point but that doesn’t matter to you. Your total outlay is 18,000.
You buy that same 20,000 car and your total cash outlay is 22,000 at the end of 4 years (you’re paying off the whole 20,000 plus interest). But, you own that 5,000. Your total net outlay at that point is 17,000 (you’ve spent 22,000, but have a 5,000 asset as a result).
Obviously with business issues there are a lot of factors to consider and my numbers above may bear zero interest on reality.
You also need to factor in reliability and the opportunity cost that having a 5-year-old paid off vehicle that is out of warranty and may likely (depending on model) need repairs that could put the vehicle out of commission. I have no idea how to actually factor that in, but I think it needs to be done.
At the end of the loan, you have an asset. Period.
At that point, you consider whether your car’s upkeep (probable repairs) make it worth keeping or should you trade it in towards your next vehicle. (Something you can’t do with a leased vehicle)
Simply as advice, you should never take a car loan that you will be making payments on after the car’s warranty expires. If you do, the point of warranty expiration is the time to consider trading it in. You should no longer be “upside down” on the loan at that point, in any case.
The vast majority of modern vehicles will last long after the loan expiration without any need for major repairs. This fact alone is a ***MAJOR ***contributor to the downfall of the auto industry.
But then you have to compare the costs of keeping the car running after the 5 years, versus the ongoing costs of paying the lease on a brand-new car.
In general, unless you buy a real lemon or have a very old car, the payments on a new car would usually be more than the maintenance on the older car. When that starts tilting the other way (e.g. when we spent 1,000 in 2+ months on our 10 year old minivan) it’s definitely time to trade. Prior to that, we’d get maybe 1000-1500 in repairs in a year, which is considerably less than the payments (lease OR loan) on a replacement.
Tax implications are so much of a pain when it comes to this kind of thing. What you really want to do is buy the vehicle yourself and have the S Corp reimburse the owner of the vehicle for mileage at the current maximum rate ($0.55). It’s an expense to the company and is not income to the owner of the car, provided that you do it under an accountable plan. An accountable plan means you provide evidence to the company of the mileage and the purpose for those miles. Since you’re required to keep those records anyway, it’s not like this is a big burden.
If the company owns the vehicle (whether lease or buy), then any personal miles driven on the car are part of the compensation of the driver and must be factored into payroll. Yes, that means you’ll pay FICA, unemployment and income tax on the value of the miles driven. (And, yes, you’ll STILL have to track miles in order to calculate this). Most companies that give company cars to employees do include the value of the car in the employee’s wages… it’s just that most employees pay no attention to that kind of thing and don’t realize it’s up to them to claim the mileage expense on their taxes so that they’re not taxed on the business use.
Most car leases are operating leases, which means you can deduct the full payment of the lease… unless the car is a “luxury car.” (The IRS has a formal definition for this that surprises many people). In that case, you can only deduct part of the lease payment. Under a lease, you don’t list the car as an asset, you don’t list the loan as a liability and you do not deduct depreciation. There is no gain or loss on disposal.
If the company buys the car, then interest on the loan and depreciation are both deductible. But there are limits on depreciation for vehicles, especially those under 6000 lb GVW, which is why Cadillac SUVs are so popular (they depreciate like a truck, not a car). One reason to buy is that you can accelerate the depreciation deduction on a large vehicle to take up to $25,000 the first year, which may be a chunk of money saved up front. If you do IRR or other NPV calculations, be sure to include the tax savings. There’s a big risk with accelerating depreciation, especially if you trade in for new cars frequently; you may have to recapture some of that expense, which could increase your tax due in the last year you have the car. That also needs to be plugged into calculations.
I think this is the key right here. You really need to factor in how long you intend to keep the vehicle, not how long it will take you to pay it off.
A 4-year loan on a car that you will keep for 8 years and eventually sell for some money pretty much beats any lease out there.
A 4-year loan on a car that you intend to sell immediately after 48 months not so much.