Exjackly

In my local newspaper, there was an article by Dave Ramsey recently talking about leasing a car.  In the article, it had some generalities and ultimately came down against leases completely, suggesting instead that the reader buy a two year old car because the most depreciation happens the first two years of ownership.

Now, I cannot argue against 'downgrading' to a two year old car from a new car.  Financially, it makes a lot more sense and is a lot easier to work into a budget.  For those of us that can control the desire to continually be driving something new and shiny, purchasing is almost always the better option.

I respect Dave Ramsey and do not wish to argue against his stance for personal financial responsibility.  Making our choices, living with them, and making an extra effort to do the right thing is important as an individual and as a society.  Despite this trust, I cannot take an article at strict face value.  I want to know why somebody says something.

In the article, Dave says, "The only one who comes out to the good in an auto lease is the dealership" and "...or as we call if 'fleecing' a car..." Such a blanket statements deserve to be looked at.  Dave does reference articles by Consumer Reports, Consumer Federation of America, and Smart Money Magazine.  That makes me expect his recommendation will be born out by looking at an example.

Buying

For the example, I will be looking at a $30,000 car.  To simplify the comparison, I will assume that insurance, maintenance, DMV fees and parking fees are the same over the 4 year comparison period.

This makes our comparison essentially the cost of the lease versus the depreciation on the car.

Since Dave provided the figure that the average car loses 60% of its value in the first 4 years, we get the following for buying the car:

• Purchase price: $30,000
• Depreciation:   $18,000
• Residual Value: $12,000

Thus, the loss/cost of the new car - ignoring the opportunity cost of spending $30,000 up front - is $18,000.

Leasing

Checking the same assumption at Ford, using a 2008 Mustang in their lease calculator (Sales price $30,000, No down payment or trade-in, 60000 mile limit) we get an estimated cost of $933 due at lease signing and $458 a month payment.  This gives us:

• Due at signing: $933
• Monthly Payments: $21,984
• Total Cost: $22,917

Conclusion

Using this example, it initially looks like Dave Ramsey is being accurate.  Essentially, it costs $4,917 extra to lease the car over buying it - a 27% premium.  Over 4 years, that is a good return for the dealership.  Especially since the people they choose to lease to have better than average credit and are generally unlikely to default on the payments.

However, I do like to try to be thorough.  Since we made the assumption that you can buy the car for cash to simplify the comparison, what if we assume that you have the $30,000 in cash when leasing too. How much do you have to make on the money to come out even if you invest the money you do not spend up front in the lease?

In other words, to make $4,917 over 4 years in interest on the decreasing $30,000 balance, what interest rate (compounded monthly) will it take?

Crunching the numbers in my spreadsheet, I get that it would take a 6.662% after tax investment return for you to break even in the lease vs buy comparison.  If you are in the 35% tax bracket, that translates to a 10.25% pretax rate of return.

Reference

Bankrate Car Lease Calculator

Suze Orman - Buy vs Lease

Edmunds Compares the Cost I want to highlight this article.  This one adds some information on buying a used car as well, which really helps to drive home the point that buying or leasing a new car is not the best way to minimize your long term cost of ownership.

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