Leasing vs Buying Maths

[tlubull]

I have been attempting to compare the lease vs. buy-finance option just for shits and giggles, I've never looked into it before and the general widely held belief is that its always bad. But how does it compare to a 72month loan?

I did some calculations and I think I'm not mathing correctly:

Lets say its a 50k 2d BD Bronco, 36-mo residual value 58%
(Billy's an idiot, got it, don't need to harp on poor Billy)

Billy wants to put down 15% and finance the rest on a 72-month loan at 5% interest.
OR
Billy will put $5000 down on a 36 month lease.​

A 50k Bronco, at a tax rate of 7%, Billy puts down $11000 to pay taxes and 15% down on MSRP.
Billy's payment is $684.46/mo at 5%APR

Total cash blowing out of the windows of Billy's new rig: $60281.12

Now for Billy's lease option:
According to the B&P, a 50k BD with $5000 Capitol Cost Adjustment and 15000k mi/yr is a:

$652 payment for 36 months.
Billy pays $5700 up front (according to B&P)

Over 36 months Billy pays: $29172
The residual value (according to Ford's spreadsheet) is %58 or $29000

Billy pays the residual value and 7% taxes in cash = $31030
Total cash blowing out of the windows of Billy's old rig: $60202

So did Billy get a deal? I have never done a lease, but for those seeking a long term loan, is it really a bad option?

Why would Billy forgo paying $35 extra month and lease rather than buy if in 3 years he can drop 30k cash? IDK, ask Billy.

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[Karl_in_Chicago]

Simple for me - leasing adds an extra tax. I don't want to pay extra tax. The end.

 

[tlubull]

Simple for me - leasing adds an extra tax. I don't want to pay extra tax. The end.

Howso? Most states don't apply tax to leasing agreements.

If anything Billy pays LESS tax on his lease. (7% on 29k vs 7% on 50k).
But he makes it up in paying the bank.

 

[Karl_in_Chicago]

In Chicago leasing is considered a service and a service tax is applicable. Back when my company had our data centers in the City any equipment we leased had an additional cost due to this. In the early days this wasn't a big deal as it was typical to assign a 5 to 7 year life to data center assets and our cost of funds, as a financial, was way cheaper than what any leasing agency would charge us. As tech evolved and some assets - especially DASD (enterprise storage) - morphed into commodities with at best a 3 year street life while at the same time the DASD demand grew like crazy it became more attractive financially to lease them. The extra whammy of Chicago's "lease tax" put the kibosh on that with our bean counters so we always had to do some crazy tech and financial gymnastics when those assets crossed over from useful to ashtray holders. When we finally built new data centers outside of the City and relocated them we no longer had to carry that burden and radically shifted our asset acquisition methodology. Having run the numbers on literally hundreds of millions of dollars worth of equipment and what that service tax would cost us I'm keenly aware of how it would affect my cost of ownership for a (by comparison) measly ~$50K Bronco - and I just don't want to pay it. I'll get my usual 3 year financing and do my usual pay it off in 18 months. The only thing I hate more than paying interest is paying taxes - I pay them, of course, but I just try to minimize what I have to pay. And, yes, I could move out of Chicago and save a ton in taxes but that's a different discussion.

 

[Compta38]

Billy's credit sucks.

 

[Roger123]

No matter how you math it, in Billy's world he is paying 60K for a 50K truck.

Billy should drive a paid for car for several years, save up the cost of the Bronco, and pay cash.

Billy will then buy a car he can afford as he's writing a check vs. using someone else's money and will feel significant pain when having to write said check. At this point he may not buy a 50K car but opt for a 35K one (like a three year old used Bronco) and put the difference in his retirement fund plus the 10K he didn't spend on interest for a total investment of 25K. Good job Billy.

This will cause Billy some short term pain in that he will not be the coolest kid on the block for awhile but he'll get over it as his 25K turns into 2.5 million over the course of his life.

Cue the "but I'm going to have a loan at 2% and invest the difference in the market at 15% and be ahead" comments. Good luck Billy!

 

[Drex]

Apples to oranges. In the leasing example; Billy pays interest for a smaller loan ($50k-$29k) for three years and then pays cash in three years and owns the truck. In the purchase example; Billy pays interest for six years on the amount borrowed ($50k-15%).

Try changing your math by having Billy (who presumably saved up enough in three years of leasing to be able to afford a balloon payment of $29k) purchasing the truck in 3 years @5% (just like the lease, they expend the money in exactly three years, the sales tax will work out about same for most whatever State he is in.) Then, for funsies add about a grand to the lease for the typical acquisition and disposal fees combined. (Or not, the difference will be apparent without adding the hidden fees.)

 

[HarderCorer]

How come Billy has to finance at 5% (You said he's an idiot so sure, he has bad credit) but can suddenly drop 30k to buy out his lease?

How the math will always play out: long term value, buy the car.

Why these calculations always magically stop after the car is paid off, I don't know. Do other states require people to always have a car payment? I'm still driving my truck I paid off 5 years ago.

On the other hand, if you love having a new ride every few years and are willing to pay a little more for that, sure, get a lease.

*edit* Yeah, what Drex said. *Damn millennials and their fast typing skills. Learn to hunt and peck like God intended*

 

[LarryZiegler]

Billy's credit sucks.

Real world interest rates for people with good credit are in the 2.5-3% interest range (and conceivably lower), not 5%. That lowers the out of pocket costs of financing vs leasing. It’s also conceivable (not likely) that Ford could have promo financing as they do w/Bronco Sport (at least here in Calif of 0% for 36 mo - I believe that was the max term) at last ad I saw.

 

[PaBronco]

Billy's credit sucks.

Billy may need to drive a vehicle that makes economic sense until he repairs his credit.

 

[rubydist]

Residuals on the Bronco are very good (high 60's - low 70's) according to what Ford has published so far, but of course we will see what they are when the vehicles actually arrive...

 

[Rover72]

I believe if you own a business you can buy the truck in the name of your business & you can write off 100% of lease payments each year, which can be a benefit to a business owner buyer. Take a write off for the business rather than taking the 50k as taxable earnings and then buying the truck.
This seems to be where leasing makes the most sense.

When the 2 payments are close in price you have to decide how long you want to drive the truck. If you want to change vehicles every 3 years then lease it. Not sure how the buyout works on a lease if you wanted to keep it at the end., assume it ends up costing more than just buying from the start.

Leasing made sense for me with Toyota and I did 2 of them. Changed vehicles at the end of the term. I leased a Toyota Tundra maybe 20 years ago for like 450.+- p/m. Was a great price as Toyota had high residuals. The lease was less expensive than buying by a significant amount. The same lease for a similar Ford F150 was $565. because the residual wasn't figured to be as good on the F150.

The spread between lease payment vs buy payment on the Toyota made leasing a real good deal. Toyota loved to get those leased vehicles back also. I am guessing that Toyota leasing is still similar. Does anyone have a lease with Toyota now?

 

[Toccoa]

One of these older threads might help.

Leasing Options

Is leasing bad???

How many are you are considering leasing versus buying the Bronco?

Leasing options available?

Leasing Options

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